Last year´s financial statements and statistics of Czech leasing companies have revealed that the leasing trade in the Czech Republic continued to grow, both in terms of quantity and quality, and that its share of domestic investments has further increased.

This growth continued despite the negative tendencies which appeared in the Czech economy last year, especially lower investment, slackening demand (mainly as a result of restrictions in the public sector), the devaluation of the Czech crown and the fluctuation of domestic interest rates. These circumstances affected the interest of solvent customers in leasing services and brought about refinancing difficulties to a number of smaller and medium-sized leasing companies. As a result of the higher cost of credits, the expenses were partly passed on to the customers. This also increased the problems of leasing companies in dealing with insolvent and unfair clients.

In spite of all this, the number of new leasing contracts and their size continued to increase. Last year, companies with their headquarters in the Czech Republic were provided with machinery, equipment and vehicles to a value in excess of 65,000 million CZK under leasing contracts (sum of purchase prices excl. VAT), constituting an increase of over 40 per cent in comparison with 1996. The leasing of property also increased rapidly, although the growth was from the previous year's extremely low base. Last year´s volume reached 1,200 million CZK. The portfolio of property values provided by Czech companies under leasing contracts also increased - to 120,000 million CZK - after depreciation for last year.

While the value of last year´s investment declined, the share of leasing in financing and implementing investment activities increased massively. Investments in machinery, equipment and means of transport last year reached 27.1 per cent. This is a rather exceptional proportion even on the European scale (where in the traditional leasing environment of West European countries this proportion does not usually exceed 20 per cent, with the exception of Great Britain and Ireland). It is a share which, considering the expected consolidation of the banking sector and the development of credit services for small and medium-sized companies and private consumers, is untenable in the long run. Despite last year´s growth, the share of Czech leasing companies in property investment is marginal.

In the background of last year´s growth of property leasing are several contracts of high value involving new shopping centres for international trading networks. As in previous years, property last year accounted for less than two per cent of the overall leasing business. The high demand for leasing property is far from being satisfied, especially in the case of dwelling houses. The reasons are the non-availability of long-term credits to leasing companies, high interest rates (which grow even during the year), unforeseeable development of a number of customer sectors, an inadequate depreciation regimen and the unjustified double burdening of leasing with property transfer tax.

Certain changes occurred last year in the commodity and client structure of Czech leasing. A positive feature is the decline in the proportion of motor cars in relation to the total volume of contracts for the leasing of movable items, which in 1997 dropped under 50 per cent (from 55 per cent in 1996). The total volume of contracts for the leasing of machinery and equipment and their share in the total volume of domestic leasing contracts increased from 16 per cent in 1996 to last year´s 17.5 per cent. Leasing contracts for businessmen in the private services sector continue to dominate. The long-term trend of an approximately forty-percent share of this sector and a more than 30 per cent share of leasing contracts with industrial and building firms was confirmed last year. The importance of consumer goods leasing has increased and accounts for approximately 10 per cent. The share of leasing contracts in agriculture has been negligible for several years, with a share of less than four percent last year. Most contracts for the leasing of movable items spread over a period of under five years.

Worth noting is a comparison of last year´s volume of Czech leasing contracts with European statistics and trends on foreign leasing markets. The value of new leasing contracts made in the Czech Republic last year accounted for more than 1.5 percent of the European volume. Despite this relatively marginal proportion, the Czech Republic has ranked twelfth on the European scale for several years, placing ahead of a number of advanced West European countries, including Denmark, Norway, Finland, Ireland, Greece and Luxembourg, and ranking first among post-communist countries.

The Czech leasing market is relatively very dynamic, which in terms of quantity significantly exceeds the long-term five-percent growth of trade on traditional leasing markets. In the remaining aspects, including the commodity and client structure, the situation in the Czech Republic complies with European trends. The proportion of motor cars is coming close to that in other European countries. Leasing contracts with the private providers of services in the Czech Republic dominate as in most European countries, and the share of leasing contracts with private consumers is increasing. Contracts for the leasing of property, however, are lagging behind European volumes and trends, despite last year´s rapid growth.

Last year, the Czech leasing market continued to consolidate. The number of companies providing leasing services slightly declined, affecting especially companies which are unable to rely on the co-operation of a strong bank or an important manufacturer. At the same time it was confirmed, in agreement with trends on the traditional leasing markets, that these companies, too, have their place on the market, especially for their flexibility, closeness to the client and specialization in certain commodities, such as computers, office equipment and used cars. Moreover, they have the benefit of lower overhead costs. Last year's leasing offer was enriched with the addition of accompanying services, such as consulting, repair and maintenance and administrative services. This is a response to the growth of qualified demand for leasing services as part of a campaign to attract stable and solvent clients. The offer of operative leasing and the leasing of durable goods increased as well.

