The effect of lease financing on the financial performance of all firms listed in Nairobi stock exchange

Abstract

Lease Financing is one of the alternatives to straight-up purchasing if a firm is seeking the means to obtain necessary business equipment and supplies that have the possibility of endangering the firm’s monetary flow and stockpile. A finance lease is a way of providing finance – effectively a leasing company (the lessor or owner) buys the asset for the user (usually called the hirer or lessee) and rents it to them for an agreed period. The general objective of this study was to establish the effects of lease financing on the financial performance of companies listed in Nairobi Securities Exchange. The population under study comprised of companies’ annual financial reports for the companies listed in Nairobi Securities Exchange that use lease financing as a means of acquiring equipment’s. The period of study was seven years (2007 to 2013).The study found that there is a positive significant relationship between lease financing and Return on Equity. This shows that lease financing has a positive influence on a firm's efficiency in generating profits from every unit of shareholders' equity. The study also found out that using lease financing, companies divert the money they could have used for making purchases of equipments to the working capital or to other investments. Lease financing is positive when it is used to generate a return on assets that is higher than the before-tax cost of debt, thereby enhancing the return on equity. This results in profitability and wealth maximization. According to the findings, there is a positive correlation between lease financing and Return on Equity.