Lack of access to capital and credit is one of the biggest barriers facing small and medium enterprises (SMEs), microbusinesses, and new ventures in developing nations even though they are crucial to economic growth and job creation. The paucity of funding required to increase productivity typically undermines such a substantial role. The government of Ethiopia passed the country’s first leasing law in 1998 in response to the need of hastening the growth and development of SMEs by allowing access to financing and providing operational machinery and equipment to businesses. Five capital goods finance companies (CGFCs) were granted licenses by the National Bank of Ethiopia in the early months of 2014. With the further entrance of the first foreign-owned leasing company and the revitalization of an already existing leasing service, lease financing seems to be slowly progressing amidst inter and intra-institutional challenges, writes Eden Teshome.
“We believe this venture has huge potential to boost the economy while providing significant financial gains for the country,” Yinager Dessie (PhD), Governor of the National Bank of Ethiopia (NBE), said at the launching event of Ethio Lease at Sheraton Addis Hotel in August 2018.
Ethio Lease, the first foreign-owned equipment leasing company and the latest addition to the sector in Ethiopia, is a subsidiary of African Asset Finance Company (AAFC) which has offices throughout Africa, the Middle East, and Europe. In the agriculture, healthcare, energy, and food processing industries, as well as those in manufacturing, Ethio Lease has been providing leasing services to alleviate equipment shortages. The company has signed leases worth USD25 million in support of the private sector, since its foundation.
Lease financing is a contractual agreement between the asset owner and the user of the asset in which the owner allows the other party the right to use the asset in exchange for a periodic payment. The lessor is the owner of the asset, the lessee is the user of the asset under the agreement, and the rent paid is known as lease rental.
“The company that was established with a capital of ETB400 million has imported machinery worth billions of Birr,” Degol Gossaye, CEO of Ethio Lease, told EBR.
A large amount of the economic life of the purchased equipment is covered by the long-term leases, or capital leases, that the company offers to businesses. Ethio Lease will make sure that businesses that lease equipment comply to proper operations, maintenance upkeep, health and safety, and adequate storage during the lease time, depending on the equipment.
The business was founded with the intention of offering lease services to address equipment shortages in key economic sectors. The type of business calls for the identification of areas of interest as well as the grasp of the dynamics of supply chains and intricate regulatory frameworks.
“The main advantage of leasing for Ethiopians is that Ethio Lease will acquire the equipment in foreign currency and provide companies with the equipment they need to conduct their business operations using the local currency,” Girum Tsegaye, the then CEO of the company said during the company’s launching event.“ Unlike other companies, Ethio Lease does not have to queue for forex, as it will use its own funds from the parent company.
Girum was trying to sell the services of his newly launched company in the face of potential competition from other similar organizations. Since 2015, Ethiopia has witnessed a growth in the number of lease financiers. Among the major players is Addis Capital Goods Finance SC (ACGF) which was founded in 2014 with a capital of ETB955 million. Without requiring collateral, ACGF provides machinery to medium-sized industrial companies in Addis Ababa on a lease and loan purchase basis. The Addis Ababa City Administration along with eight parastatals based in the capital, including Anbessa City Bus, Addis Ababa Abattoirs Enterprise, Addis Ababa Exhibition & Market Development Centre, and Addis Saving and Credit SC delegated ETB455 million to its establishment. The Commercial Bank of Ethiopia also chipped in with a loan of ETB500 million.
Further, Oromia CGFC, Waliya CGFC, Debub CGFC, and Kaza CGFC, obtained capital goods finance business licenses in 2014 and are currently operating in Oromia, Amhara, South, and Tigray states, respectively. The major shareholders of these leasing companies are regional governments and their respective microfinance institutions (MFIs). Contrary to Ethio Lease, these region-focused CGFCs are restricted in that they have to queue for foreign exchange just like other financial institutions—a damp on their effectiveness. Another drawback is that they secure the capital good from local importers—limiting the options for the lessee.
