A Financial Lease, one of the facilities offered by the Personal and Business Banking Division is a way of financing the purchase of the capital asset(s). The Bank, called the Lessor, retains the legal ownership of the asset throughout the tenure of the lease while the client, called the Lessee, has the economic ownership as they derive economic benefit through the usage of the asset.
In a Finance Lease, the legal ownership of the asset passes on to the lessee upon the successful completion of the lease.
- In a Finance lease the Lessor provides finance for the purchase and maintenance of an asset and makes a return or profit by charging interest to a Lessee.
The Lessee pays an instalment to the Lessor for the finance and owns the asset after paying the entire agreed total amount comprising the assets cost price plus interest charged less any contribution made by the Lessee.
- A finance lease is a balance sheet finance for the Lessee.
FINANCE LEASE FACILITIES OFFERED
- Straight Finance Lease
The Bank buys the asset chosen by the business customer who is allowed possession and usage of the asset in return for specific rental payments over a specific period.
- Sale and Leaseback
The Bank buys the asset at an agreed price from the Lessee and leases it back to the original owner. Essentially, under a sale and leaseback facility, a Lessee converts capital assets into cash for use in the further expansion of a business or recouping expenses incurred in procuring the capital asset.
- Top up / Maintenance lease
The Bank provides additional finance to an existing facility specifically for maintenance of the financed assets. The bank to ensure that new valuation of the asset adequately covers ultimate exposure arising from the top up.
- assets acquired with minimal initial cash outlay
- alternative investment for money saved
- no budget constraints
- interest is tax allowable
- beats inflation
- full capital allowances claimable
- repayments tailored to client’s cashflow
- The top up finance gives a new lease of life to the leased asset
The Finance lease product offers a more flexible and quicker means for customers to acquire assets in that they do not have to devote the full cost of the asset as initial cash outlay. It is also easier to the customers as generally, the asset itself primarily secures the bank’s exposure. Through this then the bank intends to increase its lending to the customers and thereby grow its book and profit levels.
The purpose of the Finance Lease product is asset acquisition
primarily for well established businesses plus credit-worth clients. It can also be extended to recently established businesses with clear, justifiable grant for doing so. Through this product, the bank can also undertake Sale and Leaseback facilities.
The facility is targeted at corporate organizations who:
- are attracted to take maximum cash flow benefit.
- are attracted to tax benefit through claiming capital allowances.
- need to own asset.
- would want to prop up the balance sheet through asset capitalization.
- would want to convert capital assets into working capital for business expansion.
The facility also targets partnerships and sole traders who have sound business track records evidenced by reports by Credit Reference Bureau, bank references, balance sheet and bank statements.
The facility targets employees who have acceptable income ratios to salary or a car allowance which can ably meet the monthly instalment.
(a) a legally registered business with distinct physical address.
(b) at least two years minimum trading record
(c) proof of ability to repay on time previous borrowings from the Bank or other financiers.
(d) demonstration of sound current trading record
(e) compliance with all legal, regulatory and environmental requirements.
(f) legitimacy of ownership of asset to be leased back
TERMS AND CONDITIONS
The facility involves two parties viz:-
(a) National Bank of Malawi as the Lessor
(b) and the Customer as the Lessee.
The facility operates as follows:
- For a straight Finance Lease the Lessee identifies the asset from a Dealer or any recognized vendor and obtains a quotation.
- The Lessee submits the quotation with a covering letter of application and relevant documents such as a business registration certificate, a business profile, latest audited accounts and / or management accounts, bank statements for the past twelve months.
- In a Sale and Leaseback, the Lessee pledges an asset which is already in the balance sheet and has a valuation report by an independent assessor preferably a recognized dealer of the asset model (if it is a second hand asset).
- In a Top up lease, the Lessee brings an application letter together with a quotation of repair costs from a recognized dealer and a valuation of the vehicle so that the resultant value of the asset can be estimated against total exposure.
