.
AN ASSESSMENT OF THE LEASING INDUSTRY
INTHE PHILIPPINES
LEILA CALDERON
easing is the process by which a firm can avail itself
L of the use of certain fixed assets for which it must
make a series of contraCtual~ periodic, tax-deductible
payments. The lessee is the receiver of the services of the
assets under the lease contract, whereas the lessor is the
owner of the assets (Gitman 1987).
A lease can be classified under two general types: the
operating and financial lease. . DiwaUase
The operating lease is a short-term contract ranging
nom one day to twoyears. The contract is cancellable and not
a fiill-payout arrangement. Incidental expenses to possession
and use is borne by the lessor and the lessee has no purchase
option at the end of the lease term.
, Financial lease or capital lease or "full payout lease",
as defined in Revenue Regulations No. 1986, is a contract
involving payment over an obligatory period (also called
primary or basic period), of specified rental amounts for
the use ofa lessor's property sufficient in total to amortize
the capital outlay of the lessor, and to provide for the
lessor's borr9wing costs an~ profits. This type of lease is
long-term in nature since the contract is non-cancellable
and covers a period of not less than seven hundred thirty
(730) days or two (2) years until seven (7) years. Main-
'tenance, insurance, taxes and other related expenses inci-
dental to ownership are...shouldered by the lessee. How-
ever, upon condu~ion of the lease contract, the l~ed asset
may be purchased by the lessee at its residual or estimated
market value.
Here in the Philippines, leasing. as defined under the
Rules and Regulations of Republic Act 5980, also known as
THE FINANCE COMPANY ACf, shall refer to financial
leasing which is a mode of extending credit through a non-
cancellable contract under which the lessor (owner of the
-assets being leased) purchases or acquires at the ins~ceofthe
10
lessee (receiver of the services of the asseIS under the lease
contract) heavy equipment, motor vehicles, industrial
machinery, appliances, business and office machines; and
other movable property, in consideration of the periodic
payment by the lessee of a fixed amount of money
sufficient to cover at least seventy percent (70%) of the
purchase price?r acquisition cost, including any inciden-
tal expenses and a margin of profit. The same conditions
under the financial lease as mentioned earlier are followed
in this country.
LEASE FINANCING ARRANGEMENTS .
nderthedirect lease, which is the simplest leaseanangc-
U ment, the lessor or owner leases the fixed asset to the
lessee. The lessee acquires the use of me asset, along with a
contractual obligation to make lease payments to the 1essQr'.
.
Under the sale and leaseback, the owner ofthe asset sells.
it to another party with an arrangement that die buyer will
lease it back to 'the furmer owner. The asset is usually sold
approximatdyat its market Y.due. The preVious owner may
initiate this move if they need additional working capital.
Selling the fixed asset would meatl additional cash to the
company's coffers, which 'can improve iis working capital.
Under this arrangement, the previous owner (now the lessee)
still benefits from the economic use of the assdS during the
basic lease period. In turn, the lessee is obligared to make
periodic lease payments and gives up the tide to rh:e asset.
Consequently, the lessor re:ilizes any residual Y.due the asset
might have at the end of the lease period.
UvuageJ lease
The lessor finanCes the purchase of the asset through a
debt-equitymix. The owner ofthe asset provides only a small
portion of the capital from his own funds to purchase
equipment fur lease. The equity portion may range from
twenty percent to thirty percent (200/o-3Q%). The balance fur
 ASSESSMENT OF LEASING INDUSTRY

