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THE EFFECT OF LEASE AS A MEANS OF PROCUREMENT IN MANUFACTURING ORGANIZATION

ABSTRACT

The essence of this research work is to investigate carefully the effects of  lease as a means of procurement in manufacturing organizations. Some selected companies were used as a case study like the studio press Nigeria plc at Lagos and Aluminum extrusion industry plc. While carrying out this research work the researcher reviewed the extent to which some firms have availed themselves to leasing and the effect of lease in tackling the logistic and financial problems of these firms. It was also carried out to examine the problems associated with leasing. To really investigate on this work, an elaborate literature review was carried out and some forms of questionnaire were issued out. The researcher choose a sample of forty eight (48) respondents within two areas of concentration using the stratified random sampling method. Based on the respondents answers to the questionnaires a study was guided by some given hypothesis which were later tested using a distribution called chi-square (X2) method. Some findings were derived from the tested hypothesis, one of them is that leasing is more profitable than outright purchase. Based on these findings recommendations were made and conclusion drawn.

CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND OF STUDY

Purchasing as a management function deals with the procurement of raw materials, components parts, equipment (heavy and light) and services required by an organisation to be used for production purposes. Organizations material procurement modus operandi can take various forms like hire purchase, out right purchase and leasing etc. this depends largely on the companies financial status. In the past many organizations that are financially distressed adopt lease as a means of procuring capital equipments.

        Leasing started is far back hundred years before Christ (Stanley L.M.C Michael and Paul T.O Kege; 1959 p1); for centuries the lease was used almost exclusively in connection with agricultural land. According to Busko (1959:24) many of the commercial buildings constructed during the period of early Urban development  were build on land that was made available under long term lease. However with the emergence of the industrial revolution and the urbanization movement which followed it, lease has broadened beyond its initial bound.

        Today leasing has dominated all facets of Nigerian economy as an alternative to purchasing of capital goods.

        Indeed today, it is difficult to find a capital goods which is not made available through leasing. This growth has been accompanied by a fundamental change in the nature of the lease transaction. It is no longer soley means of acquiring properties which are not available by other legal means but has now become an important means of financing. Most importantly, lease is a contract between a lessor and a leasee for the hire of a specific asset (Ami 1922:13). It is a legal agreement or transaction by which the owner of land building or a piece  of equipment agrees to let another person have the use of it for a certain period of time for a fixed amount of money leasing in effect is the performance of a lease transaction. The separation of ownership from the users is central to the whole concept of leasing. Under this agreement, the user (lesee) pays to the owner (lessor) an agreed sum of money at stipulated period during the life of the lease. The installmental nature of this payment, therefore makes it possible for lessee to operate a better cash flow system which ensure that at no time is much capital tied down to a particular equipment.

As a result of the introduction of the second tier foreign exchange market (SFEM) and the substantial devaluation of the Naira in 1996 prices escalated. Creditors because more reluctant to lend for fear of liquidity and when they were willing to lend high interest rate was charged in addition to straight collateral requested as security. Under this circumstances, most companies had problems findings their purchases as well as carrying out certain project.  Consequently, they relief on leasing as the alternative sources of findings project with huge capital out lay. Before this time, most companies preferred to what until they could save towards purchasing them.

1.2    STATEMENT OF THE PROBLEM

It is fundamental concept in business that finance is the life wire of every business.

        Ever before our political independence and until the beginning of 1970’s, never has there been witnessed any level of business activity. In our economy to warrant leasing at any appreciable scale as it is today. During the early 70’s, the period now referred to as the “petro dollar” era, our local currency was valued. The level of business activity then was relatively low and the naira high in value that quite a number of firms purchase rather than lease most of their operating equipments. Following the drop in the price of crude oil and subsequent decline in the value of our currency, Nigeria realized the need to properly harness her industrial economy through perfectly mobilizing resources in the area of manufacturing, distribution and above all in project financing. But insufficient capital with which to purchase equipments has posed a serious problem to this view. Leasing therefore, becomes the only way out.

        In the more developed countries of the world, leases account for a very significant proportion of capital investment (United Nations 1984). The extent to which this is obtainable in Nigerian industries is yet to be determined. Therefore, it is pertinent at this time to ascertain the degree to which we have availed of this facility and the overall effect it exerts in addressing the very problems of logistics experience in supplying.

1.3    OBJECTIVE OF THE STUDY          

        The purpose of this research work is to undertake a survey of some firms in parts of Nigeria and to achieve the following:

(i)                  Study the extent to which these firms have availed of leasing.

(ii)                 Examine the effect this has so far in solving the logistic and financial problems in these firms.

1.4    SIGNIFICANCE OF THE STUDY

The study will serve as a data of information that would assist firms that embark on lease to appreciate the company’s position financial and otherwise.

(i)                  It will also provide basis for firms in structuring their lease.

(ii)                 The government, equipment leasing association of Nigeria (ELAN) and other interest groups in supplying their businesses to the business sector.

(iii)                In addition, the study when completed will serve as a valuable contribution to the body of knowledge and at the same time serve as a source of useful reference for further research work.

