The Constraints of Leasing in Algeria: The Case of SOFINANCE (Joint Stock Company)

: Algeria seeks to develop small and medium enterprises to reduce its dependence on hydrocarbon revenue. But the funding problem drags down SME success at all steps. One reliable funding solution is leasing, which is an investment financing solution and offers many advantages. However, we cannot ignore the fact that no miracle solution exists. Leasing faces a significant number of obstacles, which is the main subject of this article, which aims to identify the source of the obstacles restraining the development of leasing among Algerian SMEs.


Introduction
Small and medium enterprises are seen as the engine of the development of an entire nation, fuel that boosts the country's economic sphere. According to Julien and Machesney, «Small enterprise is at the heart of the transformation of our economies... » (Julien & Marchesney, 1988, p. 56). In this context, the Algerian state has thought of setting up organizations, structures, and reforms, going in the direction of encouraging the creation of enterprises and developing through the various forms of support and aid to SMEs (Andi, Ansej), even going as far as tax exemption and multiple subsidies.
However, the Algerian SME, like its fellows around the world, suffers from a significant problem that greatly holds down its development: this is the problem of financing. Indeed, according to a survey conducted by the World Bank in 2001 on the size of companies and their environment (Schiffer & Weder, 2001, p. 16). Business constraints were addressed, and the financing problem is at the top of the rankings, unanimity, and on a global scale. According to the survey results, financing is SMEs' first obstacle. It would also be the leading cause of their mortality, followed by the country'scountry's fiscal policy, inflation, corruption, judicial system, etc. Nearly twenty years after this survey, the financing problem persists, especially in Algeria, despite all the available structures to entrepreneurs.
In general, any company of all sizes has the choice of financing itself in two distinct ways: internal or external funding. Among the financing methods, leasing is considered a real financing solution for SMEs, especially in Algeria, given its many advantages. However, this last statement raises specific points; as long as leasing is considered an investment financing solution for SMEs, why is leasing not so widespread in Algeria? More explicitly, what is holding back the development of leasing in Algeria, especially among Algerian SMEs? It cannot be ignored that the company must have its part of obstacles and difficulties in its application that the company must face. This is why the main topic of our work will be the nature of the barriers faced by Algerian SMEs during leasing financing. This paper is arranged as follows. The basic definitions and notions for SMEs and their financing in general. Then the leasing from its history to its current form, its characteristics, and its relationship with the SME. Finally, we will strive to answer the problem, highlighted by our research and experience with the company SOFINANCE (Joint Stock Company).

Generalities about SMEs 2.1. Definition
The term SME refers to an acronym meaning small and medium enterprises, defined by the number of employees, the balance sheet, or the turnover. The main criterion used is the number of employees. SMEs are considered to be companies with between 20 and 249 employees. Below 20 employees, we will talk about VSE (very small enterprises). With more than 249 employees and up to 4999, we will talk about ISE: Intermediate size enterprise. According to the French institute INSEE, "The category of small and medium enterprises P: 27-37 Volume (01) -Issue: (03) (September 2019) Management & Economics Research Journal 29 (SME) consists of companies with fewer than 250 employees, with an annual turnover of fewer than 50 million euros." (INSEE, 2016) According to the European Commission'sCommission's (EC.Europa) definition, SMEs are companies with fewer than 250 people. In addition, there are two other criteria to choose from: annual turnover must not exceed 50 million euros, or the total balance sheet must not exceed 43 million euros (Commission recommendation of May 06, 2003).
In the Algerian context, the SME is a company producing goods and services employing one (1) to 250 people and whose annual turnover does not exceed 4 billion dinars or whose total yearly balance sheet does not exceed 1 billion DA.
The number of SMEs has increased significantly over the past few years, according to statistics collected by the official newsletter of the Ministry of Industry and Mines for the first half of 2017. The results are pretty satisfactory. Indeed, it has been reported that at the end of the first half of 2017, the overall population of SMEs stood at 1060289 entities, of which almost 57% are incorporated, of which there are 264 Public Economic Enterprises (EPE). The rest are made up of individuals (44%), 21% of whom are professionals, and 23% are crafts.

Fig1: A Diagram illustrating the components of the SME in Algeria.
Source: A diagram by the authors, using data collected by the Ministry of Industry and Mines.

SME breakdown by industry:
Algerian SMEs operate in five primary sectors: agriculture, hydrocarbons, energy mines, related services, buildings, public and hydraulic works, manufacturing, and the services sector. The following table recounts the numbers of the SME statistics bulletin collected for 2017 concerning the sectors of SME activity in Algeria and their distributions as percentages.  Analysis of the figures from the distribution table of the sectors where SMEs operate in the first half of 2017 shows an intense concentration on services activities, representing 53.04% of all enterprises, followed by the BPHW sector. 29.83% and the industry by 15.58%.
The use of financing in any form is necessary for the company's activity to achieve its objectives. It benefits from several sources of financing. All are adapted depending on the nature of the need for financing, whether short-term, medium-term, or long-term. The company can self-finance through the non-distribution of its profits or the sale of its assets. It can turn to an external financing method which may be direct, via issuance in the financial markets, or indirect, requiring some form of intermediation between the company and the capital-raising companies. With credit in exchange for interest, the task remains to determine what type of credit is best suited to meet the company's financing needs, whether from the investment or the operating cycle. The company also has a choice to turn to lease as means of financing its investments which is the main topic of this article. We will develop more profoundly in the following pages.

