Features and Working of Leasing Industry of Germany

TLDR: Lease leasing is a financing device in the form of a lease as mentioned in this paper, which has been used as an effective alternative to the purchase of equipment, and has become one of the key engines of innovation and economic growth in Germany.

Abstract: Finance leasing is a financing device in the form of a lease. It has been used as an effective alternative to the purchase of equipment. Usually a finance leasing transaction works in the following way. At the request of the lessee, with his specification of the asset and selection of the supplier,1 the lessor enters into a supply agreement with the supplier. The lessor acquires the asset from the supplier, who receives outright payment from the lessor. Then, the lessor leases the asset to the lessee for a term which is usually most of the useful life of the asset, in return for the lessee’s payment of rental. This rental is calculated to cover the capital outlay of the lessor and also to give him a margin of profit. During the lease period, the lessee enjoys the possession of the asset and the profits resulting from the use of it. He also undertakes to maintain it in good order and is responsible for loss or damage to it. At the end of the lease period, either the lessee would continue to hire the same asset for a secondary period and pays a peppercorn rental toward it, or the asset would be sold, often by the lessee on behalf of the lessor, and the lessee would share a substantial proportion of the proceeds of the sale.Leasing is nowadays an established part of commercial life. The realization that wealth is created through the use of an asset rather than through the fact of its ownership has long been recognized. German company managers have an instinctive reverence for the principle of 'mine and thine', so it is hardly surprising that in the early 1960s they were somewhat skeptical about this newfangled alternative to the traditional forms of credit. Since then, however, leasing has become an investment instrument of unrivalled popularity, and today it accounts for just under half of all investments in equipment financed externally (i.e. not paid for out of equity capital, or out of return flows of capital from depreciation). Over the decades, leasing has become the number one alternative to the classical bank loan, and is now recognized as one of the key engines of innovation and economic growth in Germany.