Overview of the Industry
Equipment leasing is, without doubt, the creative financing alternative of today. It is an imposing industry in terms of scope, size and potential, as more and more of the world’s equipment needs are met through this unique form of financing. What is the genesis of this complex yet exciting industry? Why has it caught the imagination and attention of the press, business world and consuming public?

Leasing offers many benefits to all parties in the transaction, including low payments, in the case of Operating Leases off balance sheet financing to the lessee and financing income to the Lessor. The range of equipment being leased is vast, from basic copier leases to extremely complex leveraged leases involving nuclear facilities. Leasing truly has something to offer everyone.

Early History
Although the exact date of the first leasing transaction is unknown, the earliest records of leasing are those of transactions occurring sometime before 2000 BC, in the ancient Sumerian city of Ur. Sumerian lease documents, which were produced in damp clay, recorded transactions ranging from leases for agricultural tools and land and water rights to oxen and other animals. The clay tablets, some of which were found as recently as 1984, indicate the priests of the temples (lessors) leased to the local farmers (lessees). These early documents do not preclude the possibility that leasing may have existed elsewhere in the world at an earlier date but no documentation of such leases has been preserved. Asia was no exception, where the system of leasing of cultivable paddy land and fishing boats, was practiced by feudal landlords.

Many early legal systems make mention of the financial tool called leasing. The most noteworthy record of leasing laws relates to roughly 1700 BC, when the famous Babylonian King, Hammurabi, incorporated ancient Sumerian and Achaian mores concerning leasing into his extensive collection of laws.

Just southeast of Babylon , in the ancient city of Nippur , the Murashu family established what was to become a well known bank and leasing house in approximately 400 to 450 BC The Murashus provided financial services that reflected the current economic and social conditions of the Persian Empire . They specialized in land leasing, but also leased oxen and agricultural equipment, as well as seed.

Other ancient civilizations, including the Greeks, Romans and Egyptians found leasing to be attractive and affordable and, at times, the only viable method of financing equipment, land and livestock. The ancient Phoenicians, long known for their expertise in shipping and trade, chartered their ships. The charters resembled a very pure form of an equipment lease. Many short term charters provided for use of the crew as well as the ship. Longer-term charters also were written for periods covering the estimated economic life of the ships and required the lessee to assume most of the benefits and obligations of ownership. Many of the same kinds of negotiating issues that today’s lessors and lessees face were addressed in these ancient ship charters.

Leasing in earlier times was not limited to the leasing of only one or two types of property. In fact, historical evidence provides illustrations of the leasing of various types of agricultural and industrial equipment used in militaristic endeavours. As an example, in 1066 AD, two large invasion fleets (one Norwegian and one Norman) sailed towards England within a two-week period. Both voyages were great undertakings for their time. Neither the Norwegian King nor the Norman duke possessed the economic resources to finance such large projects; therefore, they utilized forms of lease financing to secure the necessary ships, crew and equipment.

In medieval times, lease-related activities were limited primarily to farming implements and horses, although unique opportunities to utilize leasing occasionally occurred. Many knights of old were known to have leased their armor. For instance, in 1248, Bonfils Manganella of Gaeta leased a suit of armor for the Seventh Crusade, paying a lease rental of close to 25% of its original value.

Leasing in the United Kingdom
For centuries, the leasing of personal property was not recognized under British common law. The long term leasing of real property was allowed, however, and was, in many cases, the only means available to acquire the use of land, because of a very rigid system of land laws. Eventually, with the writing of the Statute of Wales in 1284, the leasing of personal property became permissible. Some people, however, used leasing as a means to secretly transfer property, with the intention of defrauding creditors who had based credit decisions on the strength of the apparent ownership of the property. An act passed 1571 prohibited such fraudulent practices but still allowed legitimate leases entered into for reasonable consideration.

The early 1800's saw a great increase in the amount and types of equipment being leased in the United Kingdom . The development of the agricultural, manufacturing and transportation industries required new types of equipment, many of which were suitable for lease financing. The concomitant expansion of the railroads also brought about major advances in the development and use of leasing. Most early railroad companies were able to supply only the track and charged tolls for the use of their lines. This left open the opportunity for many entrepreneurs to separately provide the railroad companies and independent shippers with locomotives and railcars.

Leasing in the United States
As the demand for lease financing of all kinds and types of equipment continued to grow in the United Kingdom , so too did the need for similarly creative forms of finance. In the U. S., the first recorded leases of personal property in the 1700's provided for the leasing of horses, buggies and wagons by liverymen. Leasing developed further as the types of, and need for, equipment increased. The real growth in U. S. leasing, however, was caused by the railroad industry.

