Towards a slow and painful recovery.

Those desperate for some positive news on the economic front in the United States have something to cheer about. For the first time in nearly fifteen months, the U.S. unemployment rate fell by a smart margin, indicating a slow and painful movement towards recovery. Provided, of course, the relative data as presented in surveys carried out by Bloomberg and others is accurate and reliable.

One of the most important aspects of the current crisis is the issue of credibility of the institutions that were considered above reproach, and totally reliable. As it transpired later, many of these institutions were found sorely wanting in competence, as well as integrity.

The optimism about the current situation is mainly on account of the fact that job losses that were supposedly estimated to be in the region of approximately 325,000, turned out to be only around 247,000. It is not clear if the estimates were accurate or there is a real improvement in the ground level situation.

Some of the areas where job losses occurred in good numbers are the financial services, the construction sector, and the hospitality industry, while the auto industry added several thousand jobs in the otherwise cloudy scenario.

It remains to be seen, however, as to when and at what rate consumer spending would improve. That would be a key indicator of consumer confidence, as well as availability of disposable incomes. The economic recovery chain does not appear to be consistently strong throughout. There are weak points that could easily pull the positives back to square one.

If the American economy is really on the mend, it is definitely not at a pace that many fondly look forward to.

Challenging times for American Economy

Is the worst over for America?   Economically speaking, that is.  Is the U.S. economy on the mend?   Are better times around the corner?   Can the beleaguered citizens of the capitalist citadel breathe easier?   What would the Americans not give to get a “yes” for all of these questions!

 

Economists, Corporate leaders, experts and specialists of various hues are cautiously optimistic of the prospects of the economy coming out of the southern doldrums and heading towards northern pastures.   However, they do not want to be seen making the same mistakes again by making outlandish claims of economic well-being, in the face of continuing tough times, as they did about the supposedly unstoppable race of the economy towards the ninth heaven.

 

Some of the reasons advanced for the optimism about the U.S. economy, among other things, are said to be the slow but steady improvement in consumer sentiment, the slower pace, as well as smaller quantum of job losses, an improvement in the manufacturing environment, etc.   That apart, it is expected that consumer demand would pick up slowly in the next few weeks.   Just like a drowning man clutches at straws, the experts are clutching at any little bit of positive news to butress their claims of economic upturn.

 

Does all of this add up to an upturn in the economic conditions?   No one in his right mind would dare take a definitive stand on this.   Such is the effect of the sudden and unexpected downturn that took most by surprise.   The experts and specialists do not wish to be caught again with their tongues out!

 

From the statistics available, it would appear that American consumers are more positive of their economic future, and appear to be opening their wallets and purses a bit wider than before.   And the number of Americans queueing up for the dole seems to be slowing down a bit.  

 

It remains to be seen if the massive sums of money invested by the Obama administration to shore up the financial and other sectors of the American capitalist kingdom, would have the desired effect.   For the moment, everyone seems to keep his fingers crossed and praying for a better morrow.

 

 

 

 

 

Tax Havens

In the wake of the economic crisis gripping much of the world today, so called tax havens have come into sharp focus, for their contributory role in the present crisis.

What is a tax haven?  A tax haven may be an independent country, or a dependency, or overseas territory, of a country, or a principality.   The general term applied to this goegraphical entity is “jurisdiction”.   It is a place where there are either no taxes like Municipal Tax, Wealth Tax, Sales Tax, VAT, etc, or the rates of these taxes are so low, as to attract people, especially non-residents from other countries to take advantage of these laws. at the cost of the home country.

For example, say an American national working for an oil company, in the Middle East, repatriates his earnings to the U.S., and is liable to pay certain tax on it.   However, by parking these funds in Switzerland, he does not pay any tax at all.  Hence the gentleman may be tempted to open a numbered account in a Swiss Bank, including one operating in the Middle East, and then transfer his earnings to that Bank.   In the process, the U.S. Government loses taxes on these funds, apart from the fact that these funds mights have, otherwise been invested in the United States, and generally speaking, contributed to the well being of America.

