The Effects of Lease Financing on the Financial Performance of Companies Listed in Nairobi Securities Exchange

Abstract

The economic benefits of leasing can be derived from the firm's choice of leasing relative to borrowing and acquiring the asset. 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. Leasing is an attractive financing instrument for lessors because it allows them not only to avoid the usual credit risks but also to pass the property and price risks involved in capital goods on to the lessee. The objective of the study was to determine the effects of lease financing on the financial performance of companies listed in the Nairobi Securities Exchange. This study adopted descriptive research design. The population of the study was all the 64 listed companies in the NSE where all the companies were not using lease financing, but data for only 33 firms which were using lease financing was available for the period under study. Secondary data was collected for the firms for the period 2010 – 2014 from the annual financial reports. The measure of financial performance was taken as the dependent variables while amount of lease finance, size and liquidity was taken as the independent variable. The collected secondary data was analyzed using Statistical Package for Social Science (SPSS) version 20. A regression analysis was conducted on the data set to determine the effect of lease finance on the ROA for the firms listed at the NSE. From the regression results, lease financing and liquidity had positive effects on ROA while size had negative effects on ROA. Lease financing effects were however insignificant at 5% level of confidence, while liquidity and size effects were significant at. 5% level of confidence. The R2 showed that the model explained 12.1% of variance in ROA. The study concludes that there is a positive association between lease financing and Return on Assets. Though the relationship could be positive, it failed the significance tests at all the acceptable levels of significance.