payment of the asset is financed by financial institutions. lessee is placed at an .advantage in still getting
Usually, theloan is secured bya mortgage on the asset, as well credit from financial institutions.
as by the assignment of the lease payments. .In this case, the 2) Leasing prevents dilution of ownerhip. The
lessor is the borrower. One adV1lIltage ofthis amngement is lessee makes use of the capital assets without
that the lessor need not tie up all his available funds in expanding its capital base. The lessor in tum gets
. purchasing the asset. Only a small portion of his funds is compensated in the form of residual value of
immediately tied to the asset. The restofhis available funds em leased assets.
be used fOr worlcing c;apitd or irMstment ~ while still 3) Leasingprovides protection against obSolesance.
mainWning the payment ofthe loan amortizarion on d~ asset. The lessee may be given the fte:xibilityto upgrade
or add on equipment at any point during the
Yendor Lease lease term.
It is a sales tool employ~ by equipment manufacturers
or distributors to offer leasing to their rustomers through a tie However, there are also disadvantages to lease fiDanc-
up with a leas~ company. ing~ The lessee may have a problem in totalftexibility in the
use, deployment, adaption, rustomization and servicing of
SynJicattd Lease or Lease Packaging · the equipment to suit his specific needs since the lessor retains
A form oflease arrangement whereby big ticket leases ownership of the leased asset. Also, the lessee loses potential
thatinvolveseveral million pesos are funded btmore than one residual value which would otherwise have benefitted him if
lessor through direct investment, outright, purdtase oflease he fi.Jlly owned the equipment.
receivables or guarantee. This typeoflease is needed to service The most significant disadvantage is the expense of
capital requirements too large for a single lessor to handle. leasing. The personnd overhead cost ofkasing comPanies to
The advantages ofthis lease arrangement are: the pooling of total assets as compared to banks is definitely higher because
enougij resources, risk dissipation, and sharing of benefits lessors have to be conversant of both the, credit rating of their
among the participants. clients and their market for each type ofequipment they are
leasing. Lessors need to inspect the equipment periodically to
ADVANTAGES AND DISADVANTAGES make sure that it is properlyused and maintained throughout
OF LEASE FINANCING the lease period. These activiti~ tend to raise the cost of
leasing transactions compared to unsecured syndicated loan
ne is the freeing of valuable capital for new profit transactions.
O generation. As mentioned earlier in our discussion
ofdifferent leaSe arrangements, leasing allows the lessor or
At present; the leasing industty in the Philippines is ~ot
are
fully devdoped. Although there about eighty (80) finance
even the lessee some movement in their liquidityposition. . companies which offer leasing as one of thejr semces, the
The lessee can still use the asset and at the same'time free leasing industry is practically controlled and dominated by
a bigger portion ofits availabl~ resources for other invest- . only.ten (10) companies. Based on Table 1, the top seven
ments and business expansion. The same holds true for . lease companies accounted for 95% of the industry's total
the lessor under the leverage lease arrangement. outstanding po~lio in 1990.
Another advantage is that lease payments can be used
as tax deductible expenses and may also be used to hedge . LEASING COMPANY PROALES
against inflation. In periods of rapidly rising inflation,
equipment is acquired at current prices outoffutureeamings. ·
ost ~f the l~ing companies are sub~idiaries or are
Other advantages include: M
. affiltated ..WIth reputable commercIal banks and
business con~rDs.These are BPI Leasing Corporation,
1) Under both fin~cial and operating leases, the Citytrust Finance Corporation, and pa Leasing and
lessee normally records the account as an "off.- Finance, Inc. whiclt· are wholly owned subsidiaries of
balance" sheet transaction or a note to the finan- leading unibanb Bank ofthe Philippine Islands, Citytrust
cial statement. In either caSe, the lease payments Corp., and paBank. Of the others, Mercator Finance
aretreated as rent expense tnasmuch as Revel!ue Corp<;lration is wholly-o~ned by the Zuellig Group of
Regulation 1986 requires all lessors to record all Companies, while the Korea Merchant Banking Corpo-
rentals received as revenues. The lease payment ration and International Finance Corporation joindyown
being an "off-balance" shc;er transaction, the 20% of All-A.s;a Capital and Trust Corporation. These
LEIlA CALDERON

Table 1

TOP TEN LEASING RRMS

OUTSTANDING LEASE PORTFOLIO
As of December 31, 1990
(In millions)

1990 % 1989- %
1. BPI Leasing Corporation 898 35 688 33
2. AU Asia Capital 457 18 400 20
3. PCI Leasing & Finance 440 17 401 20
4. Consolidated Orix Leasing . 181· 7 176 9
5. Mercator Finance Corp. 176 7 114 6
6. First Malayan Leasing 144 6 153 7
7. POB Leasing 120 5 - -
8. Citytrust Ftnance 63 3 76 4
9. BA Finance Corporation 46 2 21 1
10. FEB Leasing & Finance Corp. 1 - - -
Total P2.526 100 P2.029 100

Source: Philippine A~tion of Finance Companies. Inc.

leasing companies therefore have a prominent advantage
over their competitors because they have easy access to
cheap funds. a marketing and distribution network, and
a wide base of individual and corporate clientele that can
readily be tapped. Also, such a set-up is conducive to
cross-selling of products and advertising on the institu-
tionallevel.
Most of the lease contracts done by these companies
involVe motor vehicles (fable 2). In 1990, motor vehicles
leasing accounted for 78.6% of total equipment leasing
contracts, and this can be attributed to the resurgence ofthe
car manufucturing program by the government. This was a
plus factor for the leasing industry despite the natural calami-
ties that struck the country in the second half of that year.