Another feature of a tax haven is that, they do not disclose the financial information relating to accounts maintained with their Banks, and Financial Institutions, to foreign tax and other authorities.   This presents the home country authoritites, problems in tracking illegal transfers of money, tax avoidance, stashing of ill-gotten wealth etc.   The tax havens actively discourage sharing of information relating to financial transactions of their overseas clients, through administrative practices and legislation that is aimed at protecting the privacy of such clients, even though such practices may cause harm and loss to the home countries, that is, the countries, to which the clients of the tax havens belong.

A third feature of tax havens is the lack of transparency in the legal and administrative processes, that makes it difficult for countries with a proper tax framework, to deal with such jurisdictions.   These countries find themselves at a disadvantage, vis a vis, the tax havens, on account of the obvious differences in approach to the issue of taxes on the one hand, and the concept of accountability and transparency on the other.

Tax havens, typically, do not engage in due diligence of their foreign clients, in respect of their identities, source of funds, etc, before establishing a relationship with them.   Further, they do not require overseas companies to have a local presence or even to have local introductions.   Practically, everything is “arranged” for a price.

Often, tax havens advertise themselves as such, through the media.   One can come across advertisements of tax havens, in financial journals in different countries.   It is not uncommon to encounter an advertisement of a tax haven in a particular edition of a journal, carrying  critiques of tax havens!

Future of Tax Havens:  It is difficult to predict the future of tax havens at this time.   Definitely, they are under pressure to “reform”.   The present economic cisis has led to several countries, notably the United States, coming out strongly against these jurisdictions, and acting to discourage their activities.

It remains to be seen what eventually happens to the tax havens given the complexities of the system.

Marine Insurance in International Trade-Part VI

In this concluding article on Marine Insurance, we take a look at the remaining Institute Cargo Clauses, that deal with the extent of insurance coverage offered.

Institute Cargo Clauses B:  Compared to the clauses A, clauses B is more restrictive in its coverage.   As a matter of fact, it occupies the middle ground between clauses A and C, being the least and the most restrictive, respectively.

Clauses B offers coverage for:

1)  Fire and Explosion:  Loss or damage suffered by the cargo on account of fire and explosions  are insurable and eligible for claims under this clause.

2)  Sinking etc:  Loss or damage to the cargo resulting from the sinking, grounding, capsizing, etc., of the vessel is covered under this clause.

3)  Collision, etc:  Collision of the ship with another, or other objects, other than water, resultig in loss or damage to the cargo is covered under clauses B policy.

4)  Discharge Loss: The risk of cargo being discharged at a port of distress is eligible for coverage.

5)  Other losses:  Loss or damage to the cargo in transit abroad any land conveyance or transport is eligible to be covered for the risks associated therewith.

6)  Washing Overboard:  Loss or damage on account of cargo getting washed overboard is eligible for coverage.

7)  Water Seepage:  Entry of water into the vessel, etc., thereby causing loss or damage to the cargo, is covered under the clauses B.

8)  Loading/Unloading:  Loss or damage caused in the process of loading and unloading of the cargo is covered under this clauses B.

9)  General Average Sacrifice:  Loss or damage suffered by the insured on account of application of the rule of General Average Sacrifice, in relation to the value of the cargo saved, is also covered under the clauses B policy.

10)  Jettison:  The loss or damage suffered by the assured on account of jettison of his cargo can be covered under the clauses B policy.

In addition to the above coverage, the B clauses policy also affords additional coverage for loss or damage that can be “reasonably attributable to”: Earthquake, Volcanic eruption or lightening.  

Exclusions:  The Institute Cargo Clauses B policies do not include coverage for the loss or damage accruing to the assured on account of theft, shortage, or non delivery of the goods.

Even though the clauses B policies provide greater coverage compared to the clauses C policies, yet it is useful only for certain types of cargo, on account of its restrictions.

Institute Cargo Clauses C:  Clauses C policies offer the least coverage on account of the highly restrictive scope of these policies.