Railroad companies in the U.S. faced many of the same problems as their counterparts in the United Kingdom . Because expansion was called for, yet conventional financing was hard to come by, the railroad companies searched for ways to either obtain the use of the railcars or to have the cars provided directly to the private shippers.

This need created opportunities for investors to earn a profitable return by providing financing for locomotives and railcars through equipment trusts. Banks or trust companies set up and administered these trusts and equipment trust certificates, representing the right to receive a return of principal and interest on invested funds, were sold to the investors. The trust’s administrator paid the manufacturer for the equipment and collected rentals from the end-user during the term of the trust. The rentals covered the obligation of the equipment trust certificates issued to the investors.

Many variations of the equipment trust came into being. The most widely recognized type of railroad financing was the Philadelphia Plan, which allowed for the transfer of ownership to the end-user upon completion of an initial term. The Philadelphia Plan became the forerunner of today’s conditional sales contracts and money-over-money leases.

In the early 1900s, many railroad leasing companies recognized that a growing number of shippers did not want the long-term control or ownership of railcars inherent in the equipment trust, but, instead, wanted only their short-term use. These leasing companies began offering shorter-term contracts, at the expiration of which the railcars was to be returned to the leasing company, which continued to retain title. These types of leases marked the beginning of the true, or operating, leases that are offered so commonly today.

In other areas of leasing growth, the developing economy as well as the desire of manufacturers to provide financing for their products caused a surge of installment credit in the U. S. during the early 1900s. Manufacturers or vendors believed they would be able to sell more products if they were able to offer an affordable payment plan along with the desired equipment; hence, the beginning of lease financing provided by vendors. Apparently those early manufacturers were right, as vendor leasing is continuing as a significant force in the equipment leasing industry today.

Certain manufacturers, however, were looking for something more. Although definitely interested in the profits that could be made by offering financial services, manufacturers were equally interested in protecting the proprietary technology they had developed and built into their new machinery. Many viewed the leasing (versus selling) of equipment as a way to protect the ownership of such technology, thereby creating a monopoly of sorts.

As early as 1877, the Bell Telephone Company made it a policy to provide equipment in a customer’s home or office on a rental basis. Similarly, the Hughes Tool company kept strict control over the amount paid for its specialized 166-edged drill bit by providing it to wellhead operators on a lease basis. Other examples followed, most notably U. S. Shoe Machinery, which manufactured boot and shoe making equipment and also employed clauses tying customers to its products exclusively. Eventually, however, the enforcement of federal anti-trust legislation required manufacturers to offer their equipment for sale.

The U. S. Government’s use of cost-plus contracts in World War II was another important impetus to the development of the leasing industry. In most contracts, government contractors were allowed to earn only a certain amount above and beyond their costs. These contractors realized that many of their goods or services were needed by the government only during wartime, and that the government would not in all likelihood, renew those contracts once the war was over. A company that purchased machinery for a specific governmental project could be exposed to a high degree of risk if the contract was not renewed because the contractor may have not yet recovered its equipment purchase costs. Furthermore, if the equipment was specialized, it may have had little market value. Government contractors recognized that leasing, as opposed to buying, of production equipment during a specific contract period minimized their exposure to contract non-renewals. In some cases in which large specialized machinery and tools were required, the government had to act as the Lessor to the contractors.

During this same time period, the vehicle leasing industry was beginning to develop on a large scale. Although the first car rental business dates back to 1918, Zollie Frank, a Chicago car dealer who offered long-term fleet leasing of automobiles in the early 1940's, is credited as being the originator of the vehicle leasing industry.

As was previously mentioned, many manufacturers recognized the value of providing financing for their products throughout the development of the U. S. leasing industry. Some manufacturers even set up their own finance organizations. The manufacturers who chose not to, or who were unable to provide financing, were left with two options: to let the customer seek financing independently, as before, or to work with an independent financial concern to set up some type of vendor financing arrangement or program. Independent, or third-party, leasing companies were formed to provide this specific product financing for manufacturers and dealers. Eventually, independent leasing companies also began providing leasing services directly to the lessee for other, unrelated equipment.

Leasing in Asia
The Japanese were it’s pioneers in the Asian region in the early 1970’s and now there are almost 15 asian countries with mature leasing markets, contributing upto a third of the regions investment in capital goods.

In most asian countries, leasing is considered an alternative source of long and medium term finance. The other sources of finance available to prospective investors are equipment finance schemes, project finance, loans to small and medium scale industries and hire-purchase finance.

Project finance and equipment finance are provided by the Development Finance Institutions (DFI) . Finance to small and medium scale industries is available from DFI”s as well as the local commercial banks.

Despite the available alternatives, leasing is a very popular mode of financing assets in asia and the growth of leasing companies over the past thirty years has been rapid.