TABLE 2

CLASSIFICATION OF LEASE CONTRACTS

BY TYPE OF EQUIPMENT
. As of December 31,1990

TYPE OF EQUIPMENT Percentage

Motor Vehicles 78.6%

Heavy Equipment 9.5
Office Machines 6.2
Industrial Machinery 2.4
Others 3.3

Total 100.0%

Source: Phinppine Association of Ftnance Companies, Inc.

12

Asw:as mentionedeadier. the leasing indusny is notyct
fully developed. It still has to evolve beyond its adolescent
st3ge. The indusny em improve if a sound business and
invatmcnt climare wiD occur. As for the oontribution of
leasing to capital fonnarion. leasing aa:ounted for a measly
1.2% of toC3l gross domestic capial formation in durable
equipment in 1990. cnmpan:d to 1.5% in 1988. and 1.9%
in 1989. The slowdown w:as due to the natural alamities,
and the attempted mop during the Iattez part of 1989.
LEASING INDUSTRY ANALYSIS
SWOT Analysis done on the leasing industry is
A itspresented.to large and cheapas long-term
are: access
H~ted the industry's strengths
funds; econo-
mies of scale; wide distribution network; stability and
wholesome reputation. These strengths are present ~
cause of the affiliation of most of these leasing oompanies
to reputable commercial banlcs and business concerns.
Identified weaknesses are: hear dependence on one
major madcer. particulary auto financing for business in-
rome; high operating oosts; limited number of business
oudets; and relatively high oost of funds. The Iattez two
weaknesses are applicable to leasing oompanies not afIiIiared
with the top banks and business concerns.
An economic stabilization is ecpected due to the
peaceful and orderly transfer of political powClS last June.
With this, the enny of foreign capial is anticipated. New
invesnnents in heavy industries will require big-ticket financ-
TABLE 3
CONTRIBUTION OF LEASING TO CAPITAL FORMATION
As of December 31, 1990
(In miUion pesos)
Gross Domestic Capital Formation
Total
In Durable Equipment
Total Leasing VoIwne
Leasing % of Total GOCF
% of GOCF in Dlr.lbIe Equipment
Source: Economic and Social Statistics OffICe
National Statistical Coordnation Board
ASSESSMENT OF lEASING INDUSTRY
ingand thiswiD, begoodfortheleasiogcompanies. Waththis
occutrena; leasing may gain wider aa:cptance.
The government den:gularion on import Icvy and the
setdement of the 10% Value Added T u (VAl1 issue wiD
open doors for the leasing industry. Govanment deregu1a-
tion on import levy would mean an inaase in the asset
3aJuisitiondforts ofthe industrialsectorandcapial iIm:sroIs
which theleasiogoompanic:semcapitalize00. Ako.ifIeasing
companies are ex~ from the 10% wliae added ra, the
true benefits and adwnt:lgeS of Icasiog &I a1rc:rnarift to
uadirionalfinancing schemes wiD be highlighted.
With an anticipation that the impending cc:onomic
recovery~ be consumer-driw:n. then: wiD be new require-
ments for capital equipment and machinc::ryused to produce
consumergoods. Thus, financing &cilities will be needed in
both the heavy industries and consumer madcet.
lbeassetprivatizarion programofthegovernmcntalso
spdls opportunities for the industry since the noo-pc:rform-
ihg assets will be sold through biddings and ncgotiarcd saIes..
Most of these assets are big-ticket items that will ""luire
syndicated financing which leasing companies em join in.
Since most of the oonsumer goods are made up of
materials and oompooents imported.abroad. most manufav
turingoompanies would have placed their orders lWOorrhnle
months earlier. However, the ream move of the IIlOIlCtaIy
board to have a foreign exchange liberalization and the
adoption of the Philippine Dealing S~ in fun:ign ex-
change trading could have resulted in the present peso-doIIar
exchange rare ofP 23: $ I, thus spelling some,losses for these
1988 1989 1990
P 110,394 153,887 158.208
56,730 65,760 75,238
871 1,245 914
0.79% 0.81% 0.58%
1.50% 1.90% 1.20%
13
 LFlIA CALDERON
manufacturing companies which have placed orders at an
exchangerareofp 26: $ 1 oreven more. With theseprojeaed
·losses. manuf.acturing firms will 'be forced to pass on the
additional costs to the consumers. thus a slowdown in the
demand in the consumer market may occur. Requirements
- fur additional equipment may not be needed. thus affeCting
the activi~es of the leasing indusny.
_ .Aside from the peso-dollar exchange rate. the indusny
has to lmce itself against rising inBation. In 1991, the
·inflation rate was at 17%. Even if there is an optimistic
economic furecast fur this year; the indusny still has to work
with a projeaed inflation rate of 12%. Consequendy, high