. History of Leasing
Leasing is an Anglicism describing a transaction allowing the acquisition of property in exchange for royalties and the option of a property right at maturity. Born in the United States in the 1950s, "leasing" was introduced in Europe and especially in France only in the 1960s under leasing. However, this operation will not be the most recent. It would be just as old as the era of trading and exchange; renting property is an ancestral practice. 3.1.1. leasing in the age of ancient civilizations: According to historians and economists, leasing goes back much longer in history. It was possible to trace transactions similar to the leasing dating from the Sumerian era or 2000 years before Jesus Christ. This was even written on clay tablets found in the ancient Sumerian city of Ur, containing information on the rental of agricultural equipment, land, irrigation systems, cattle, and other animals. The great philosopher Aristotle also refers to the idea of leasing, arguing that true wealth lies in the fact of use, not in property. Other evidence of the existence of a principle similar to leasing could be reported from the Roman era, as well as evidence written in the code of Hammurabi, dating from 1760 BC. Many other ancient civilizations, such as the Greek, Egyptian, and even Phoenician civilizations, have used this financing tool. According to the manuscripts and papyrus found, leasing was the only affordable way to procure and finance equipment, land, animals, boats, and the crew as a bonus. During the medieval era, weapons of war and armadas were added in addition to rented production and agricultural equipment.
The industrial contributed to the development of metallurgy and the textile industry, the intense mining activity and the considerable growth of transport, and the invention and start-up of the steam engine. This created new opportunities for expansion for the leasing market, which first experienced a meteoric rise in the United States, Canada, and, subsequently, Europe.

development of leasing worldwide:
As has been mentioned previously, historically, leasing is not a recent practice but goes back to antiquity. Only during the last fifty years has it experienced a development in its principle and the form that we know of it now.
The United States, presumed to be the birth country of the current leasing, is also considered to be Globally, largely the first market with a significant propensity for investment leasing, in the order of 30%, a figure that Europe only reaches at half currently. (Gervais, 2004, p. 11) According to the European leasing federation, the European leasing federation is a prevalent method of financing in all four corners of Europe and is experiencing a real boom, in France in particular. This tool was introduced there in 1962, then formalized in 1966, and it has rapidly developed since then. (Nicolas & Trogan, 1970, pp. 33-42) The Constraints of Leasing In Algeria: the Case of Sofinance (Joint The federation is responsible for writing annual reports on the leasing market based on the figures and statistics collected from its 47 member countries. The reports are then classified as dissected and schemed in the form of graphs and figures. Here are the figures reported by the federation for 2016:

Fig 3: Leasing expansion volume in Europe in 2016
Source: (www.leaseurope.org) We notice on the map that leasing financing is expanding in Eastern European countries with a 20% increase in the volume of investment acquired in this way. According to reports from the Leaseurope federation in 2016, 49% of the investments acquired by leasing in Europe were passenger vehicles, compared to 28% of all types of equipment. The percentage of commercial vehicles is 18% in real estate, representing only 5%.

Descriptive leasing study
This section will focus on the exact definition of leasing, how the transaction is going and how it works.

Definition of Leasing
By definition, leasing is a contract by which a person, the lender, or credit (financing company, bank) Buys a property and makes it available to another person, the lessee, for the payment of rent. The lessee is, therefore, not legally the owner of the property made known to him.
According to INSEE, leasing is a financial transaction that allows you to acquire a property through a monthly lump sum payment called a royalty and to claim an option to purchase at the end of the lease agreement.

