EQUIPMENT LEASING AND ORGANIZATIONAL PERFORMANCE ON MARUM CONSTRUCTION COMPANY

CHAPTER 1

INTRODUCTION

1.1 Background to the Study

Leasing as an easy access to assets required for operation in the realm of marketing as basis for spurring societies to economic development through growth is obviously the need of the industrial sector of Nigeria-Olusoga (2004) and Oko and Anyanwu (2002). The complexities involved in leasing were due to its mechanism. Osaze, (2003) investigated lease mechanism and it’s advent in Nigeria. Izu, (2008) “focused on the development, awareness and opportunities associated with leasing as well as the major constraints associated with the practice of leasing in Nigeria. Eke (2008) emphasized on the prevailing factors in Nigerian Economy as it makes equipment leasing very attractive as an alternative source of capital asset acquisitions, and highlighted in the process; the relationship between lease turnover and profitability of leasing companies.

Osaze (2003) defines leasing as a contractbetween the owner of an asset, the lessor and the prospective user of that asset, thelessee, giving the lessee possession and use of the asset on payment of rentals over aperiod of time.

The lessor retains ownership of the asset so that it never becomes theproperty of the lessee or any third party during the tenure of the lease. Overall, small- andmedium-sized enterprises constitute a significant sector in any economy.

Access to finance is one of the most widely discussed issues in recent times among financial experts world over. This is because it has become the major hindrance to industrialization. According to Adam and Hardwick (2008) ineffective domestic investment, poor economic growth and slow pace in poverty reduction experienced in most nations of the world is as a result of lack of access to affordable and reliable finance or credit to power their local industries. Lack of funds is a major challenge faced by captains of industries in developing nations of the world. According to Smith and Wakeman (2005) organizations exist in competitive environments and they continuously employ mechanisms that make them take lead in their line of businesses.

The quest for good financial management strategy is not contestable because every business needs a good and dependable cash flow to grow their businesses. This has made it necessary for corporate bodies to seek for ways of reducing cost of operations especially when it comes to asset acquisition. In today’s fast paced business environment, acquisition of modern equipment is imperative for long term growth and development but funds to acquire these equipment are not accessible. Gabara and Todaran (2011) observe that there is need as a matter of urgency for industrialists to develop other innovative financial products that would circumvent access pitfalls associated with traditional forms of financing. One form of such financing that has the ability to emerge as an innovative form of financing is lease financing (Westley, 2003).

There is no doubt that most organizations need a lot of equipment and machineries to embark on smooth operations inspite of the fact that these equipment and machineries are costly. However, specialists have discovered that these equipment and machineries can be leased rather than purchased outright in order to have sufficient and adequate capital for operations. According to International Finance Corporation (IFC) (2004) leasing in its simplest form is a means of delivering finance. It is cheaper than the traditional means of borrowing. Miller (1990) is of the opinion that leasing, in effect, separates the legal ownership of an asset from the economic use of the asset. However the curiosity about the emergence of financial leasing as a common method of funding capital equipment led too much of the early research into the choice between leasing and buying.

1.2 Statement ofthe Problem

The research problem lies in the absence of the use of non-traditional methods of financing, such as leasing, which can be used by Marum Construction Company, as industrial companies need to finance some of their projects due to lack of financial liquidity for these establishment.

The political changes at the end of the eighties of the twentieth century have led to unprecedented economic transformations represented by moving trend towards market economy, and the adoption of the privatization policy which gave the private sector the largest relative weight in the economic activity , and entailed the search for methods of financing new and more flexibility to suit the conditions of the market economy to finance large capital equipment in the infrastructure sectors, and the implementation of programs of structural reforms to replace the declining traditional funding sources Despite the importance of lease in the work of industrial companies, but most companies do not rely on leasing in their operations.

1.3   Purpose of the study

The main aim of the study is to investigate Equipment leasing and organizational performance on Marum construction company.The study is aim at achieving the following objectives:

1.     To identify the impact of Equipment leasing on the financial performance of Marum Construction Company.

2.     To identify the impact of leasing on the profits of Marum Construction Company.

3.     To identify the impact of financial leasing on the financial risk in Marum Construction Company.

4.     To identify the impact of equipment leasing on the liquidity in Marum Construction Company.

1.4 Research Questions

Here, certain questions are raised; the provision of answers to them will be controlling the idea of the research work. The questions pertain the crux of the matter and are statements of major problems to be encountered as the progress is made on the work. The questions, which are interdependent, include the following ones:

1.     Does leasing enhance the financial performance of Marum Construction Company?

2.     Does Leasing intend to achieve profits for Marum Construction Company companies?

3.     Does leasing affect the risks of Marum Construction Company?

4.     Does leasing have an effect on the liquidity of the Marum Construction Company?

1.5 Research Hypotheses

Ho:   There is no significant relationship between equipment leasing and financial performance of an organization.

1.6   Significance of the Study

The investment funding is the cornerstone of infrastructure projects in general and industrial companies in particular, and because of the high capital costs as well as the continued need for working capital in the operational phases of the maintenance, replacement, and renewal of the productive assets to maintain levels of productivity and to improve it if possible, and in this context the lease is one of the methods of funding that has being introduced as a significant funding method in the recent times as a suitable tool to face the global challenges related to funding sources.

In addition to being a system of financing designed to attract savings necessary new capital market, it also achieves a lot of advantages through the modernization of equipment and selection of advanced technology necessary to raise production efficiency and increase competitiveness.

The leasing is the perfect solution in many circumstances where there are no sources of funding necessary or rising costs as the cost of other funding sources, and the importance of research is also came through the international attention through the issuance of several accounting standards, which describes the accounting treatment for leases and how it is disclosed, such as the International Accounting Standards (IAS 17).

1.7 Scope of the Study

The study examines equipment leasing and organizational performance using Marum Construction Company, Port Harcourt as case study. Findings and recommendations from the study are limited to this area and activities of the company between 2010 to 2015 as the researcher could not cover a wider geographical area and time frame due to the limitations of the study.

1.8 Limitation of the Study

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 Definition of Terms

Equipment: Tangibleproperty (other than land or buildings) that is used in the operations of a business. Examples of equipment include devices, machines, tools, and vehicle.

Lease: A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset. Broadly put, a lease agreement is a contract between two parties, the lessor and the lessee.

Organization: an organized group of people with a particular purpose, such as a business or government department.

Organizational Performance: Organizational performance comprises the actual output or results of an organization as measured against its intended outputs (or goals and objectives).