Clauses C policies offer coverage for the following risks, but with the rider of “reasonably attributable to”.  

1) Fire and Explosion.

2)  Sinking of ship etc.

3)  Collision of ship etc.

4)  Cargo discharged.

5)  Transit Losses.

6)  General Average Sacrifice.

7)  Jettison.

  Exclusions:  Clauses C policies do not offer coverage to losses or damages suffered on account of Earthquakes, volcanic eruptions or lightening.   Also exluded are risks like cargo being washed overboard, entry of sea water into the ship and resultant loss or damage etc.

Conclusion:  Insurance obtained under any of the above three Institute Cargo Clauses is subject to respective exclusions.   In spite of that, it is necessary to obtain insurance for the cargo, in view of the uncertainties and dangers posed at various stages of the journey of the cargo.

Further, the enormous protection enjoyed by the carriers under various national and international rules and conventions, gives them ample opportunity to bail themselves out of tough situations, leaving the shippers high and dry.   Even where the carriers are liable to compensate the shippers, such liability is limited in scope and quantum.   It is for these reasons that it is important to obtain insurance and play it safe.

Marine Insurance in International Trade-Part V

In this article, we shall study what is the Institute Cargo Clauses, and what it covers.

Institute Cargo Clauses:  Historically, London has been the center for marine insurance business, and many of the customs and practices, as well as guidelines relating to this trade have originated from here.

Of  such guidelines, one of the most important one  relates to the extent of risk coverage offered by various marine insurance policies, as laid down in the Institute Cargo Clauses, A, B, and C.   These guidelines have been accepted by several marine insurance organizations across the globe.   The risks covered under these clauses, and the exclusions thereof, are discussed below.

Institute Cargo Clauses-A:  This clause provides the maximum coverage against the risk of loss or damage to the insured cargo.   Because of its very wide scope and application, it is also called “all risks” coverage.

The coverage offered by this type of policy includes loss or damage by fire and explosions, that are not so rare on ships.   It covers the risk of the ship being sunk, grounded, stranded, etc.   Also covered here is the risk of collision between two vessels, the discharge of cargo at a port of distress etc.   That apart, it also covers loss or damage on account of jettisoning of the cargo.   As can be seen, the coverage offered under clause A is quite comprehensive.

Exclusions:  The following are the exlusions applicable to Clause A.

1)  Willful Misconduct:  Willful misconduct of the assured in relation to the insured cargo may nullify the policy, thereby releasing the insurer from his liability to the insured.   If the assured acts in a manner that has the effect of causing loss or damage to his own property, then he loses the protection of the insurance coverage for that cargo.

2)  Ordinary Losses:  Often, cargo, depending on its nature and constitution, undergoes changes in its quantity and or quality, thereby reducing its value.  Similarly, leakage is inherent in certain types of cargo like oil.   Further, certain cargo suffers wear and tear in the course of voyage, without any deliberate action towards this end.   Such losses are excluded from the scope of this clause.

3)  Improper Packing and Loading:  Many a time, shippers do not ensure proper packing and loading of the insured goods, resulting in loss or damage, in the course of the voyage.   Such losses care not covered under this clause.

4)  Inherent Weaknesses:   Certain types of cargo suffer certain inherent weaknesses, that may render them vulnerable to loss or damage.  Insurers would not be responsible for such losses.

5)  Delays:  The insurer is not responsible for loss or damage that can be attributable to delays, even though such delays may be a result of risks that are insured.   For example, a ship may stall on account of mechanical problems, resulting in the fresh fruit cargo on board going bad.

6)  Insolvency, etc., of Carrier:  Loss or damage to the insured cargo, on board a vessel, whose owner is insolvent, bankrupt, or otherwise in financial default, cannot make the insuere liable to settle the claim of the shipper in respect of such cargo.   Financial distress of the carrier affecting the well-being of the cargo, does not make the insurer liable to compensate.