In the year ended 31st March 1996 , the total value of leases executed amounted to 12% of the total value of capital expenditure of the country while in the previous year it was 11%. This figure is low compared to the percentage utilization of lease finance in other countries which range from 14 - 20%. There is, therefore, tremendous scope for expansion of the industry.

The popularity of leasing as an instrument of finance is due to the convenience with which a lease could be obtained by users and the greater accessibility of lease finance to small and medium scale industrialists to whom traditional bank borrowing is not always readily available.

Leasing in Maldives
Leasing was introduced to the Maldives with the formation of Maldives Leasing Company Pvt. Ltd. In 2002, formed under the patronage of the Ministry of Finance and the MMA, with a strategic investment by the IFC (the private sector investment arm of the World Bank) and the NDB of Sri Lanka as a technical partner. The all inclusive regulations for Finance Leasing Companies and Finance leasing Transactions became law in the Maldives in 2001, paving the way for leasing industry to make a significant contribution to the growth and development of the national economy.

Leases contracted in the Maldives are full pay-out finance leases. The lease period ranges from two to five years and rarely extends beyond five years.

Modern day Leasing
The tax attributes of equipment ownership, which have become a major force in the leasing industry, did not become so until the advent of accelerated depreciation. These tax benefits, inuring to the owners of equipment, had little value to companies that could not fully utilize them. Lessors and lessees soon realized that a Lessor in a tax-oriented lease could claim the tax benefits of ownership and pass them back to the lessee in the form of reduced rentals, which were often much lower than the payment on a corresponding equipment loan. This type of lease created a two-fold benefit:

In order to realize the expected tax benefits of ownership in a tax-oriented lease, however, lessors had to be very careful to make certain their agreement with the lessee was, in fact, a lease in the eyes of the Tax Authorities.

The technology revolution of the 1960s had a major impact upon the growth of modern day equipment lease financing, as firms recognized the competitive advantages of using equipment, such as computers and communication systems, that incorporated the most advanced technology.

Although these firms needed this new equipment; they were often wary of its future economic value. They found leasing to be a flexible way to hedge against potential technology obsolescence. Additionally, the cost of acquiring this new technology was, at times, prohibitive. Many firms that could not afford the down payment required by the bank, let alone the full purchase price, found leasing to be an affordable means of acquiring the necessary equipment. The significant amount of computers and other office equipment leased during the 1960s was very critical to the growth of the leasing industry, as those leases represented the introduction of many companies to equipment leasing.

Tax and accounting factors
The modern leveraged lease structure came of age during the 1970s. An investor, or equity participant, in a leveraged lease was entitled to 100% of the available tax benefits of ownership, while paying out only a portion of the leased equipment’s cost. The rest was borrowed from a non-recourse funding source. Investors in this type of lease were concerned over the availability of tax benefits in a specific transaction, as these benefits represented a major portion of the investor’s return in the lease. The tides of tax law changes have had a significant impact on the growth and direction of the equipment leasing industry. The value of depreciation in lease structures also has been impacted by tax law change.

The constantly changing tax laws have altered not only the tax benefits of equipment ownership, and, hence, the economics of tax-oriented leasing, but also the specific definitions of what constitutes a lease in the eyes of the Tax Authorities.

The financial reporting attributes of a lease have faced no less a dynamic history. The rapid growth of tax-oriented leases in the 1960s and early 1970s brought about many questions as to the appropriate financial reporting treatment for such transactions. Attempts were made to formulate accounting guidelines; however, it was not until 1976, prompted by pressure on the accounting profession from the Securities and Exchange Commission in the U.S. , that the newly formed financial Accounting Standards Board (FASB) issued FASB Statement No. 13 (FASB 13). FASB 13 sets forth comprehensive guidelines for both Lessor and lessee lease accounting. FASB 13 has given much greater uniformity to the financial reporting of equipment leases, although, since 1976, many other statements, interpretations and technical bulletins have been issued by the FASB in an attempt to further clarify FASB 13.

The leasing industry has evolved from and been impacted by various significant events. Many of these important events, such as the technology boom, the proliferation of sales-aid financing and tax and accounting guidelines, have occurred in the past 30 years. In spite of all the changes, however, the core leasing concepts of over 4,000 years ago are still a part of today’s industry. Because of this, it should be evident to both outsider and insider alike that the leasing industry is very dynamic. The strength of the industry as a whole is characterized by its resiliency and its ability to make the most of a changing environment.

Equipment Leasing today
Today, the equipment leasing industry remains a significant force in equipment finance. Whether due to the benefits of obsolescence avoidance, off balance sheet financing, income tax factors, 100% financing or flexibility, leasing remains the single most widely-used method of external finance in the world today. The leasing industry in Asia generates around USD 100 billion in new lease volume each year and provides almost a third of the external financing for investment in capital goods in the region. Worldwide, this number approaches $650 billion.

