Why does Financial Leasing remain one of the most Modern Credit Options in Albania?

Abstract

Financial leasing is an important source of medium and long term financing in developed economies and developing countries, because it is an efficient economic solution to the problem of acquiring shares of an asset. Financial leasing plays a special role in the modernization and competitiveness in the economy and job creation in developing economies .Often leasing is the only way of financing for units with financial inability to pay immediately the cost of purchasing the asset. The renter can increase its production capacity without collateral requirements, as would happen with a bank loan. While the lesser has a lower risk of business financing, because of the holds the ownership of the asset until the liability is completely settled. Also he has the ability to maintain control of his investment by regularly monitoring financial leased equipment. Leasing is a modern alternative to classic credit but can be reactivated, and a method of blocking capital (lease - back). Leasing is a way of encouraging the development of activity in some sectors. [PUBLICATION ABSTRACT]

Headnote

Abstract

Financial leasing is an important source of medium and long term financing in developed economies and developing countries, because it is an efficient economic solution to the problem of acquiring shares of an asset. Financial leasing plays a special role in the modernization and competitiveness in the economy and job creation in developing economies .Often leasing is the only way of financing for units with financial inability to pay immediately the cost of purchasing the asset.

The renter can increase its production capacity without collateral requirements, as would happen with a bank loan. While the lesser has a lower risk of business financing, because of the holds the ownership of the asset until the liability is completely settled. Also he has the ability to maintain control of his investment by regularly monitoring financial leased equipment. Leasing is a modern alternative to classic credit but can be reactivated, and a method of blocking capital (lease - back). Leasing is a way of encouraging the development of activity in some sectors.

Keywords: classic lending, financial leasing, lease -back, privatization, real assets

JEL Classification: F3

Introduction

Leasing constitutes an effective mechanism to give incentive to an economy by mobilizing huge opportunity for growth and expansion of various sectors of economy.

Leasing provides a means to expand the production line and development of small business that need financing, but often do not have a credit history of sufficient collateral for other financing sources.

Leasing increases total capital investment in the economy, constituting an additional form of financing and bank loan substitutes.

Leasing creates competition by not carrying such risks as other forms of financing, such as lending of working capital. It competes directly with bank loans, creating an alternative way of financing. In developing countries, leasing meets bank financing, allows businesses to have access as leasing financing as well as in additional bank financing without increasing their debt with collateral.

Leasing increases equipments sale. It offers to domestic and foreign suppliers a new mechanism to increase the customer base and access to new clients, especially in those with limited funding opportunities. In general this facilitates economic development by increasing flow of financing to the productive sector of the economy, domestic output growth and improving opportunities for business financing.

Lesser are constantly in search of regulatory measures that will increase the potential benefits of leasing. Banks, as institutions that enter directly in contact with savers and companies, represent the ideal way to link the services that provide these companies with investments. In fact leasing companies have emerged as more participatory initiatives and individual banks or banking groups, the more that investment diversification has been notable, targeting a distinct maximum specialization in the areas of these services. In financial lease rental company makes simply the task of sponsors and it is not interested regarding the operation and maintenance of leased property. Analysis of leasing as a financing choice can be made only after the cash flows of the investment project will prove they really will add a value to society. It should be admitted that leasing often involves economic costs, especially in the operating lease agreements where the lesser should be compensated for the maintenance, supply, finance and replacement of equipment. Lease payments must be sufficiently high to make leasing attractive for lesser as asset's investor. At the same time the lesser is able to benefit from economies of scale in purchasing and serving of assets that may affect favorably in the cost of rent, as in the case of leasing companies for example. Related with the lease and loan as an alternative, it should be noticed that if it can be processed a loan plan that provides the same cash flow as rents in future periods but a higher inflow at the initial moment, and then it should be not taken the rent. But if happens the opposite, then the leasing is the best choice.

Objectives

The objective of this paper is to analyze the development's dynamics of financial leasing in Albania.

Procedures

Leasing activity has begun to spread in Albania but otherwise from the general trend observed in the region and beyond, Albanian leasing was leftin a very narrow segment, with a considerable weight in the economy of the country, financing mainly vehicle purchases, and is not extending to the greatest needs for financing of new technologies especially in small and medium enterprises. In the non development of the leasing must have influenced a number of factors:

a) Level of education of individuals and directors of entities;

b) Legal infrastructure;

c) Lack of political orientation and little support in the development of this activity;

d) The high cost of using;

e) Lack of a clear treatment of fiscal incentives;

f) Law No. 9396, dated 12.05.2005 "On financial leasing" and contractual relationships governing the financial leasing, but contains no provisions regarding the tax treatment of leasing activities. In the current tax legislation there are several provisions which, unlike the tax policies pursued in the region and beyond, do not contain any element favorable to leasing.