7)  Deliberate Action:  Deliberate actions to cause loss or damage to the insured cargo relieves the insurer of his liability toward the insured.   Deliberate destruction or damage of the cargo is a criminal offence, and cannot be allowed to result in a pecuniary gain to the insured.

8)  War, Civil Disturbance, etc.:  Outbreak of war, or civil disturbances resulting in loss or damage to the insured cargo will not be underwritten by the insurer.   However, some insurers do allow coverage for cargo even under such circumstances, on payment of additional premium.   The current unrest in Thailand, is a case in point.

9)  Un-Seaworthy Vessels etc:  Where the deployment of vessels that are not seaworthy, etc., results in loss or damage to the insured, the insurer would not be liable under the policy to compensate for any loss or damage to the cargo.

                                                                                   To be concluded

Marine Insurance in International Trade-Part IV

In the previous article,we had examined as to who has an insurable interest, and the type of marine insurance available in regard to international trade.   In this article, we shall take a look at the various types of insurance policies offered by insurers to support the four types of insurance.

Types of Marine Insurance Policies:

1)  Specific Voyage Po9licy:  As the name indicates, this marine insurance policy covers a particular voyage only.   The insurance cover becomes effective when the ship starts its voyage, and expires upon the delivery of the consignment at the place of destination.   It is a one off policy covering only one voyage.

This type of policy is suitable only for those who do not engage regularly in international trade, but only ocassionally.  

2)  Time Policy:  This policy is issued for a particular period of time, normally one year at a time.   The cover under this policy commences from the date and time as specified in the policy, and expires at the end of the stated period.

The assets covered under this policy would enjoy the same for the period of insurance, whatever the course of the voyage.   This policy, though issued normally for a period of one year, may be extended beyond this period, through suitable amendment.

3)  Mixed Policy:  Sometimes a mixed policy is obtained which covers the risk to the insured assets during a specific voyage, for a specific period of time.  It may also be insurance to cover two different types of risk, on land as well as by sea.

4)  Valued Policy:  In this policy, the value of the consignment is ascertained before hand and specified in the policy.   The insurance cover is thus restricted to such stated amount.

5)  Un-Valued Policy:  In this policy, the value of the consignment is not specified in the policy.   Rather the insured is favored with a specific amount of insurance within which he may forward the goods for export.   The value of the goods on a particular voyage is ascertained as and when there is a claim.

6)  Floating Policy:  Also called ‘open policy’, it is popular with merchants and exporters who regularly export goods.   It is convinient for them to obtain a floating policy that offers cover for a specific amount, without reference to the cargo, or the voyage, or the ship.  

Every time a consignment is exported, the details of the same must be conveyed to the insurer, in advance, who takes congnizance of the same, and provides for the necessary cover for the stated cargo on the specific vessel, for the concerned voyage, within the overall limit fixed for the particular customer.

7)  Wagering or Honor Policy:  Normally, only a person with insurable interest is eligible to obtain insurance.   For example, a ship owner for the ship, and the cargo owner for the cargo, and so on and so forth.   Sometimes, an insurer issues a policy to a person without insurable interest, without benefit of salvage to himself (the insurer).

8)  Sellers’ Contingency Policy:  This is policy meant to protect the interests of the seller, who may find it difficult to get payment for the goods supplied to the buyer, on account of a change in the quality etc of the goods, for different reasons.

Where the seller of the goods, affords credit to the buyer in an export transaction, but the goods are exported on  F.O.B basis, a peculiar situation arises,  where the  ownership of the goods remains with the seller, but the responsibility for the goods passes on to the buyer.  In such a case, if the buyer does not accept the goods, citing reasons of damage to the goods, then the seller stands the risk of losing money.   The Sellers’ Contingency Policy is meant to address this risk, and protect the interests of the seller.

                                                                                           To be concluded

Marine Insurance in International Trade-Part III

In earlier articles, we had studied what is marine insurance,  why it is required, who can obtain it , and the types of insurance available.   In this article, we shall briefly examine the concept of loss ascertainment in marine insurance, and the system of  ‘Averages’, by which loss or damange is compensated for the insured assets, that are destroyed or damaged.