inflation ~es translate to high interest rates which will result
in a slowdown in economic activity.
Otherthreus identifiedare: theIo.vawarenessoftheleasing
<XlfKllX among aedit users; lade ofleasing opportunitic:s; and the
mueon thewIueadde;d taX. Atpn:sent, theleasingindusay isstill
fur from marurityand its full aa:q>tma:amongaedit users cannot
.be brought about easily. Th~ fi a need for sustained and
aggressive ~ dfurts to sdl the oonc.epc of leasing ta
businesses befOre they come up with an offur.
Companies mayspend heavily on equipment onlyona:or
onceeveryfiveyears. l.easingmay beconsidennas aon~otdeal.
,Ona: the lease company misses its opportunity, it may wait for
.quite a time befOre dealing anew with that company.
The sales ofleased assets are slapped with a 10% Value
Added Tax (VA1) which in tum is passed on to the lessee.
With this additional cost, tht lessee may have second thoughts
in leasing the asset and may just purchase the asset.
CONCLUSION
.W.· hat has been presented is the current state ofthe leasing
industry in the Philippines. As mentioned earlier, it has
yet to evolve from its ·adolescent stage. The political and
economic stability ofthe country would greatly influence the
future of this indusny. which can be tapped as an alternative
financing schemefot those so-called traditional financing
schemes. Leasing qn contribute a lot to capital formation
smce this is needed in the production ofconsumer goods and
operations ofheavy industries, thus acting as a catalyst in our
. economic devdopment. . "LtasinglnaustryPostsHighGrowth. "1989. ManilaBulletin.
l.easing can be considered an alternative financing scheme
because ofits salient fuarures (such as low downpayment and less
stringmta>llateral) to the high-growth ·eamomic segments and
small and medium ente!pOscs (SM&): These SMEs may use
leasingtosecureexpansionandgrowthfundingwhichtheycannot
avail of from traditional financing schemes.
, There is ·a need for the leasing industry to lobby with
congreSs and the senate on how to improve its current state.
To make leasing reach its maturity, the government should
14
set a framework on what it can and cannot do. Also. it has to
seede the 10% VAT imposed on the sales and leaseback
arrangement. If possible, it should exempt the leasing
companies from the 10% VAT. In this way. both the lessor
and lessee will be benefitted sina: the lessee will inaease her
working capital under the sale and leasebaCk arrangement.
Also, without the 10% VAT. lease rental would besubstan-
tially lowered. As for the lesSor. this may mean an inaease in
his business of leased ~.
Perhaps it is best to explore the possibility of turning a
leasecontraa into an instrument in the capital market.' Given
the proper government agencies where lease contracts can be
registered and sold at a discount to the investing public, this
could mean opening a new dimension to our capital market
and devdoping both the leasing indusny and capital market.
As a whole, the future of the leasing industrywill ~y
on changes the government will initiate that will affect them.
Also. political and economicstabilitywi1l inBuenceits growth.
There is still a need for the indusny to dearly sell its concept
to industries dependent on capital assets. A sustained and
aggressive marketing of its services.. is needed particularly fur
the non-affiliated leasing companies. As fur those affiliated
with the top unibanks. acona:rted effort ofboth the unibank
or holding companies and the leasing company is required to
assure success of the leasing companies. In the future. it is
hoped that leasing will finally come out of its cocoon and be
recognized by those heavily dependent on capital assets as an
alternative to what we have known as traditional financing.
REFERENCES
Asian Devdopment Bank. 1987. UasinginDaI~lopingAsia.
Manila: 128-156.
"Business uasing: Another Gamble. " 1989. Manila StanJarJ
(March 28).
"Financing Firms Rrport 499% RUe in CombinuJ Profits in
.'91. "1992. Tk Philippine Star (March 26).
Gitman. Lawrence. 1987. Basic Managn-itJ Financ~.
USA;Harper and Row. Publishers. Inc.
"Leasing Industry Hamstrung by lAck of Government Sup-
port. "1990. Manila Times (February 23).
(May 5).
Lirio.RP. 1988. "Leasing in the Phiiippines: Golltmmml
Pmp«tiv4 »Cmtra/ Bank Reuiew39 (Decanber): 14-17.
Scott. David. et al. 1988. Basic Financial Managemmt
USA:Prentice-Hall International.. Inc.
uila Cakkron is a faculty mnnbn- of th~ Financial
Manag~m"'t D~partmmt of th~ Colleg~ of Business ana
Economics.