During 2005 in Albania have operated three companies that has developed the leasing activity. These companies are: Tirana Leasing, Bi-Leasing and Landeslease, where the latter is the local representative of Landeslease Germany. Raiffeisen Leasing Albania also started its operations in June 2006, while the newest company in the leasing market is Credins Leasing, which has entered in the market with full activity only in January 2008. The leasing market is growing. The two largest companies in the market have had a significant increase in the value of their funding in recent years.

Tirana Leasing is a joint venture company which is owned by the banks of the Piraeus Group, and was established in November 2004 and started its operations in April 2005. The company has created a funding surplus in the portfolio of 10 million Euros at the end of 2007. Also during 2007, Tirana Leasing financed by leasing about 10 million Euros from 6 million a year ago resulting in an annual increase of 65%. Compared with the results of the Piraeus Group companies of Leasing in the region's financial figures are up 30 times more than that and all this as a result of strong competition despite the majority of the population. This company has focused its activity only in vehicles, where vehicles make up about 90% of this portfolio, but their main objective is the expansion of activity in other items such as machinery and equipment, or buildings necessary for customer needs. Tirana Leasing does not limit an amount to provide financial lease, but once done the financial analysis which determines the solvency of entities applying for financing and also the amount to be allocated.

Landeslease stock is the first independent leasing company in Albania. It was created at the initiative of some bankers and businessmen with more experience in national and international banking and financial markets in the U.S. and Europe. It is a joint venture that is focused on leasing of Siemens products created in March 2005. She does not exercise leasing activity itself, but through intermediary banks operating as against a commission of 1%. The company is not very competitive in the market given the fact that it is focused only on certain products and rates offered aren't very competitive.

Raiffeisen Leasing Albania (RLAL)

Raiffeisen Leasing Albania celebrated its fifth anniversary, on 29 June 2011. In only 5 years, the company has progressed rapidly in all the challenges that may arise in a leasing company and exceed them. Even during the economic downturn, RLAL never shut its doors to customers and continued to do new business with them, understanding that true partnerships are valuable in good and bad times.

Raiffeisen Leasing Albania aims to keep the first place and to get more market share by offering leasing sectors not only in the current activities but also in other sectors of the economy such as food and bottling industry, green energy leasing of refurbished (such as wind mill), paper processing, medical, etc. Raiffeisen Leasing in Albania shows today that financing equipment through leasing, especially in the construction and transport, have contributed to the positive development of public and civil infrastructure in the country. Raiffeisen Leasing in Albania has started 5 years ago as the company's second financial leasing in the local market where most customers did not know almost nothing about.

Raiffeisen Leasing in Albania became the leading company in domestic market and leasing and since then, for more than 3 years, still holds the first place with a portfolio of assets financed by more than 30 million by the end of 2010 and 48% of the market. Lease of various tools in the construction and transport is a competitive advantage. The trend shows a decline in the share of SMEs, while corporate increased weight to the fact of increased funding of the construction sector assets (mainly Construction of activity conducted by large businesses). While according to products, portfolio comprises 20% of the equipment leasing and financing 80% in vehicles. Devices are divided into two major groups, medical device and informatics and telecommunications, where each has a weight equal to the total portfolio by 10% each. Vehicles are the main funding vehicle leasing group with a weight of 48%.

Credins leasing is a special unit created within Credins institution, whose activities officially began in September of 2007, but actually they were consolidated in January of 2008. It is a society that has entered in the market with great ambition to be among the best in the market by focusing both on the structure of the product and also service. The product will be acceptable by a large extent of people, offering a financing structure that allows these clients to have monthly payments financially more affordable. Leasing product presented differently from that of competitors, will have a 20% down payment and not 30%, an even more aggressive product will also be thrown on the market with a lower fee for the special tools. The Product structure will be such that the "residual value" that the customer pays at the end of the period of funding, can be either paid immediately or in installments. As for the service, it will be offered to the client all the time (during contact period and after) staying in constant contact with customers to provide assistance during the use of tools.

Final is another leasing company licensed by the Bank of Albania on 20.02.2009, which gives in use consumption items (movable). Target market are customers who do not have the financial resources to pay both for different equipment or who cannot be credited by the banks. The advantage for customers is the fact that is required no collateral for this type of financing but is simply taken to use a tool that transfers ownership of the customer at the time that it deletes all the repayments. These latter values are monthly and affordable by anyone, from 20 to 150 Euros per month. In the leasing market we could classify some of the distributors of motor vehicles in Albania, who have offered leasing for cars only to particular clients. These cases are not frequent because the car distributors have not sufficient financial and human resources to operate with multiple leasing contracts.