Intenational Trade, or for that matter, even domestic trade, involves the movement of merchandise from the place of its origin, and or production, to the place of its delivery and or consumption.  

This movement, or transport of goods involves initiating several steps, or actions, till the goods, or cargo reach their final destination.   Some of these steps include loading the cargo on to trucks or railway carriages, or barges from the point of origin to be taken to the vessel, or ship that actually carries the cargo across the seas,  to its destination.  

At every step of the way, from the time the cargo leaves the origin point, till the time it reaches the final destination, and handed over to the consignee, it is subject to several known and unknown risks, that might cause loss or damage to the cargo.

The quantum or extent of loss or damage that the vessel and the cargo within, may suffer, is measured by a system of ‘averages’.   There are two types of ‘averages’, namely, Particular Average, and the General Average, that are discussed below.

Particular Average:  This average relates to two types of situations.   One, where loss or damage occurs, both to the vessel as well as the cargo.   And the other, where loss or damage is restricted to the cargo.  

In the first type of situation, the loss or damage may involve both the cargo and the ship.   Some of the situations where this might happen, are the sinking of the vessel, resulting in the total loss of the vessel and the cargo.   Another example is a collision between two vessels, causing either sinking of the ship, or considerable damage to the ship, and of course, the cargo.   A third example, is where a ship is grounded on encountering an obstruction in its path, in the sea.   Here, considerable damage may be caused to the ship, and to some extent, the cargo.

In the second type of situation, only the cargo on board the ship may be subject to loss or damage.   Typical examples of such loss and damage may relate to one or more of the following: theft/pilferage of the cargo;   degeneration in the quality and quantity of the goods on account of vibrations of the ship;   episodes of turbulence, acceleration or deceleration experienced by the ship on account of exposure to elements, and inclement weather, etc.  

General Average:  This average refers to the loss or damage suffered by one or more of the shippers  whose cargo had to be jettisoned, or thrown overboard, into the sea, in order to save the rest of the cargo.   Certain situations at sea may demand the ’sacrifice’ of certain cargo to safeguard certain other type of cargo.

Naturally, this would be unfair to the shippers that lost the cargo, as they had also obtained insurance for their cargo, like the others.  

Hence, in order to compensate such shippers, who find themselves at the receiving end,  as above, all the other parties involved in the shipment are obliged to contribute towards the losses suffered by the shippers whose cargo had to be jettisoned.

The quantum of contribution to be made by the other shippers depends on the equation between the value of the cargo jettisoned and the value of the cargo thus saved.   Again the value of the cargo that was jettisoned is fixed according to its  insured value.   This process can be a bit complicated, and requires the services of a specialist called the “average adjuster”.

                                                                                      To be concluded

Marine Insurance in Intenational Trade-Part II

In the previous article, we had studied what is marine insurance, and the rationale for obtaining marine insurance.   In this article, we shall examine as to who is eligible to obtain such insurance, and the various types of insurance available, as well as necessary  in international trade.

For Whom?:  Marine insurance is necessary for all those engaged in international trade, in different capacities, like exporters, importers, Bankers and Financiers etc.   All these parties have a stake in the successful completion of the transaction, from the beginning to the end.

The rules regarding marine insurance revolve around the concept of  “insurable interest”.   A person is said to have insurable interest in any asset, if he is likely to suffer some kind of loss in case of loss or damange to such asset.   That is, the well being of the asset is important to that person, to the extent that anything that affects the value of the asset, would also cause a loss to that person.  

Under laws governing marine insurance, the following parties are deemed to have an insurable interest.   That makes them eligible to obtain insurance for the  assets under consideration.    As they have a stake in the underlying transaction, these parties are considered to be interested parties, and therefore, the law takes cognizance of their “insurable interest”.

1)  Ship Owner:  Logically, and by common sense, the owner of the ship has an insurable interest in the ship.   For the simple reason that he owns the ship.

