Leasing industry needs better fiscal regime to grow, boost nation’s GDP – ELAN’s Emonuwa

ANDREW EMONUWA, Executive Secretary, Equipment Leasing Association of Nigeria (ELAN) in this interview with business a.m.’s TOLA AKINMUTIMI, speaks on the strategic roles equipment leasing is playing in the nation’s economy and how its contributions could be improved through appropriate policy measures, amongst other issues.

Sir, the leasing industry has been making modest contributions to Nigeria’s Gross Domestic Product in recent years. As an industry top player, what are your projections for the industry in the years ahead?

Yes, as you rightly noted the industry has been growing steadily and the efforts of operators have been rewarding. The prospect of the industry has been bright because if you look at most sectors of the economy you will see that the financing gap has always been there. There is no sector of the economy today that does not require one form of equipment or the other.

So, you find out that the industry is growing with members creating awareness about what leasing can do to boost the nation’s economic growth.  This is more so with the recent economic policies of the government and what leasing can do to ensure support for the developmental agenda of the country. For instance, in the Economic Recovery and Growth Plan (ERGP) we see major roles leasing can play to achieve its objectives; and if you look at the growth trend of the economy, whether it is growing or not, leasing has a very critical role to play based on its capital formation and wealth creation potential in the economy. For the past few years, the industry has been growing modestly. From our records, in the last 15 years the industry has recorded over N4.5 trillion growth trajectory and the recent statistics that we have about the 2018 performance, we have about N1.6 trillion outstanding volume. So, like I said the potential of the industry is great and it is going to be more impactful on the economy in the years ahead in terms of job creation, capital formation and empowerment of our people.

A cursory assessment of the distribution of lease volume by customer base from the 2017 and 2018 statistics showed that the informal customers appear not to be embracing leasing as a finance option for their business. What do you think the operators could do to encourage these critical players in the economy to explore the opportunities in the industry?

I think what is paramount here has to do with the issue of awareness which the Equipment Leasing Association of Nigeria, our association, is already doing, especially by trying to create awareness about what leasing can do to reduce their financing burden.  Again, you also find that the structure of small businesses does not create or encourage operators to develop the appetite to reach out to them. But then, leasing throughout the world remains the best way to reach out to these MSMEs because leasing is a non-collateralised transaction as the equipment itself serves as the collateral. In recent times, the World Bank has been doing a lot to support equipment leasing to small and micro enterprises and I think that is a welcomed development. In Nigeria our members are doing a lot but because of the scope of the country and scope of the economy, the depth of leasing in the informal sector is not very deep but we are doing our best to make sure we take leasing to that sub-sector. Most of our members that are dealing with that category of businesses, the small and medium scale enterprises have specialized products to meet their needs. So, we are doing a lot but that may not be enough now, but we will surely get there.

Based on the 2018 statistics by your association on the lease volume by sector, the manufacturing sector accounted for a mere 12% of the volume. How would you justify this low volume to the real sector within the context of sectoral leasing volumes in the developed economies?

I think this is a reflection of the development of the nation’s manufacturing sector itself. If you look at the sector, you will find out that many companies are not doing well in terms of capacity utilization and other areas.  So, there is no sense in saying, for instance, I want equipment and then you cannot use such to optimize your operations.  But then, when we look at the 12 percent in absolute figures, that translates to about N600 billion. We equally wanted to work with the Manufacturers Association of Nigeria at a point in time to be able to identify some of their members who would probably want to embrace leasing as a financing option. Again, given the challenges in the industry itself the volume could be part of orientation or awareness of the operators who are doing a great job in terms of the SMEs. But for the corporates, yes we are supporting them with leasing equipment but it can be better.     

ELAN projected during the launching of the Federal Government’s ERGP, that it will create more opportunities to grow the leasing industry. Now, looking at the implementation of the plan one year after, could you say if the implementation has improved leasing volume generally?

As you rightly said, the ERGP is a growth plan and therefore would depend on several policies and other variables to achieve its goals. At the setting of the various laboratories for the plan, we were involved and we tried to see how leasing could be used to drive some key sectors of the economy like mining and manufacturing. We have been talking to them and we have been engaging the government and can say that so far so good. The roadmap is still there and we are still following it and our association also had some engagement from the World Bank and we want to see how we can work with government because leasing is a key to unlocking the potential of the key sectors of the economy. So,  we can say so far so good with the ERGP, as a lot has been done and a lot has been achieved in terms of the framework and where the government wants to go with the plan. So, the potential of the plan for the economy and leasing industry is huge.

Assessing the nation’s leasing industry environment, vis-à-vis what obtains in other climes in terms of policy measures, what would you say the Nigerian government should do to make the environment more supportive to leasing business?