- The Lessee completes an application (proposal) form of the Bank.
- If the Lessee is a limited company, a board resolution by the directors will be required to sanction the borrowing.
- Once approved, the Bank issues a sanction letter to the applicant advising of the terms and conditions governing the approval. Another letter will be issued to the supplier as a notification of the arrangement to go into lease agreement with the Lessee. The supplier is asked to raise an invoice to the Bank in order to arrange payment.
- Under a sale and leaseback arrangement the general rule is that the asset under consideration should be valued by authorized dealers and the Bank pays usually up to a maximum of 75% of the valuation.
- Reconditioned vehicles not more than 10 years of age and second hand vehicles of 5 years old may be considered for financing. This is on the understanding that reconditioned vehicles are considered “new” because of the new lease of life given through reconditioning and generally considered to have higher life.
- In a Sale and Leaseback, the Lessee raises an invoice selling the asset to the Bank and in addition to signing the lease agreement; the Lessee executes an Agreement of Sale and Lease back.
- In a Top up finance, the customer signs a new Schedule of Goods and a lease summary.
- The Bank prepares lease agreement documents to be executed with the Lessee and once the parties are satisfied, the Bank releases the payment to the supplier.
- The lease agreement includes an agreed repayment pattern whether monthly, bi-monthly, quarterly etc. to which the Lessee will be expected to comply to avoid breach of contract.
- Balloon payments can be structured into the lease where the lessee is willing to pay off the balance at the end of the lease and such payments are appropriate for the cash flow.
- A Lessee must pay a minimum advance rental equivalent to 25% of the asset being financed. A lower or no advance rental can be considered in the case of applicants who have previously enjoyed and serviced credit facilities with P&BBD or where alternative security is offered, the value of which exceeds the cost of the asset being financed or where the borrower is considered undoubted and there are valid reasons for the waiver.
- Structured payments are allowed in the lease.
- A higher advance rental can be demanded if the perceived risk in the deal is considered high.
The major obligations of the parties:
- The Bank – to pay for the asset which will be leased.
- The Lessee- to repay monthly, bi-monthly, quarterly, bi- annually, annually instalments as the case may be and as stipulated in the lease agreement and in a pattern thereto.
- The Lessee – to insure the asset under lease comprehensively plus any collateral i.e. additional security from the onset and during the entire lease period.
- The Lessee – to keep the asset in good state of repair and subjected to dealers recommended service schedules.
- The Lessor- to inspect the asset at least once a year or on demand.
- The Lessee – to inform the Lessor about any accident to financed asset and progress on insurance claim.
- The Lessor - To advise changes in instalments in accordance with changes in the National Bank of Malawi Base Lending rate.
- The Lessor – to provide quarterly statements on every
account and acknowledge every payment from the Lessee.
- The Lessor – to transfer title holding to Lessee upon satisfactory completion of agreed payments.
TENURE AND REPAYMENT MODE
(a) The facility shall be repaid over a minimum period of 6 months but not exceeding a maximum period of 48 months. However longer repayment period may be considered on case by case basis but not exceeding 60 months.
(b ) The facility shall be repaid over the lease period or at the
termination of the agreement.
(c ) The Lessee shall have an option of settling the agreement
early without penalty provided a written notice of at least
ninety (90) days is given.
(d) An option of early settlement shall only be allowed after attaining minimum lease period of six (6) months.
(e) Repayment can be through a standing order, direct debits, cash or cheques (postdated or current)
- Grace periods for repayments shall only be granted where assets are being imported, where plant is being commissioned or property financed.
- The maximum grace period is three months. Six months grace period may be granted but with interest payments being made in the interim.
- Endorsement of the registration certificate of the asset to show National Bank of Malawi as “Title Holder”
- Cession over compulsory comprehensive insurance on the asset on account of the Lessee with the Bank’s interest noted, preferably arranged under the Bancassurance Scheme.
