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You are here: Home Headlines NBE to license Finance Lease, Hire-Purchase businesses

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06 July 2013 Written by Yohannes Anberbir

NBE to license Finance Lease, Hire-Purchase businesses

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An amendment to the capital goods leasing business proclamation has set the stage for the
emergence of the sector in Ethiopia, most significantly the system of Finance Lease and Hire-
Purchase businesses under the supervision of the National Bank of Ethiopia (NBE).
The business of capital goods leasing, including any equipment or machinery used in the
production or service rendering companies, was permitted under the proclamation No. 103/1998.
The old proclamation mandated the Ministry of Trade (MoT) to license all equipment leasing
business, which according to the preamble has led to the amendment. The equipment leasing
business, as per the amendment, has three distinct categories: Operating leasing, Finance Lease
and Hire-Purchase system. The first category, Operating lease, will still fall under the realm of
MoT and is the standard equipment rental agreement, where the user of the machinery makes
payment for the short-term use of the products.

However the second type, Finance Lease, will involve long-term leasing contracts where the user
retains long-term rights in exchange for regular payment. At the end of the contract period, if the
payment made by the user covers the cost of the product over the years after accounting for
depreciation cost, he/she might retain ownership of the equipment or not upon termination of the
contract, the proclamation stipulates. But, the ownership right remains in the hands of the leaser
throughout the payment period.
As far as the Hire-Purchase system is concerned, the user will make payments towards eventual
ownership of the capital goods in addition to the right to use the equipment. In effect, the Hired-
Purchase system is a mortgage system, where the equipment user makes payments that increase
his/her ownership rights until the payments are complete. All the other payment systems,
however, remain the same as with Finance Lease. Hence, the mandate to license and control the
last two in light of their close ties to the financial institutions has been given to the NBE.

According to the preamble, the primary purpose of the amendment is to provide the much-
needed push for the small-scale manufacturing sector in the country. In the recent press briefing
Prime Minister Hailemariam Desalegn stated that the small-scale manufactures are the core and
backbone of the manufacturing sector. The growth of the sector in the previous year was pulled
down to 13 percent because of the small-scale sub-sector, in face of the medium and large sub-
sector recording 18.3 percent growth.
Currently, the Operating Lease business is big in Ethiopia. In fact, a lot of private sector
members have made the shift to the construction material rental business in recent times
motivated by the usurious rental prices, while construction companies suffered in the process.
The amendment is aimed at making the small construction companies owners of the machineries
they use.

Furthermore, the amendment tabled at the last day of the parliament also eliminated the
repetitive value added tax (VAT) levied on the capital goods rental and lease business. The
amendment said that since the leaser has already paid the VAT on the equipment it had imported
to the country, the requirement of VAT from the transaction of equipment rentals would be
repetitive taxation, hence is removed. The proclamation also gave further mandate to MoT and
NBE to workout detailed directives to be implemented in the future.