The Development Bank of Ethiopia (DBE), another sector player, recently amended its lease financing policy which was adopted in March 2016, in order to assist small and medium enterprises (SMEs). SMEs in the context of DBE are defined as businesses in agriculture, agricultural mechanization services, agro-processing, manufacturing, mining and quarries, tourism, and construction industries that are managed in a personalized manner by owners with a total capital of between ETB500,000 and 10 million while employing more than six people.
A 2019 study by Sintayehu Abebe shows that DBE’s lease financing service has been challenged by internal and external factors. Inconvenient requirements from the bank, lack of forex, a divided management system among branch and district offices, inadequate and unclear legal frameworks, and a limited number of suppliers were among the bank’s challenges in availing lease financing services.
Other initiatives by individual institutions focusing on particular sectors have also been witnessed in recent years, such as programs of the International Maize and Wheat Improvement Center (CIMMYT) and the German Development Agency (GIZ). CIMMYT and GIZ launched a new small-scale agricultural machinery leasing scheme in the State of Amhara in December 2019. The initiative offers farmers and groups of farmers the opportunity to buy agricultural machinery with only 15-20Pct advance payment and the rest to be paid during a three-year period.
Further, CIMMYT and GIZ have been working with selected microfinance institutes to pilot a machinery leasing scheme for small-scale agricultural mechanization. For several years, they have partnered with Waliya CGFC and Oromia CGFC in the states of Amhara and Oromia, respectively.
Liquidity advantages—as the lessee can make money without having to spend money on the asset—is one of several benefits of leasing and is one of the most convenient options of financing fixed assets. Businesses can utilize their finance for convenience as well as for working capital with no mortgage or hypothecation or collateralization required. The constraints that come with long-term borrowing from banking institutions are also avoided. Finally, there are fewer formalities associated with leasing than borrowing from financial institutions as lease commitments are not recorded as liabilities on the company’s balance sheet.
Indeed, the balance sheet of the lessee corporation does not list lease agreements as a liability, in contrast to loans obtained to acquire assets. Leasing enables the lessee to declare a lower debt-to-equity ratio as a result. There is no risk of obsolescence; rather, the lessor is responsible for the risk of the asset deteriorating due to advancements in technology. Time and cost savings, as well as flexibility are just a few of the benefits of lease finance that outweigh drawbacks.
Such advantages are crucial as SMEs continue to face significant challenges in expanding, particularly in emerging economies like Ethiopia. The private sector plays a crucial role as a catalyst for economic change by offering funding options that enable enterprises to grow and innovate. Small firms in Ethiopia struggle more than their larger counterparts in securing formal funding; they are much more likely to be denied loans and have less access to outside money. Banks usually work with major corporations, and while they see the SME market as having tremendous growth potential, they also see it as being riskier and less lucrative than lending to corporations.
New products offer the opportunity for future growth even in regions where leasing hasn’t yet taken off, like Ethiopia. According to the International Finance Corporation (IFC), one of the most promising avenues for leasing in developing nations is currently underutilized. IFC encourages long-term equipment financing by combining loan lines, risk-sharing arrangements, and advisory services to assist lease businesses in identifying possibilities, growing their company, and evaluating the risks and cash flows of various equipment types.
With all the promises of capital goods leasing, sufficient positive results are yet to be recorded. The mechanism requires entrepreneurs and businesspeople to request the service. Dampening factors to the manufacturing side of the economy in Ethiopia has created an environment where capital goods are not as much in demand as would have been liked. Therefore, enabling economy-wide settings are required for there to be factories—both small and large—that require the capital goods to be leased. In the contemporary situation, the tendency for one looking to invest is towards the service sector rather than manufacturing. In such instances, there is no use for capital goods leasing companies, except in exceptional circumstances. Foreign exchange and limited number of importers are further drawbacks requiring attention. EBR
10th Year •July 2022 • No. 109