Leasing, as a new banking instrument, has grown vastly to the extent of being an excellent delivery mechanism for all types of businesses and institutions including government entities.
In many countries there is, usually, a law or a regulation governing and defining leasing activities.
By all means, leasing companies in all regimes should be regulated, supervised and examined by central banks.
Leasing is an investment banking activity, however, it should always be taken and regarded with utmost care due to the legal and financial implications associated with it.
Failure to carefully examine the lease activity or lease proposal or failure to ascertain the exact parameters of a proposed leasing transaction can have profound risky financial and legal consequences.
Repercussions that occur as a result of lack of awareness in these respective fields cost business organisations and institutions a lot of money and other uncountable losses.
This unclear stand comes from the fact that, in many places it is not clear who should be responsible in the institution to decide on leasing, to examine the cost reduction and bottom line profits as it relates, for instance, to equipment leasing or project financing? Which is which?
Is it the responsibility of procurement, accounts, the controller, or should it be that of all personnel involved with the leasing process. This point should be studied and decided upon so as to give the responsibility to specific persons or departments.
While in the process of leasing it is, also, essential to know that each funder has different rates, policies, terms and conditions, different billing procedures and documentation.
It is also imperative to note that in large funding applications with long-term requirements, securitisation of funds with one or more lenders may become part of the leasing contract.
Therefore, persons or department responsible for signing a lease agreement or other financial contract should be fully prepared to understand every aspect of the agreement.
Unfortunately, few contracts actually end up prioritising the client’s needs, many contracts have hidden and or undisclosed exposures.
However, we could say that no one person or company or institution is immune from this invisible side of leasing activities.
Leasing now is needed to cover many projects or activities at different volume and rates.
Accordingly, we could face many difficult situations in any of the leasing contracts being small or large, and it makes no difference whether the lease contract is for a small car or a fleet of planes or vessels.
In other words, let the buyer beware, because there could be unforeseen exposure conditions in all types of leasing contracts.
Here comes the importance of leasing know-how from banking perspective.
In all cases, the funding agreement should be carefully read and verified by the personnel concerned and relevant departments.
Some contracts are small and short, while others could be long and include very complicated details.
There are some issues that need careful consideration, including, are there end-of-term obligations or exposures you may not be aware of such as escalation clauses providing for increased payment amounts during the term of the lease, or early termination penalties, etc.
All these points and more should be taken into consideration at the time of negotiating the deal and signing the agreement.
Knowledge and awareness about leasing agreements is mandatory.
Clear strategy and policies for leasing should be there in the bank or financial institution, we mention this because it has been noticed that there are many places where they are not aware that they spend more than they need to on their leases.
It has been observed that many problems occur when different departments, in one place, administer and follow leases.
There are reasons, of course, and benefits for purchasing decentralisation, however, when it comes to leasing it has been proved that centralised administration reduces many risks that encumber the components of a lease contract.
Leasing activity, undoubtedly, for many parties saves money, time, energy and know-how. Banks and financial institutions could benefit a lot and add value to their credit portfolio when dealing with leasing, however, based on above difficulties and its associated risks, more careful and wise approach is recommended all through so as to achieve best results and valuable profits.
(The author is a Bahrain-based lawyer and professor of
business law.)
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