Market Segments
Now, more than ever before, all types of equipment are leased. Automobiles, aircraft, personal computers, mainframes, laboratory equipment, nuclear magnetic images, adding machines, satellites, trucks and ships are all commonly leased. The differing types of equipment and respective price ranges help to divide the overall leasing industry into three core segments: the small, middle and large ticket market. (Some lessors further subdivide these categories; for example, the small ticket can be broken down into mini-ticket and micro-ticket leasing.) Each market is characterized by the range of its transaction sizes, the key decision factors influencing lessees and the most common types of lease products available.

The small ticket market is that portion of the overall marketplace that concentrates on leasing lower-priced equipment, such as copiers, fax machines, personal computers and word processors. The cut-off point between the small ticket market in the Maldives ranges from Mrf 150,000. to Mrf 1,300,00. depending upon individual firms’ interpretations. The lessee in this market is more concerned with the convenience of acquisition, maintenance and disposal than it is with cost. Although tax-oriented leases can be written in the small ticket market, money-over-money leases and conditional sales contracts are more common.

The large ticket market, on the other hand, is very price sensitive, as it focuses on higher-priced equipment such as aircraft, mainframe computers, ships and telecommunications equipment. The large ticket market typically is defined as equipment having a cost of Mrf 3,000,000. or more. This market is quite competitive because of the number of interested parties vying for these transactions. This market, for the most part, consists of large tax oriented leveraged leases. Documentation tends to be more involved than in the small ticket market because of the size and complexity of each individual transactions.

The middle market, by definition, fills the very wide gap between the small and large ticket markets, both in size and complexity. This market is influenced by a number of different and, at times, conflicting factors. Price and convenience are common issues surfacing in the negotiation process. Lessors focusing on the middle market often offer both tax and money-over-money leases, depending upon the specific needs of an individual lessee.

Todays Lessors
Estimates approximate the number of active equipment lessors at roughly 2,000 to 3,000 companies worldwide, and 500 in Asia alone. Few accurate statistics exist concerning the proportion of the leasing industry that any individual Lessor group represents. Nevertheless, all leasing companies, can be classified into one of three groups ; captive finance organizations and lease brokers, or packages.

Independent leasing companies represent a large part of the leasing industry. These companies are independent of any one manufacturer. They purchase equipment from various manufacturers and then lease the equipment to the end-user or lessee. Independent leasing companies often are referred to as third-party lessors. The three parties are the Lessor, the unrelated manufacturer and, of course, the lessee. Financial institutions involved in leasing, such as banks, DFI’s and Finance companies, also are considered independent lessors. Many of these financial institution lessors provide lease financing to lessees as well as funding to other leasing companies. Independent lessors also may provide lease financing plans (called vendor programs) to equipment manufacturers.

The second type of Lessor is a captive Lessor. Such a Lessor is created when a manufacturer (or equipment dealer) decides to establish a leasing company to finance its products. The manufacturer realizes that, by providing lease financing, it can increase the sales of its products over the level of sales utilizing traditional financing alone. The captive Lessor also is referred to as a two-party Lessor. One party consists of the consolidated parent and captive leasing subsidiary, and other party is the lessee (or actual user) of the equipment.

The final type of leasing company is the lease broker, or packager. The lease broker may find the interested lessee, arrange for the equipment with the manufacturer, secure debt financing for the Lessor to use in purchasing the leased equipment and locate the ultimate Lessor in the lease transaction. The lease broker typically does not own the equipment or retain the lease transaction for its own account. The broker provides one or more various services, depending upon what is needed in a given lease transaction.

Industry Associations
Over the years, a number of leasing associations have emerged to assist their member firms in identifying and maximizing the opportunities available in this burgeoning industry. Some associations are geographically specific, such as national or regional, whereas many others focus on a specific type of leased equipment, such as computers, aircraft or vehicles. Each association, regardless of its specific focus, provides its member firms with a wide variety of valuable services. The Leasing Association of Sri Lanka is one in Sri Lanka . LeaseEurope, AsiaLease (The Asian Leasing and Finance Association, of which MFLC is a member) and USLease, are some of the others worldwide.

Why Leasing?
The bottom-line reason equipment leasing continues to grow is that leasing meets the needs of so many types and sizes of companies. For example, mature, profitable companies may lease equipment to keep bank credit lines open for other purposes. Young, start-up companies lease to conserve cash, and firms requiring state-of-the-art technology lease equipment to avoid technological obsolescence and preserve the ability to upgrade. Leasing meets the different needs of each company: Large companies that want to leave managers free to acquire small, non-capital budget items of equipment; midsized companies that cannot tap the stock or bond markets; and small companies that like the convenience of leasing all utilize this creative financing alternative.