Sogelease is the latest leasing company licensed by the Bank of Albania on 25.01.2010, which gives in use consumption items (movable).

All these entities exert their activity in accordance with law "Finance leasing" as well as regulations and supervisory rules set by the Bank of Albania.

The Importance of financial leasing

Leasing is a modern alternative to classic credit, but can also be a method of reactivating blocked capital (lease - back). This form of financing provides to creditors as a guarantee the right of ownership, a fact that assures a low credit risk. Leasing emphasizes modern tendency of capital to make a division between those who hold the capital and those who actively use the capital.

Leasing is a way of encouraging the development of some sectors of activity. International leasing plan is a tool of export support, or companies with financing development projects and last but not least, leasing may be a way of financing investment in countries that are in the way of development. Leasing can be used as a privatization. Currently, the transfer of capital assets depends on real disposable monetary fund, financial market, as well as the structure of public and financial institutions involved in the privatization process. In this process, leasing facilitates the transfer of ownership right on immovable fixed assets of the commercial real estate company and the assets owned by state companies.

Leases can be considered as a development tool of equipment firms. By financing the purchase of equipment, a new market segment is developed: that of beneficiaries who do not have the option of full payment of these devices. In this way the market can be promoted in new equipment, performance of which is unknown by beneficiary. After testing the new equipment during the lease direct sales will be increased, if beneficiaries are satisfied with the performance of the equipment rented.

These facilities encourage funders to be oriented towards financial leasing. Another view suggests that leasing is a way of creating some funding sources of investment objectives. In this way the fact that a leasing company has a portfolio of things that it funds, could constitute a guarantee for getting some credit for the financing of certain investments in the future. An important role in creating leasing opportunities belongs to the government, which through tax incentives can attract financial resources leasing companies. Housing crisis, ritechnology and development of some sectors of activity, stimulation of exports, the acceleration of privatization, are just some ways in which the state can create barriers. When comparing leasing with the option of borrowing, must be remembered that this does not mean that an asset purchase will not only afford the fees of each. Company-lesser will have to withstand installments with its other assets. In the comparative analysis of the final choice between leasing and purchasing should be well weighed such elements as:

* Periodic expenditures of lessee;

* Advantages of using technological equipment and the latest tools;

* Services received as part of the contract;

* The flexibility of not being related by ownership;

* Impact on the company's financial position.

As in all financial analysis, decision is based on analysis of quantitative data and also on managerial discretion. In some industries, leasing is a more normal way of doing business (example: wholesale, stores usually rented, or in the transportation industries prevailing hiring of trucks, aircraft, or railway carriage). In other areas, the choice of leasing is much broader and also depends on other funding options taken into consideration at the moment.

Results

Financial leasing has some forms which are important to analyze.

1. Financial leasing. It is a way to finance the purchase of equipment. Lease period is approximately fixed and determined as the estimated economic life of equipment.

2. Operating leasing. It's a way when the lesser has signed a contract for short term use of the device.

3. Hire Purchase, which is similar to financial leasing, is a way to finance the purchase of small equipment.

4. Sale and lease-back is more or less as financial leasing, despite the fact that the lessee is the initial owner of the asset.

5. International leasing. Rent is also internationally where as landlord and tenant or one of them does not have permanent residence or domicile in Albania.

Among the main forms of financial leases are: financial leasing of sale type; direct financial leasing; leveraged leasing; a direct financing lease.

A financial lease contract is estimated as sales-type lease if it meets a set of criteria for financial leasing transaction and if the lease is structured in such a way that the landlord apart from interest income, accounts profit or loss from the transaction. To make this happen, the market value of the asset, or if this value is lower, the actual values of the minimum installment payment plus the guaranteed residual value of the asset at the end of the term of the contract shall be different from the cost of assets (book value).

Lessor in a direct financial leasing purchases an asset for use only in a transaction of lease financing and immediately gives it to rental lessees. In this case, there are not two types of income that are accounted for, but only interest income from this product, given that basically has occurred no sales transaction. Market value at the contract moment is equal to its accounting value. This type of transaction only replaces conventional borrowing transaction under which the borrower uses borrowed funds to purchase the asset. A direct financing lease differs from a sales-type lease because the lessor does not realize gain or loss from the transaction but only the interest income. In this type of financing lease, the market value of the asset in the moment of contract of financing lease is equal to its carrying value. This type of leasing transaction deals mainly with entities engaged in financial operations.

Leveraged leasing is an operation which net leasing of lesser raises funds to invest in equipment by borrowing from a credit, a substantial part of the purchase price.

A direct financing differs from a sales-type lease for the fact that the lesser does not realize gain or loss from the transaction but only the interest income.