Growing competition in the leasing market has resulted in wider commodity and product specialization of leasing companies. Greater emphasis is placed on the effectiveness of the work of leasing companies (including data processing, standardization of documentation and procedures, diversification of refinancing sources, etc.). The worsened macroeconomic conditions called for the continuous innovation of the leasing offer to meet the demands and interests of clients. This qualitative development of the Czech leasing market will continue this year, and, as well, in years to come. New leasing products, the strength of the consolidated market and a client-oriented policy of leasing companies will create conditions that will put the leasing business on an equal footing with cash purchases and buying on credit.

The surprisingly favourable results of Czech leasing last year testify to the fact that the basic domestic leasing infrastructure has already been created. What is the reason? In the first place the continuing interest of a number of businessmen, especially owners of small- and medium-sized businesses, and newly-starting entrepreneurs, who are becoming aware of the advantages (as well as the limits) of leasing in deciding on how to provide objects of private use. The services provided by companies having their headquarters in the Czech Republic have strongly restricted the activities of foreign leasing firms. In the Czech Republic, leasing has already become an alternative means of investment and an instrument of cash-flow management. Its role in this country is comparable with that in a number of advanced market economies.

"In 1991, when our association was established by six companies, the extent of moveable assets leased by our members amounted to 182 million ECU. In the following year the amount reached 452 million. That was the last year in which the minimum duration of a leasing contract could be two years. In the year 1993 a quite new system of tax laws was enacted. Since that time the duration of a leasing contract has to have been at least 3 years, thus to enable a lessor to utilize all advantages that leasing can offer. Both lessors and lesses had to orient in new economic conditions and it is understandable that the growth of newly leased equipment almost came to a halt. 1993 results were fully compensated the following year when the amount mushroomed to 817 million ECU. Last year, in 1995, the amount of new moveable assets leased by members of our association rose further still to 877 million ECU.

The situation in real estate leasing was and is quite different. In the year 1991, members of our leasing association concluded contracts for 20 million ECU, but to date we have found it difficult to exceed this level. The most disappointing result achieved so far was last year when the amount of newly leased real estate came to only 10 million ECU. The situation in real estate leasing is brought about by the current legal and economic framework, especially due to the fact that this form of leasing is subject to double property transfer tax and because of lack of suitable funding.

These figures [graphs not reproduced here] concern the general amount of leasing. Commodity structures can be demonstrated with the situation in 1995. From this picture [graphs not reproduced here] it is clear that the biggest portion belongs to car leasing, representing 56%. Second position is taken by leasing of machinery with its 19% market share. Road transport vehicle leasing stands at 14%. Next follows computer and business machines with 6%, then others with 4%, and, in last position, leasing of ships, aircraft and railway rolling stock with 1%.

As for type of customers the situation can be seen in the 3rd figure [graphs not reproduced here]. The biggest portion of leased equipment is destined for services in the private sector. The second position is taken by leasing for industry and construction. These two together take up approximately 82% of the market. Consumer leasing is approximately on the same level as leasing for agriculture, but it has however been experiencing rapid growth since last year.

All figures given concern members of our association. New assets acquired and leased by Czech based leasing companies as a whole reached more than 32 billion Kc in 1995 (approx. 960 million ECU). The proportion of leasing in total Czech investments in movable equipment topped 16 per cent last year. It is expected that situation will be similar in forthcoming years.

Also, analysis of the nature of the leased product offered is significant. Under conditions of a deepening balance between leasing supply and demand, outstanding leasing companies bring more advanced leasing products into the market - products that are common in advanced leasing environments. Specifically, this means operational leasing, consumer leasing, leasing for public entities and even leverage lease. The period of complete dominance of a simple financial lease on the Czech market is over. The scale of additional services is growing. Activities of leasing companies are improving from the professional point of view and the specialization of their services is deepening. Market pressure is gradually leading to taking over of residual value risks by leasing companies. Credit risks of both customers and suppliers is being verified with higher care. An end has been put to the period of dramatic growth of leasing and of many new companies entering the leasing market (which was almost beyond control). A remarkable concentration and specialization is occurring in the area of leasing supply. In the nearest future, two thirds of the Czech market will be concentrated in the hands of the 5-6 strongest domestic leasing companies. In parallel a substantial reduction of the current number of companies active in the leasing market will come about .

The basic starting points for leasing were already especially stipulated in taxation, accounting, banking and civil law. It is a consequence of a deepening recognition of the substance and advantages of leasing as well as of its role in the development of the young market economy by respective state authorities.

