Sense and Nonsense in the Regulation of Equipment Financing Business in Ethiopia

Author:Fekadu Petros Gebremeskel
Position:Fekadu Petros Gebremeskel (LL.B, LL.M) Assistant Professor, Addis Ababa University School of Law; Attorney at Law and Legal Consultant. Email: pehfekadu@gmail.com The author thanks Mr. Frans Van Schaik, Mr. Jetu Edossa and the two anonymous external reviewers for their comments and suggestions towards the refinement of the manuscript. All...
Pages:31-62
SUMMARY

The discourse about equipment financing (financial leasing) business is not as to whether it is useful; but it is about how to create the best possible investment climate for the growth and expansion of the sector; that is how to maximize the economic gains in terms of facilitating alternative access to financing for businesses. Equipment financing or financial leasing is one of the alternative... (see full summary)

 
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31
Sense and Nonsense in the Regulation of
Equipment Financing Business in
Ethiopia
Fekadu Petros Gebremeskel
‘‘Wealth does not lie on ownership but in the use of things.’’ -Aristotle
Abstract
The discourse about equipment financing (financial leasing) business is not as to
whether it is useful; but it is about how to create the best possible investment
climate for the growth and expansion of the sector; that is how to maximize the
economic gains in terms of facilitating alternative access to financing for
businesses. Equipment financing or financial leasing is one of the alternative
mechanisms of solving financing needs of businesses and individuals. It combines
the attributes of lending and leasing, hence the name finance leasing or lease
financing. It involves lending equipment (instead of lending the funds needed to
purchase it) with the possibility of eventual ownership of the equipment by the
borrower. Although equipment financing and leasing existed in Ethiopia over a
long period of time, a detailed law on the subject was introduced only recently.
However, the new regulatory regime which placed the financial leasing sector
under the regulation of the National Bank of Ethiopia (NBE) did not stimulate the
emergence of financial leasing companies as intended. It brought about the
creation of big government owned leasing companies whose formation and
operation is rather politically driven than supported by economic rationales. Much
of the reason for the lack of enthusiasm from the private sector seems to be the
discouraging regulatory environment. Therefore, the complex and cumbersome
regulatory framework should be simplified if financial leasing companies are to
flourish and play a meaningful role as alternative sources of financing.
Key terms
Equipment financing · Financial Leasing · Financial Regulation · National Bank of
Ethiopia · Prudential Regulation
DOI http://dx.doi.org/10.4314/mlr.v13i1.2
This article is licensed under a Creative Commons Attribution-NonCommercial-
NoDerivs (CC BY-NC-ND)
Fekadu Petros Gebremeskel (LL.B, LL.M) Assistant Professor, Addis Ababa University
School of Law; Attorney at Law and Legal Consultant. Email: pehfekadu@gmail.com
The author thanks Mr. Frans Van Schaik, Mr. Jetu Edossa and the two anonymous
external reviewers for their comments and suggestions towards the refinement of the
manuscript. All errors remain mine.
32 MIZAN LAW REVIEW, Vol. 13, No.1 September 2019
Introduction
Capital goods financing business (CGFB)1, also commonly known as equipment
financing business, is a type of business that finances acquisition of equipment
for businesses in a contractual arrangement whereby the financier (lessor)
supplies the equipment required by the customer (lessee), and the latter pays
rent plus interest for the duration of the period of the lease with eventual or
possible transfer of ownership of the equipment to the lessee at the end of the
lease.2 The types of businesses served by equipment financing sector are often
start-ups, micro, small and medium level enterprises that cannot get financing
from banks3 due to, among other factors, their inability to produce collateral.4
Frequently used acronyms:
Capital Goods Financing Business (CGFB)
Micro and Small Enterprises (MSE)
Micro-Finance Institutions (MFIs)
National Bank of Ethiopia (NBE)
Non-banking Financial Institutions (NBFI)
Small and Medium Enterprises (SMEs)
1 Cap ital Goods Leasing Business Proclamation No. 103/1998, Federal Negarit Gazeta 4th
Year No. 27, 1998 introduced the modern for m of equipment financing into Ethiopia; and
Capital Goods Leasing Business (Amendment) Proclamation No. 807/2013, Federal
Negarit Gazeta 19th Year No. 60, 2013 has amended the earlier proclamation, Both
