Lease education and consulting by Vinod Kothari

The Leasing industry over the World: 

This section intends to provide a quick overview of the leasing industry World-over.

Textbooks trace the history of leasing Sumerian and Babylonian periods, but all that was asset renting, not leasing as a mode of financing. Renting of assets, obviously enough, must have been a necessary companion of transactions in those assets: the two go together.

Financial leasing is a US innovation and grew in popularity during the Great Depression when it was demonstrated that companies which leased their products were lesser victims of the depression than those that merely relied on sales.

As one of the major motivations in the growth of leasing has been tax incentives, the US leasing industry saw an unprecedented spurt during the 1950s and 1960s when investment tax credit and accelerated depreciation was allowed on capital assets. As a matter of fact, it is quite natural for leasing to grow or shrink in demand with general industrial scenario in the country, but it has been seen that a growth in demand for new equipment has an accelerated impact on the demand for new leases.

As noted elsewhere (click here), UK saw the development of asset-based transactions in hire-purchase business. Hire-purchase to begin with was a device of selling: Singer Sewing Machine company would offer its machines on hire-purchase to promote the sale of its products. Financial hire-purchase developed at a later date.

Coming of age, there is very little difference today between the equipment lease instrument and the hire-purchase instrument. (Click here for details). The difference, if at all, is purely technical and is a creation of regulation.

With global volumes estimated at about USD 350 billion, Leasing is presently the third most important source of financing in the World, after loans and Eurobonds. According to data published by London Financial Group, till 1991, leasing occupied the second largest place in financing, but slipped to Eurobonds thereafter.

The growth of leasing in developed markets has been subdued in the 1990s, and in the emerging markets, it is still growing quite very fast.

The reasons for decline in growth (in some countries, a negative growth continuously for some years) are - increased regulation and taxation problems in most countries, discontinuation of some of the traditional advantages of leasing such as accounting distinction and tax privileges etc.

USA remains the largest leasing market in the World. Of the estimated $582.1 billion spent by business on productive assets in 1997, $179.8 billion or almost 31% was acquired through leasing, states the U.S. Commerce Department. In 1998, the Commerce Department projects of the $593.0 billion of all equipment investment, $183.4 billion or nearly 31% will be acquired through leasing. 80% of U.S. companies lease all or some of their equipment.

Japan is the second largest leasing market in the World. Leasing volume in 1996-97 was estimated at about 8286 billion yen, representing an increase of 8.7% over previous year and crossing the 8 trillion mark for the first time in 5 years. Notably, Japan had registered negative growth rates for several years after 1991.

Japanese economy is crisis-ridden currently - as usual, all business react to crises, but leasing does so more than others.

The most impressive growth rates in leasing have been achieved in emerging markets - Korea, Latin American countries, India, etc.

IFC Washington has played a key role in encouraging leasing in developing economies. IFC has published a document containing its experiences in leasing in emerging markets. Some brief extracts have been put on the Web also.