Advantages and disadvantages of financial leasing as a financing alternative

A. Lack of demand for collateral. The main advantage of leasing is the lack of demand for collateral, the device itself serves as collateral because the lessor has ownership of the device. If the lessee is unable to make payments, the lesser takes possession of the asset. In most countries, this is a very difficult procedure.

B. Financial Flexibility. Renting is generally considered to provide financial and operational flexibility more than other ways of financing. The value of financial flexibility is influenced by financing costs and tax measures which determine the effective cost of holding cash.

C. Providing immediate cash. In circumstances where entities are not in favorable position of cash, fact that makes it difficult to invest in assets required or a change in the technology used, highlights the advantage of financial leasing for an immediate insurance of required assets.

D. Promotion of tax. In many countries the fiscal system leads to the Lessee. Lessor as owner of the device registers all Leasing payment (principal + interest) as income but deducts depreciation of the asset in order to accelerate normally. The lessee claims that installment payments are deductible from taxable income. While both parties benefit breaks in an accelerated basis, overall leasing tax payments are reduced.

E. Transfer of ownership. The possibility of transferring title of ownership at lower price creates an advantage if the asset is still in good condition and continues to bring us economic benefits for subsequent periods.

F. Lower monthly payments. Low monthly payments allow easy management of budget changes. Fixed monthly payments also improve budgeting and forecasting capacity and thus improve control of cash flows.

G. Provides additional sources of capital. Leasing does not replace or diminish the ability to use cash or bank loans for other purchases. But he adds a source of capital with products that maximize flexibility and facilitate the use of modern technology.

Among the disadvantages we can mention:

* Tax disadvantage. Fiscal advantages have played an important role in expanding the leasing sector in developed countries, while the opposite occurs in developing countries where many small business and micro- business do not benefit from tax advantages because they operate outside of the formal economy or pay taxes that are not based on their real profit.

* B. Spreading the lease to control the territory. Leasing companies in developing countries usually limit their services in urban areas, the city contracts between companies and small businesses in rural areas are not common. Factors that directly affect this are: the cost of monitoring the device, lessees in rural areas are far from suppliers.

* C. Compulsory working capital. Leasing can only finance the purchase of fixed assets. Leases cannot directly meet the needs of lessee for working capital, though small lease installments indirectly meet working capital. However, the lesser must be careful because the lack of working capital could risk the ability of lessees to generate inflows of rented equipment and not be able to pay installments. In Albania the current economic context, the advantages of leasing as a financing instrument are related primarily to the needs of rapid development of firms, especially those of the private sector. Limited financial resources may force many firms to choose, at a given moment, between the investment projects which would like to realize, by giving up some of them, which of course will have completed general plan of development of the firm and will have led to a greater profit rate. Leasing "saves" money by allowing more simultaneous realization of investment projects.

Conclusions

1. Financial leasing is effectively a capital market instrument. Although some features which assessed positive and negative sides of using it are the equal.

2. The main feature of leasing is the separation of ownership from using the asset, the legal and economic activity. A financial lease agreement depends more on the economic content of the transaction rather than the legal form of contract.

3. Analysis of leasing as a financing choice can be made only after the cash flows of the investment projects prove themselves to add real value to the company.

4. In Albania, according to the importance of financial leasing contracts, must be noted that the current conditions of our country, along with business development and overall contribution to the banking system, there is a lack of long-term funding and in particular SMEs, where access in the bank is limited, with high interest, short-term loans and unthinkable collateral.

5. Clarification of the regulatory environment for financial leasing. It is necessary to establish a regulatory authority to decide the rules of the game to market discipline, so that this can be more transparent, consolidated and competitive.

6. Equity in terms of fiscal incentives of the borrower's position in the case of financial leasing in terms of unknown costs as in the case of bank loan financing, by not having limitation in terms on interests, etc.

7. To allow leasing companies to preserve financing costs for leasing losses, given that this transaction is basically just a sort of financial that bears the risk of failure of the lessee for not paying the financial lease installments.

8. Clarification of tax treatment of leasing in Albania, especially in relation to the value added tax VAT, allowing amortization of VAT, the immediate reimbursement of this tax, even to the exclusion from this form of taxation of leasing companies in order to equalize these companies with other actors of the financial market in Albania.

9. Financial leasing activity taking place in Albania, developed by local companies, cannot be considered as the traditional finance leasing product that takes place in the world. It resembles more to a conditional purchase than a financial lease, since it does not leave the lessee the purchase option at the end of the term finance lease, but is clearly defined at the beginning of the contract that the ownership of the asset necessarily passes to the lessee, by not allowing him the right to choose at the end of the lease term whether to purchase the asset or not.

References

References

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Different materials published by SEED and the KPMG