How does a leasing operation work?
People wishing to finance their investments by leasing must, after determining the property to be acquired and have reached an agreement with the seller, approach a leasing company (or bank or financial institution). After a review of the financial situation of the person concerned and the agreement on the financed property between the lessor and lessee, the file is accepted by the leasing company. A lease agreement is signed between the leasing company and the company, with a promise to sell at an agreed price. The rental starts at the reception of the equipment.
-Terms of the contract By this contract, the owner transfers the right to use the property against the payment of rent for a fixed period, after which the lessee has three options: Lift the option to purchase by acquiring the property at a rate that considers payments already made.
Return the property to the lessor. Extend the rental period. When signing a leasing agreement, each of the two parties, the lessor and the lessee must meet obligations -End of contract : At the end of the contract, the lessee has the choice between three options: The option to purchase: the lessee acquires the property at the agreed price at the contract signing. More often than not, the price paid is reduced from the security deposit paid at the signing.
Restitution of the property: the security deposit is then refunded to it.
•Signing a new lease agreement for the same property, usually with royalties lower than the previous ones or for a new one. -lessor's obligations Yielding property in good condition. Receive payments. -Lessee'sLessee's obligations Make payments. Choose whether or not to acquire ownership of the asset at the end of the contract. The operation, therefore, involves three players: the user (lessee), the lessor (renter financing the investment), and the supplier of the asset. For SMEs, leasing presents an exciting opportunity to acquire the material properties necessary for producing goods and services. Investments in real estate and furniture may be too large for small and medium enterprises. The capital contribution may be too high relative to the available capital or force the company to forego other projects. Leasing then allows the company to keep capital intact, allowing it to take out additional credit just as necessary for its development without adding to its debt. It is flexible because it can adjust to the company's needs. For example, for a small business that is starting with little acquired capital, it may be more convenient to rent a specific machine or tooling rather than buy it. With this service, the company's budget for acquiring personal property and real estate is established until the end of the lease. Thus, this investment is perfectly controlled since the amount of invoices is known for the duration of the contract.
The leasing market in Algeria is considered relatively new and has only really developed in recent years. It has a total of twelve entities offering this method of financing, divided into two main categories, on the one hand, the companies specialized in leasing, and on the other, the banks or financial institutions with a department offering leasing. Among the financial institutions offering to lease, Sofinance (Joint Stock Company), placement, participation, and Investment Finance Corporation, is a public financial institution approved by the Bank of Algeria on January 09, 2001, with a share capital of 5,000,000,000 DA. In 2017 its social capital rose to 10,000,000,000 DA. SOFINANCE JSC was created on the initiative of the National Council of State Participations (CNPE) with the main tasks of support in the modernization of the national production tool and the development of new financial products. Its social purpose includes all occupations developed by the universal bank, excluding customer deposits and the management of means of payment.   There was an apparent increase in equity with stable share capital during the three years from 2014 to 2016, resulting in an increase in the total balance sheet from 9,974,000 DA in 2014 to 12,029,000 DA in 2016. They were noted that the social capital rose to 10.000.000.000 in 2017.
According to the figures published on the official website of Sofinance, we note stability in fixed-income securities and fluctuations in equity holdings and long-and medium-term loans. We also report an increase in leasing activity and signature commitments over the three years from 2014 to 2016.
Sofinance JSC'sJSC's obstacles to the application of leasing: It was found that at the application of leasing, the SME of all its nature of the activity (BPHW, production, industry, or services) faced several obstacles and problems, relatively embarrassing or even disabling, delaying the operation, until the SME'sSME's absorption of the problem, or in some cases the SME was even categorically denied the request for funding. These barriers can take different forms, whether at the time the file is set up, which may even extend to the payment of royalties. Among these obstacles are the most relevant: As the file is set up, Sofinance requires a technical and economic study of the company wishing to finance itself and a forecast balance sheet for the next five years. However, even if the figures provided by that company are very optimistic, this is not a criterion for granting leasing. Other criteria are much more considered, particularly the company's seniority, which must be at least two years of age or older to qualify for a leasingtype credit. The company must also be impeccable towards tax and social security agencies. Another condition, the company must in no way be reported to the risk centre. The company's application will be systematically refused if this is the case. Sofinance is perceived to be quite flexible in terms of payment, as the company can pay quarterly or bi-monthly. However, the company may run out of liquidity and funds and be unable to meet its debts. Companies in direct contact with state-owned enterprises also suffer from the payment constraint operating by the rate of progress situations, thereby delaying the payment of the due amount. Once the deadlines are overpassed, Sofinance has no choice but to send notices and clamp down consequently.

Conclusion
There is no doubt that through its efforts, Algeria seeks to increase the development of SMEs and local production to gradually free itself from the influence of hydrocarbons on its overall income. However, despite all that has been committed, the Algerian SMEs are still far from reaching the desired level, and Algeria still suffers as much from its dependence on hydrocarbons. What is most delaying this development of SMEs is not the lack of ideas but, above all, the lack of funds. This financing problem can be solved in theory by using third parties outside the company, the issuance in the financial markets of bank loans, and leasing.
Leasing is one of the investment financing solutions used by the company; however, we have seen that the company also had its share of obstacles hindering its proper deployment in the world of SMEs.
Thanks to our experience in Sofinance, we have seen that these so-called obstacles can come from the financial institution proposing leasing, for example, given the bureaucratic heaviness faced by the concerned company to acquire an investment in that way. These constraints can take the form of many legal documents to be presented and many guarantees to support the funding application.
On the other hand, the company may find itself ineligible for such a method of financing if it does not present certain irreproachability in all respects at the risk of displeasing its potential borrower, and therefore its application will be denied.
The institution offering leasing may be less accommodating and insensitive to the various difficulties that the company that has acquired an investment in this way may encounter, especially if it struggles to meet its due amounts. It may find herself cornered, in addition to that, by late penalties pushing her further to the brink of the abyss, even in some cases until the seizure of her property, despite convincing proof of late payment. The institution offering leasing cannot wait indefinitely for its payment.