An assessment of the potential of leasing as an alternative source of finance for Maltese companies

Abstract

Leasing is significantly important for the economy as it may result in more investment and hence in a faster rate of economic growth. It offers companies an alternative way of financing their capital investment needs and effectively reduces the cost of finance to firms. The development of the leasing sector is enhanced by establishing appropriate legal and regulatory frameworks, tax treatments and accounting standards. The main objectives of this dissertation are to assess the existing and potential demand and supply related to leasing services in Malta, to examine the type and characteristics of leases offered or potentially offered locally by banks and leasing operators, and to investigate the benefits and risks of leasing when compared to other sources of finance as perceived by banks and leasing operators in Malta. Surveys were carried out with financial controllers or competent personnel of ten banks and eight leasing operators in order to gain an understanding of their viewpoints regarding this subject. The sample of these surveys consisted of Deposit Money Banks and International Banking Institutions, and motor vehicle and computer hardware and software companies that offer leasing services. This study concludes that financial leasing is not generally available in Malta while operating leases are supplied by various leasing operators. Our present tax legislation is not a favourable one for financial leasing activities and thus banks in Malta do not offer leasing services. However, banks would potentially offer financial leases and not operating leases. The potential leasing customers of banks would apparently be medium-sized companies pertaining mostly to the manufacturing sector. This research also concludes that operating leasing has been carried out in Malta for quite a long time. Leasing services are not that much requested in Malta. However, in these last few years the demand for operating leases has generally increased. Leasing provides several benefits which make it more attractive than other sources of finance. However, lessors are faced with credit risk and the risk of ending up with unsaleable equipment. This study recommends that financial leasing should be further developed in Malta. In order for this to be successfully implemented, there is the need for a specific leasing law that regulates financial leasing. There is also the need for a more advantageous leasing taxation legislation. Government should establish a competitive fiscal regime when compared to that of other countries. If the right tax environment is created, cross-border leasing could be developed and