- Board Resolution by the Lessee authorizing the company to ente into a finance lease arrangement if the Lessee is a limited company.
- The Bank may seek further security/guarantees from the Lessee in form of deposit of, or caution over, title deeds, undertakings to create legal mortgage, or Bill of Sale over an unencumbered asset(s) or creation of legal mortgage over acceptable property.
- Execution of the Master Lease Agreement , Agreement of Sale and Leaseback and Schedule of Goods defining and serializing the assets under the lease.
- Lending to Malawi Government or parastatals a “NO OBJECTION” consent letter from the Ministry of Finance and Ministry of Justice must be obtained to evidence that the borrowing is approved in principle.
- The Bank shall exercise a right of security set off where facilities available to the lessee are not being serviced in line with agreed conditions elsewhere in the Bank.
- Comprehensive insurance covering the asset is a MUST, with an insurer approved by the Bank and the interest of National Bank of Malawi as a loss payee shall being noted therein. Where the customer is willing, the Bank arranges cover under the Bancassurance Scheme.
- The Bank shall closely monitor insurance of the vehicle and enforce renewals as they fall due.
MAINTENANCE AND REPAIRS
The Lessee is responsible for the maintenance and repair costs of the assets throughout the duration of the lease with a recognized dealer or acceptable garage.
PRICING AND REVENUE
- Interest charged will vary from client to client depending on the credit rating of the client and is normally in line with the Base Lending Rate quoted by National Bank of Malawi.
- Interest rates are floating and changes are at the Bank’s discretion but communicated to the Lessee.
- The unpaid rentals attract a penalty interest charge of above the prime rate lending rate compounded in arrears. (why not 10% penalty rate)
- Suspended accounts will be charged a penalty interest of the ruling base rate PLUS 10%.
(a) The Lessee by virtue of being the owner is entitled to claim capital allowances.
(b) Leasing is a taxable supply and in compliance with tax regulations the Bank charges a 1% arrangement fee on the cost price of the asset and VAT there on.
Management of risk covers the following:
The lending conforms with Credit Policy of the Bank. Lending exposure at any point in time is restricted as follows:
- To the Lessee – the unpaid capital plus any arrears.
- To the Bank – credit facilities extended to any company or group of companies not to exceed 25% of the capital base unless a waiver from the Central Bank is held.
Operational Risk is defined as loss resulting from inadequate or failed processes, employees, and systems or from external events.
The operational risks shall be mitigated as follows:
- System failures – proper transactions, regular documentation and account reconciliation by lending teams.
- Internal processes – strict adherence to agreed turnaround times and properly defines roles in the work chain.
- Fraudulent documents – lending teams to obtain original documents from the customer and verify authenticity.
- Employees – to be well trained in credit management and strictly abiding by the checklists provided for guidance in processing loans.
- External events – abide by changes in the regulatory and control environment within the financial industry.
The Bank assesses the Lessee for the eligibility of the facility. The following information is submitted by the applicant.
- application letter stating the intention to access a lease facility, the asset required and its cost quotation.
- a brief outline of the business and organizational profile.
- the latest audited and/or management accounts and or 12 months bank statements.
- Board Resolution authorizing the borrowing where applicable.
- Registration certificate of the business, Memorandum and Articles of Association, in case of a limited liability company.
- Partners identities in case of partnerships.
- On receipt of these documents, the application is assessed based on the Credit Appraisal Guidelines in conjunction with the Credit Policy Document.
- When a lending officer believes that an application has merit although not conforming to the product profile, the proposal shall be referred to Credit Management Division with the Head of Personal and Business Banking Division’s recommendations.
- All applications above the Personal and Business Banking Division’s Discretionary Limit) are referred to Credit Management Division.
- Once a facility is approved, the sanction letter is issued and acknowledged by the Lessee.
PURCHASE OF ASSET
(a) The Bank purchases the asset on behalf of the Lessee by settling the supplier’s invoice.