2)  Cargo Owner:  The person that owns the cargo that is the subject of the voyage on board the ship, also has an insurable interest in the cargo.   Just like the ship owner, who, by virtue of his ownership of the ship, has an insurable interest in the ship, so also, the same holds good for the cargo owner, vis a vis, the cargo.

3)  The Financeir:  The Bank or other Financier, who has lent money to either the ship owner or the cargo owner, against the security of the respective asset, has an insurable interest in the ship, as well as the cargo, to the extent of his loan amount.

The above three parties, having an insurable interest is obvious, from the circumstances etc.   However, apart from the above, there may be others also who have an insurable interest.   For example, the Master of the ship and the crew is also deemed to have an insurable interest, as they depend on the ship for their livelihood, and receive remuneration for the work done on the ship.

Types of Marine Insurance:   Four types of marine insurance are widely recognized in the industry.   They are:

1)  Hull Insurance:  Literally, the hull of a ship is the basic structure of the ship.   This type of insurance covers the insurance of the ship or the vessel, and all the machinery and equipment that goes with it, i.e., necessary for running the ship.   It also includes, furniture and fittings, fuel, spares, etc.   Practically every part of the ship is covered under the Hull Insurance, offering protection against loss and damage to the ship.    This insurance cover is arranged by the ship owner.

2)  Cargo Insurance:  This insurance covers all types of cargo carried on board the ship.   It also extends to the personal effects of the crew of the ship, provided they are declared, and accounted for.   This insurance would be arranged by the cargo owner.

3)  Freight Insurance:  Freight is the consideration that the ship owner receives for carrying the goods or the cargo abroad his ship.   It may be either pre-paid, or payable at destination at the time of  delivery of the consignment.   Where freight is payable at destination, it involves an element of risk.   Because, if the cargo is lost or stolen, or otherwise damaged in the course of the voyage, the carrier would not be entitled to the freight.   Hence the carrier may obtain freight insurance to cover this risk.

4)  Liability Insurance:  This type of insurance is obtained to take care of the third party liabilities, that may arise on account of major hazards like collision of ship, etc.

                                                                                    To be continued

Marine Insurance in International Trade-Part I

Introduction:  Insurance is a mechanism, or system of providing coverage for losses likely to occur in relation one’s life or property, on account of various factors, or risks.

Marine Insurance:  Marine Insurance is that branch of insurance that deals with the coverage of losses or damanges that might befall sea and ocean going vessels, the cargo loaded on board, and also the related infrastructure involved in trade by sea.

As a matter of fact, marine insurance is acknowledged to be the oldest type of insurance.   And for several centuries, London was the center for the marine insurance business, for historical reasons, as Great Britain was the undisputed superpower of the world, in those days.   As such, many of the customs and practices followed in this business originated in London.   For instance, the universally accepted ‘Institute Clauses”, that lays down the rules regarding coverage, and still in vogue.

Rationale for Marine Insurance:  Why marine insurance?   For that matter, why insurance at all?   There must have been a time in history, when insurance was unknown.

Insurance, like several other theories, concepts, mechanisms, systems, and practices,  developed over a period of time, as part of man’s evolution through the ages, to meet his needs, either genuine or contrived.

In fact, marine insurance traces its history back to the origin of international trade.   The export of commodities from one country to another over seas and oceans, and the consequent risks posed to both the vessels and the cargo on board, led to the realization for the need to ‘cover’ these risks.   The ‘idea’ was to ensure that the ship, as well as the cargo reached their destination safe and sound.  

This ‘idea’, over a period of time, developed into a formal insurance policy, subject to legal terms and conditions;  and today, no ships sets sail with cargo, without the comfort of a insurance policy to take care of the various risks it faces in its journeys across the seas and oceans.

Hence, given the uncertainties associated with international trade, and the consequent adverse affects that can derail businesses engaged in international trade, it has become compulsory, as it were, to play it safe, and obtain suitable marine insurance for the merchandise involved.

