The Financial sector has a long history in Ethiopia that traces to the establishment of the first bank in 1905, the Bank of Abyssinia. However, the capital goods leasing sector is one of the most unutilized aspects of the finance industry. To this day, the major sources of finance operating in the country are banks, insurance companies, and micro-finance institutions. This page tries to introduce the reader to the laws dealing with the capital goods leasing sector.

Definition of Capital Goods Leasing

Capital goods leasing can be defined as a means of financing in kind by which a lessor provides the lessee with the use of specified capital goods on a financial or operating lease or hire-purchase agreement basis, without the requirement of collateral, for a specified period of time and collects, in turn, a certain amount of installment in periodical payments over the specified period.

In this context, capital goods mean any equipment or machine that may be used to produce products or to provide services and include accessories.

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Types of Capital Goods Leasing Businesses

According to the current legislation on capital goods leasing, there are three types of capital goods leasing businesses.
The first is the financial lease that is a type of leasing by which a lessor provides a lessee against payment of mutually agreed installments over a specified period with the use of specified capital goods. The following are the typical features of a financial lease:

• The concerned capital good may have either been already acquired by the lessor or purchased by the lessor from a third party, known as the supplier;
• Although the lessor is the one that buys the capital goods, the lessee has the right to choose and provide specification;
• During the term of the financial lease, the lessor retains full ownership right on the capital goods; and
• Subject to agreement between the two parties, the lessee may have an option to purchase the capital good outright after the termination of the lease period at an agreed price.

The second type of leasing is a hire-purchase by which a lessor provides a lessee with the use of specified capital goods, against payment of mutually agreed installments over a specified period under which, with each lease payment, an equal percentage of the ownership is transferred to the lessee and, upon effecting of the last payment, the ownership of the capital goods shall automatically be transferred to the lessee. As opposed to a financial lease, in this type of lease arrangement, ownership is automatically transferred when every rent installment is paid. As indicated earlier, in a financial lease, the lessee ‘may’ only have the option to buy the leased capital goods after the termination of the lease period at an agreed price.

The third type of leasing is operating lease that is a type of lease for a period of time not exceeding two years, by which a lessor provides a lessee against payment of mutually agreed rent with the use of specified capital goods that the lessor at hand.

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Who regulates the Capital Goods Leasing Sector?

There are two government organs that primarily regulate the capital goods leasing sector; the National Bank of Ethiopia, and the Ministry of Trade and Regional Integration. The former has the power to issue a license, monitor, and supervise a capital goods finance business, i.e. a company that renders financial lease and/or hire-purchase services. The latter, on the other hand, is empowered to issue a license, and monitor and supervise an operating lease business.

What is the form of business organization required to engage in the capital goods leasing sector?

The National Bank of Ethiopia has enacted a directive that requires any person who seeks to engage in capital goods finance leasing business (this means finance lease and hire-purchase lease) to register as a share company.

Unlike the NBE, the Ministry of Trade and Regional Integration (MOTRI) has not enacted any directives setting a requirement (at least as far as this research is concerned) regarding the form of organization to engage in an operating lease. Thus, any person or business organization (sole proprietor, partnership, PLC, share company, etc) can engage in operating leasing once a license is obtained from MOTRI.

Note that a person licensed to engage in operating lease business may not undertake capital goods finance business.

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What is the minimum capital requirement to engage in the capital goods leasing sector?

• The minimum capital requirement for establishing a capital goods financing company depends on the scale of the service to be provided.
• A capital goods finance business license targeting lessees having a capital goods finance requirement of up to 1,000,000 Birr per single lessee is required to fulfill a minimum capital requirement of 200,000,000 Birr.
• On the contrary, a capital goods finance company that targets lessees having capital goods finance requirements not exceeding 30,000,000 birr is required to fulfill a minimum capital requirement of 400,000,000.
• Please note that companies established by the equity of the government (regional and/or city administrations) are exempted from the requirement imposed on the second category of finance companies.

Who is currently engaged in Capital Goods Leasing Sector?

Despite the existence of the capital goods leasing proclamation for about 22 years, there is only one private company that provides capital goods finance business, ETHIOLEASE.

The government-owned micro-finance institutions (at regional and city administration levels, such as Addis Micro-finance Institution) have been and are still the main provider of capital goods leasing services.

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