Amended proclamation to boost SME’s activity

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Capital goods leasing business proclamation is amended in view of helping boost small and medium enterprises in the country. The equipment leasing business, as per the amendment, has three distinct categories: Finance Lease and Hire-Purchase businesses under the supervision of the National Bank of Ethiopia (NBE) while operating lease is regulated by the Ministry of Trade.

The proclamation is expected to assist people with skills and knowledge, but without financial muscle to invest. The proclamation had been amended in 1998 reasoning that it was found to be incomplete in addressing investment issues as regards to the equipment lease business. However, amending the proclamation was again needed as only construction machinery lease companies were using the operating lease financial scheme. The latest amendment is expected to fill gaps which were not addressed by financial institutions due to lack of proper regulation.

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 as indicted in the preamble has led to the amendment.

Operating lease that still falls under the realm of MoT is the standard equipment rental agreement, where the user of the machinery makes payment for the short-term use of the products.

On the other hand 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. The mandate to license and control the last two in light of their close ties to the financial institutions has hence been given to the NBE.