The treatment in Czech taxation law is slightly preferential or neutral. The most important taxation issue in dealing with leasing is the distinction between operating and financial leases. Ownership of a leased asset has to be passed to the lessee in financial lease, according to Czech taxation law. The period of any financial lease has to be longer than one fifth of the depreciation period of the leased item or at least 3 years. Leasing payments are subject to VAT, with, in most cases, the standard VAT rate of 22 per cent applies.

As to the taxation treatment of a financial cross-border lease into the Czech Republic, only a 1 per cent withholding tax is applied on the lease payments of a Czech lessee to a foreign lessor. Conversely, a 25 per cent withholding tax (reduced to 5-10 per cent under most Double Taxation Treaties) applies to operating leases with foreign lessors. These withholding taxes can generally be taken as a tax credit in the home country of the foreign lessor.

In a cross-border lease, both financial and operational, the lessee may defer the payment of customs duties and VAT on the imported asset. This is done through the application of the so-called temporary use regime under Czech customs laws, which allows qualifying importers to postpone payment of customs duties and VAT for up to 34 months.

Accounting is based on the legal approach in the Czech Republic. Our methodology of accounting of lease contracts is very similar, among others, to that of France and Italy. The leased asset is depreciated in the lessor's balance sheet. It is assigned to the accounting of the lessor. However, the lessee is obliged to indicate their obligations resulting from any leasing contract in an enclosure to the balance sheet. Any change of our present accounting system towards IAS 17 has to be connected with substantial changes in corresponding stipulations of the civil law and of the taxation regulation.

Leasing companies are neither subjected to any licence system nor subordinated to a bank supervision in the Czech Republic. On the other hand, in addition to taxation and accounting law, leasing companies have to follow certain other imperatives of civil law. They have to comply with the Economic Competition Protection Act, the Consumer Protection Act, Acts on environmental protection, the new Money Laundering Act etc. To "sum-up" there is a reasonably well-elaborated and comparatively stable legal framework for leasing in the Czech Republic. For further progress, however, Czech law applicable to leasing must become more compatible with European Union legislation as the Czech Republic continues its bid to enter the institution.

The first issues that need to be addressed involve banking activities. EU banking directives cite "financial leasing" in their definition of the permitted scope of credit institution activities, but the precise definition of this term is left to each nation. Such a characterization still does not exist in Czech law. In the context of EU banking directives, it is even more urgent to define leasing companies. The manner in which leasing companies are to be classified will be significant in defining their ability to provide services in EU member states.

The Czech Value Added Tax Act also needs to be addressed in order for leasing laws to be made consistent with those of the EU. For instance, in contrast to the 6th EU VAT directive, Czech lessees have no right to fully recover VAT paid when leasing a car, even when a vehicle is used exclusively for business purposes. In the previous era, cars were considered luxury items, and so were singled out for discriminatory VAT treatment in Czech taxation laws.

In contrast to the stable political environment, quite favourable economic conditions and fairly settled legal framework, the development of Czech leasing is also marked by considerable problems.

Scarcity in refinancing resources for leasing transaction is to be named in the first instance. It is still difficult and sometimes even almost impossible to obtain credit for most independent leasing companies in our country. At present, our banking sphere is in a state of transition. The bad-loan debacle has resulted in an ever growing list of forced administration and bankruptcies of small- and medium-sized banks. It has also compelled bigger banks to set aside large reserves. This development in the banking sector has led to an over-prudence on the part of all banks in crediting most leasing companies and to a consideration of leasing as a business too risky for lending. Thus, the current lending policy of commercial banks contributes, through measures beyond ordinary market tools, to a consolidation of the Czech leasing sector. At present, only leasing subsidiaries of banks and holdings have enough credit resources for financing their leasing activities.

In response to the current limits of the credit market, a growing number of leasing companies are seeking more accessible sources of financing. Many of them are being refinanced through forfaiting. For instance, more than 80 Czech based leasing companies are involved in a forfaiting programme offered by Investicni a Postovni banka. For some leasing companies, commercial paper programmes may also be a flexible and cost effective solution. Compared with the expensive and lengthy procedure of issuing bonds, commercial paper programmes remain a much cheaper and administratively lighter alternative. Unfortunately, as everywhere, such refinancing alternatives are not for everyone. Due to short maturity, the high rating requirements for such programmes deny access to most Czech leasing companies.

Unpaid lease installments represent the second current major headache for Czech leasing companies - most are haunted by them. At the same time, it is necessary to state that leasing companies are much more successful in dealing with bad debts than banks in our country. The lack of basics on the part of many customers (such as balance sheets and other past data) are in the background of most bad debts. However, improvements in the basic reporting process, a wide use of early warning systems (including one which is provided to its members by the Czech Leasing Association) and growing experience of the staff in leasing companies have led to a remarkable improvement of the bad debt statistics of most leasing companies.