Car Leasing in Lebanon from the Perspective of the Lessor

Abstract

This is a theoretical case study on car leasing in Lebanon from the perspective of the lessor. Although the methodology can be applied elsewhere we chose to take into consideration local domestic features. The procedure adopted is to start from a base model and then change the parameters of the model with the use of the command Data Table in Excel. We are able to conclude that car leasing can be a very profitable business even with modest input characteristics. The two factors that are highly relevant are the credit or financing limit, and the market salvage value, that both are critical to the lessor. We therefore recommend that car leasing firms pay particular attention on the natural depreciation of the car, choose, if possible, the customers with a good driving record, and equip the car with enhanced security measures. Alternatively the lessor can buy “full-risk” insurance against all damages to the car. This will help in mitigating the agency costs and the concomitant moral hazard that arise from the separation of ownership and control. Additionally the car leasing firm should aim to raise as much as possible its own borrowing capacity by appealing to its relative advantage from the pooling effect of holding a fleet of cars. Other factors, like, lending, or leasing rates, and borrowing rates, taxes, the recovery amount of the car, the car purchase price, and the assumed ROE have little effects.