1.5    FORMULATION OF HYPOTHESIS

        The notion that lease is unavoidable in business cannot be over emphasized, thus to ascertain the validity of the above statement, the following statements will be tested to prove the various impact of lease in business.

H0:    Leasing does not have positive impact on firms.  

HI:    Leasing does have positive impact on firms.

H0:    Firm does not engage more in leasing rather than outright purchase.

HI:    Firm engage more in leasing rather than outright purchase.

1.6    COMPANY PROFILES STUDIO PRESS (NIGERIA) PLC.     

        The company was incorporated on 9th July 1965 as a private company to produce exercise books. On incorporation the capital was N80,000 divided into 31,000 ordinary share of N2 each and 9,000, 6% preference share of N2 each. The ordinary share were owned equally by a Nigerian and German who founded the company. The preference shares were then held by Deutsche Gelleschanft for wirtchaftiche-zusammenarbelt (Eritiocklungsgesellschaft) a development bank wholly owned  by the Federal Republic of Germany.

        The factory was established on a site of approximately 0.41 hectres at 30. Henry car street, Ikeja, where production of exercise books began. In 1966, the main market for the books developed in the then Eastern Region of Nigeria but with the outbreak of the civil war, that market was adversely affected. As the financial situation of the company deteriorated, it was decided by the two founders to sell their interest in the company to the following:

(1)        CFAO (Nigeria) Limited.

(2)        Ernst Kleft Druchken (Klett) a large and reputable printing publishing house in West Germany.

(3)        Interpart Gesellchaft fur International Beteiligungun Mbtt and CO KG (Interpart), a printing consultancy company also in West Germany.

(4)        DEG (a development bank wholly owned by the Federal Republic of Germany.

In 1970, it was decided that diversification was necessary and manufacture of light cartons and packaging materials was introduced. This area at the activities grew steadily and in 1975 it was decided that the production facilities for exercise books be dropped and to concentrate on packaging.

        In 1976, a two phase development programme was embarked upon at a cost of approximately N2.4 million. The second phase of this programme was completed in 1979 and running in of new machine commenced in March 1979. Recognizing the significant growth of consumers packaging in Nigeria and the need to enhance working capital of the company and further replace and modernize plant and machinery, the company in 1979 decided to comply with the Nigerian enterprise promotion degree of 1977. The company offered to the public for subscription 2,694,000 ordinary shares of 50k each. This was fully subscribed. Thus the company assumed the status of public limited liability company with a share capital of N2,245,000 representing 4,490,000 ordinary share of 50k each.

        The company in September, 1989 offered to the public for subscription of further 5,510,000 ordinary shares 7.50k each. The proceeds from the second offer was used in the planned expansion of acquiring gravure machine and a new site at plot B Israel Adebajo close Ikeja. The company therefore moved to the new premises in 1982. Business grew rapidly over the years and in July, 1991, the company at a general meeting. Increased the authorized share capital from N60,000,000 to N42,000,000.

        In 1995, the company again increased the authorized share capital to N60,000,000 and went forward immediately for a rights issues to the existing shareholders. A four colour ultra man 6 machine was also purchased in 1995 to further increase capacity and ensure improved quality and delivery time to our value customers. The company in the same year acquired an ink factory (chemical technology) which now provides all the ink requirements of studio press (Nigerian) plc. There is a plan now to modernize the ink factory and improve the facilities in order to meet the requirements of the external market.

        The corporate policy guidelines of the company are laid down by the company’s board consisting of a chairman, managing director and three other members.

Aluminum Extrusion Industries Plc

        Aluminum extrusion industries plc was incorporated on 26th October, 1982 and carries on the business of manufacture and sale of all types of extruded aluminum products. The company is located at km 4, Atta –Amaimo Road, Inyeshi and is registered as a public limited liability company under the provisions of the companies and allied matters decree 1990.

        Nigeria citizens and associations hold 30% of the share capital while the balance is hled between the Imo state Government, Abia state government and Tower Aluminum (Nigeria) plc. The company has a technical and management services agreement with comcraft management services S.A. A company which also provides Tower Aluminum (Nigeria) plc with similar management services.

        However, the company’s corporate policy decisions are taken out of the board level while routine operational decisions are taken at the divisional/department levels.

1.8    DEFINITION OF TERMS

A lease: A lease is a contractual agreement between an owner (the lessor) which conveys to the leassee the right to use the leased asset for an agreed period of time in return for a consideration, usually payments called rents (SAS, 11).

Logistic Activities: Supplying logistics is the planning,

organizing and controlling of all more store activities that facilitate product flow from the point of raw materials acquisition to the point of find consumption as well as the attention information flows. Activities involved in this regard includes transportation, inventory management, warehousing as well as material handling and acquisition. All these logistics activities entails the use of certain equipment for performing profitably by firms.

Operating Lease: This is one in which the lessor, while

giving the lessee the use of leased property, retains practically all the risks, obligations and reward of ownership (SAS, 11).

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