Basically, there are some legislative and policy issues we have been engaging government on over the years and the government has been taking steps to address them. For instance, the Equipment Leasing Act 2015, which provided for the legal framework guiding the relationship of the lessee and the lessor, amongst others. Part of what we are looking at now is the funding mechanism or arrangement because it is the raw material for leasing and it requires that the funding mechanism is there because what we have today in Nigeria is short-term fund sources which are not necessarily suitable for leasing business which requires medium to long term funds. So, to avoid the issue of transactional mismatch in the industry, the type of funding we require is medium to long term. We are also advocating for government to put leasing as part of the beneficiaries of some of these specialised funds government has created to intervene in key sectors like agriculture and power sectors. Although the law is there but we also want leasing to enjoy that type of specialized funding vehicles with low interest rate regime to grow the industry. So, funding is a major issue we feel the government should tackle such that leasing business can be extended to other sectors with huge financing gap. Then, to some extent, the tax regime is not really supportive of leasing business, especially the issue of withholding tax. The withholding tax for the leasing industry is 10 percent and that is really cumbersome. Although withholding tax is not a tax itself, but it is the recovering of the 10 percent; because the profit of the leasing companies might not be able to carry the 10 percent burden. Those are the issues we are trying to look at but so far, we continue to operate within these fiscal constraints. But we feel the tax regime could be fine-tuned and made better for operators to do business. Another challenge is that we see that rate of default of lessees is becoming a source of worry for our members. We found that some people take equipment and don’t want to pay, possibly not because they don’t want to, but because of disenabling business environment. We need government’s support to mitigate these constraints and urgently so.

Yes, the issue of payment default by lessees in Nigeria is becoming increasingly worrisome to industry analysts in view of its far-reaching implications for operators’ sustainable funding and the industry’s contributions to the GDP. How have your members been coping with this problem, which may not be totally due to the fault of the lessees?

I want to say that the growing rate of lessees’ default is part of what is responsible for lessors’ reduced appetite for the informal sector, especially the MSMEs, because operators tend to mitigate risks by leasing to entities whose credit rating is high. So, what is happening now is that in order to manage the rate of default, operators tend to make the risk assessment process very tedious and those who finally qualify for equipment leasing among the MSMEs are always few. This is because operators need to protect their funds too because they also source for funds from somewhere which they have to pay back. So, what is happening in the industry is that operators are risk averse and the rate of default is not peculiar to the small entrepreneurs as we have some big companies also defaulting in payment too due to the problem of corporate failures here and there. So, lessors are trying to manage the risks by adopting more efficient mechanisms in terms of product development, in terms of assets deployment and in terms of the sector they want to play in. For instance, you find out that they are trying to shy away from specialized equipment leasing and focus more on general leasing such that if there is any default, they can quickly recover the equipment and avert losses. So, like the product I talked about, operators are trying to see how they can control the equipment through operating lease arrangement and by so doing minimize their risk exposure.

Still on this increasing worrisome rate of lessees’ default, a few days ago, international lessors announced that Nigerian airline operators had been blacklisted for failure to meet their repayment obligations. What is your view on the implications of this sanction for the nation’s aviation sector and how do you think this ugly development could be reversed?

Aircraft leasing, is a big ticket leasing and has become a major source of airplanes acquisition all over the world , because of the huge capital outlay involved in outright purchase. The blacklisting will mean fewer aircrafts being acquired by Nigerian companies as the capacity of Nigerian lessors to finance such big ticket transactions, is constrained by paucity of funds. The overall implication if not addressed will see our airspace being dominated by old planes with far reaching effect on air safety. It is therefore imperative for airline operators to be more committed to their obligations in order to build confidence in the international investing community. If possible, the Nigerian aviation authority should intervene and facilitate the lifting of such ban.

You spoke about the operating environment and the challenges operators are contending with in their efforts to grow the leasing industry. What are you really looking at in terms of fiscal measures by the government that you think could reduce the current challenges of lessors and improve their operational efficiency and profitability?

I think in 2010 we had some engagements with the fiscal authorities, especially the Federal Inland Revenue Service, that led to the release of tax guidelines on leasing. Yes, the tax regime can still be better because the issue of Value Added Tax and capital allowance were some of the issues we discussed with them then. But the issue of VAT is now no longer applicable in terms of finance lease because what that did before was a kind of double taxation arrangement. So, this is no longer a problem but we still have some, like the issue of withholding tax, which I mentioned earlier, which is now a work in progress. The important thing is that we are engaging the fiscal authorities in discussions with a view to minimizing our members’ tax burden and we are happy that government is seeing the increasing roles of leasing in development and they are prepared to support efforts we are making to grow the industry.

Sir, a major sub-market which it appears your members are not fully exploring is the domestic/household segment which also has a huge potential. What do you think is responsible for this, especially when it is clear that housewives would be happy to lease items and pay in installment as their real incomes seem to be dwindling now?

We call this segment the consumer lease market. The picture you painted is not really the position of the market because consumer leasing is a major product in the industry and our members are doing it but it is just the credit risk profiling that is the issue. Before now, operators want to look at your employment, where do you work so that when they give you this asset, you can pay back but at the same time our members have really suffered doing consumer leasing. The major problem is we don’t have in Nigeria a reliable identity database of the people such that when a lessee probably relocate from one street in a city to another or from one state to another it becomes practically difficult to trace or locate him. So, that is one of the challenges our members contended with and they were doing a lot to promote consumer leasing through TV commercials and other media and many are still doing that today. In fact, over 90 percent of our members are doing consumer leasing and some have separate portfolio for this.