Another important rationale for obtaining marine insurance is the fact that, invariably, the carriers wriggle out of a good part of their liability to the insured, by virtue of the protection afforded to them under various international conventions, like the Warsaw Pact, the Hague Rules etc.   Under these conventions, the liability of the carriers is limited, and may be even lower than the value of goods insured.

Risks faced in international Trade:  The various risks faced by the exporters and importers, as well, that are sought to be neutralized, or managed with the help of insurance, that is, marine insurance, are discussed below.   They may be divided into two classes of risks, namely, Standard Risks, and Exceptional Risks.

Standard Risks:  Standard risks are those that are encountered in the normal course of the voyage.   These include the risks of sinking, grounding, etc., of the vessel.   Also included are fire accidents, explosions, and the like.

Exceptional Risks:  These risks are those that do not occur normally, but on account of exceptional circumstances.   Like a war, civil war and disturbances, strikes, etc.  

A current example of a civil disturbance is Thailand, where anti Government protesters have taken over streets and Government buildings, forcing the Thai Government to declare emergency in parts of the country, and cancel the prestigious ASEAN conference.

These type of situations, which can crop up without notice, have to be taken into account, when engaging in international trade, and suitable insurance be obtained to counter such risks to one’s commercial and financial interests.

                                                                                        To be concluded

Finance: Leasing-Part I

What is Leasing?   Leasing is a type of financing,  in kind (instead of cash).   A lease transaction involves the owner or lessor of the asset, say machinery, or a car, etc., transferring the right to use the same to another person called the lessee.   This transaction is formally called a lease.

In this transaction, the ownership of the asset continues to vest with the lessor.   Only the beneficial use of the asset is afforded to the lessee.   The consideration due to the lessor from the lessee is called as the lease rentals.   These rentals are normally fixed amounts payable monthly.

How it works:  John Deere, a resident of Oklahoma City had always dreamed of owning his own taxi and ferrying passengers across cities.   He loved driving and wished to combine his love of driving with a service that would take care of his livelihood.

But John did not possess the financial wherewithal to buy a car on his own and get started with his passion and his profession.   He therefore approached a local Bank with a proposal for purchase of a car for the purpose of plying it as a taxi.   The Bank, after evaluating his proposal did not find him upto the mark in regard to his creditworthiness for the USD:36,000.00 loan he had asked for.

Disappointed,  John thought of approaching a fleet owner to join them as a driver.   But his heart was not into it, and he gave up the idea.   Eventually, John contacted a Leasing company, that offered to lease out a car of his choice to John for a reasonable monthly lease rental.   John considered the proposal inside out, and decided to accept it.

Under the terms of the contract, John would get a brand new car of his choice.   He could use it for his professional activity and pay the lessor, or the owner, a fixed monthly rental.   He would also have to take proper care of the car, and keep it in good condition.   Further, at the end of the lease period, he would have the option to buy the car from the lessor, at a very attractive price.

In this way, John came to possess, albeit constructively, a brand new car to pursue his passion to drive, as well as make a livelihood out of it.   This is a simple example of how a lease transaction works.

Benefits of Leasing:  There are several benefits of leasing, both to the lessor and the lessee.

Benefits to the Lessor:  The lessor that owns the asset, may not always be in a position to utilize it for his own benefit, and thereby incur costs for maintaining the same.   Leasing offers a way of making some money out of the asset.

The lessor does not have to bother about the upkeep and maintenance of the asset, as it is taken care of, by the lessee.

The asset brings a regular income with the minimum of hassels.

Benefits for the Lessee:  The lessee may not be eligible for a Bank loan for various reasons, and leasing is an alternative finance option for him, that is more convinient, and may be cheaper.

The lessee has the option to buy the asset at the end of the lease period at a very attractive price.   Moreover, it is an asset that he himself had been using. 

If, at the end of the lease period, the asset is giving diminishing returns, the lessee can go in for a fresh lease, and get a new asset for the new lease.

Leasing has become a well established financing option for businesses, providing them with an alternative to the regular banking finance.

                                                                               To be continued

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