proclamations use the term „„Capital Goods Leasing Business -CGLB.’’ This is because the
proclamations cover oper ating leases. On the other hand the National Ban k uses the term
„„Capital Goods Financing Business-CGFB’’ in all of the directives it issued so far
probably with the view to make the terminology more fitting to its overarching mandate of
regulating t he financial sector. The terminology of NBE is appropriate because, NBE is
not concerned with operating leases which are regulated by the Ministry of Trade (MOT).
In realit y vario us other terminologies are used in different literatures. To mention just a
few, Equipment Financing, Asset Financing, Lease Financing, Financial Leasing, and so
on. In this paper t he writer uses the term „„Equipment Financing’’ and „„Financial
Leasing’’ alternatively as these are the terms widely used in literature, and for their
simplicity as well.
2 Deloitte, „Banking and Financial Services: Finance Leasing’ Deloitte Limited, 2017p. 3,
<https://www2.deloitte.com/content/dam/Deloitte/cy/Documents/financial-
services/CY_FinancialServices_FinancialLeasing_Noexp.pdf> accessed on 1 August 20 19
3 Asress Adimi Gikay (2017), „Rethinking Ethiopian Secured Tr ansactions Law through
Comparative Perspective: Lessons from the Uniform Commercial Code of the US’, Mizan
Law Review 11 no.1:169.
4 See, National Bank of Ethiopia, „Capital Goods Finance Companies in Ethiopia: An
Overview’ Birr itu Magazine 118 (2014), p. 32 for the assertion that equipment financing
scheme simplifies t he collateral related problems of SMEs. See also Economisti Associati
and BKP Development, „Access to Finance in Ethiopia: Policy, Regulatory and
Administrative Remedies’, WBG/IFC, p. 24, 33, 35 (2014). According to this survey
problems associated with collateral were found to be the second most pressing c hallenge
Sense and Nonsense in the Regulation of Equipment Financing Business in Ethiopia 33
Because the equipment supplied through leasing serves the function of
collateral5, those businesses that cannot get credit from banks for lack of
collateral can be served by financial leasing companies.
The first section of this article highlights the features and indicators in the
regulation of equipment financing. Section 2 deals with the conceptual and
theoretical underpinnings of the regulation of equipment leasing in Ethiopia,
namely, the broader historical and theoretical literature on the evolution, types
of financial leasing companies and regulatory approaches for equipment
financing businesses. It compares financial sector firms especially banks and
equipment leasing firms with the view to assessing the regulatory regime for the
latter by contrasting it with the regime for banks. In Section 3, an evaluation of
the regulatory system of financial leasing sector is made based on five indicators
and building upon the theoretical and conceptual analysis.
1. Regulation of Equipment Financing and Core Indicators of
Regulatory Effectiveness
Financial leasing is one of the alternative mechanisms of solving financing
needs of businesses and individuals along with bank loans. Essentially it is an
activity of lending equipment instead of lending the funds needed to purchase it
with the possibility of eventual ownership of it by the borrower. In spite of these
parallels between financial leasing and bank lending, the business of financial
leasing is not the same as that of lending. Thus, the regulatory design for leasing
cannot be a replica of the banking regulatory architecture.
In Ethiopia, equipment financing businesses are part of non-banking
financial institutions (NBFI) which is subject to NBE regulation. NBFI are
financial companies engaged in economic activities akin to banking –“but are
not classified as deposit takers.6 Under Ethiopian law, the place of Micro-
Finance Institutions (MFIs) is equivocal from this perspective if one strictly
applies this definition. They are deposit takers, and hence technically outside the
scope of NBFIs; on the other hand MFIs are not banks, and thus functionally
can be considered to be NBFIs. In any case, it is generally assumed that the
regulation of NBFIs should be less cumbersome than the regulation of banks.
The regulation of these institutions is usually, but not always, vested in
next to inadequacy of loan size. T he problems in relation to collateral are basically two: (i)
very limited types o f as sets are accepted as collateral; and (ii) overcollateralization, i.e.,
when accepted, the value of the collateral is required to be substantially more than the
amount of the loan requested.
5 Asres Adimi, supra note 3, p. 181.
6 IBRD/IMF (2005), Fina ncial Sector Assessment: A Handbook, p. 171.

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