(b) All security arrangements are perfected before the asset is leased to the Lessee.
MONITORING AND RENTAL PAYMENTS
- The Bank provides amortization schedules covering rentals for the entire period of the lease.
- The Bank issues statements on quarterly basis for advising the status of account to the Lessee.
- Repayments commence on signing of the Lease Agreement or one month after commencement of the lease or at a date mutually agreed between the Lessor and Lessee.
- Payments are effected by stop order, lodging post-dated cheques or simply bringing the cheque on the due date.
- The Lessee arranges for the service of the asset and maintains it in proper repair and working order.
- The Head of Personal and Business Banking Division is accountable for monitoring the performance of the account and ensuring timely payment of instalments by the Lessee.
PROVISIONING AND WRITE-OFF
- The account that is current is classified as standard or performing.
- The account that is at least two months in arrears is classified as irregular and treated inline with the Bank’s policy on substandard debts.
- The debt that has been classified as irregular is subject to provision for income loss.
- The Bank determines the amount of the provision for income loss using the Estimated Recoverable Amount Method (ERAM).
- Interest on outstanding rentals that are two months (60 days) old or more past due, are suspended and only recognized as income on receipt of payment.
- The debt deemed uncollectible is eligible for write off but recovery efforts continue despite the debt being written off.
The Lease Agreement may be terminated;
- Through early settlement of the agreement.
- In the event of any breach of the Lease Agreement by the Lessee.
- If the Lessee fails to make payments in terms of the Agreement thereby breaching the terms and conditions, the Lessor will have the right to terminate and within seven (7) days re-take possession of the goods.
Where such a breach has occurred the Bank, in pursuance to the lease agreement, will;
- Within 5 3 days advise the customer of the missed installment, telephonically.
- If 7 days after the telephonic advice the breach is not rectified, issue a notice of default letter to the customer giving the customer 14 days to remedy the breach.
If the breach is not rectified in the period specified in the notice of default letter, re-take possession of the goods.
- Upon termination of the Agreement.
- The Bank claims at the Lessees’ cost return and possession of the asset.
- The Lessee is given an option to settle the lease and redeem the asset at a price to be determined by the Bank.
- The Bank has the right to sell the asset within such period and in such manner and on such terms as the Bank in its entire discretion deems reasonable.
- The Bank applies net proceeds of sale of the asset to discharge any outstanding liability of the lessee.
- The Bank refunds the lessee any surplus remaining after the discharge of the liability but in the event of any shortfall, the lessee is required to make good the deficit.
- Upon repossession of the asset under the lease facility the Bank will freeze further accrual of interest on the account.
- The lease debtors are accommodated on an appropriate accounting system.
- The system is interfaced with general ledger through Gross Lease Debtors account.
REPORTING AND RECONCILIATION
(a) Computer generated reports are produced on request or monthly for credit control purposes.
(b) Facilities granted under Discretionary Limit are advised to Credit Management Division under form ADV 36 while monthly and quarterly returns are submitted in line with Bank’s Credit Procedures.
There will be cases when customers are unable to repay their debts due to a change in circumstances. In such cases, the entire debt balance may be at risk and the Bank will have to take legal action to recover the debt.
A completed form ADV41, with specific details of identifiable assets such as title and plot numbers for landed property, registration numbers for vehicles and serial numbers for machinery etc which must be listed overleaf, must be submitted to Credit Management Division.
RBM REGULATORY COMPLIANCE
- The lending conforms to the Banking Act hence no specific regulatory approval is required.
- The lending complies with the Reserve Bank of Malawi Directives on Large Exposures and Asset classification.
- Leasing as a taxable supply conforms to Malawi Revenue Authority regulatory requirements vis-a-vis VAT.
This product profile will not exceed 15% of the Bank’s advances portfolio.
PRODUCT PROFILE REVIEW
This product profile is subject to review every THREE years or when circumstances demand for a review.
Approved by the Credit Committee.