Lease financing and Tanzania’s economy

By Eric Toroka
Business Times; Friday, 7-13 march,2008

The economy of Tanzania is said to be missing the multiple effects that are associated with the lease financing business. It is general agreed that lease financing is a significant financial marketing product. This is in the sense that is furthers capital investment, SME development, domestic production, industrial diversification and proper people welfare and infrastructure improvements – thus overall contributing to national economic growth.

Speaking in an interview with Business Times in Dar es Salaam Tuesday last week, an expert in the field, Bernard Elia Kihiyo, said “Tanzania was missing the multiple effects of the leasing finance business”, adding that” leasing can provide additional marketing channels for financial services”.

Kihiyo, who is the executive director of the Tanzania Consumer advocacy Society (TCAS0, we want on: “Equipment suppliers can link customers to leasing companies and banks …these can also provide credit lines to independent leasing companies once these are established”.

Finance lease is similar to capital lease. This is when a financial institution effectively allows a firm or an individual to acquire or use an asset or equipment, even if the firm never owns the asset.

Typically, a finance lease will give the lessee control over any asset for a large proportion of the assets useful life, providing the lessee with the benefits-and risks-of ownership.

Kihiyo said one of the effects of lack of access to leasing finance is that doing business will require huge sums of money.

“This is because a lot of capital would be tied up in equipment, installation, freight, consulting and software, living fewer funds available for items such as inventory, safety improvement, advertising consumer’s education, marketing and personnel,” he explained.

Usually, “banks want a 20 – 40 per cent down payment instead of upfront 100 per cent costs of not with leasing finance support”, he said, noting that “buying or selling a house, for example, was going to be a difficult task, as the country would be having the so-called stagnant economy with idle or dormant capital assets.

“Without leasing finance”, Kihiyo went on, “business and individuals would not be protected from obsolete equipment, and the costs associated with property disposition of outdated equipment.

“Certain lease structures are 100 per cent tax-deductible. The full cost of leasing can often be treated as an expense item for income tax purpose, and may result in a large tax deduction. The opposite is true-as business or individuals have to pay a substantial amount on tax,” he stressed.

“Without a proper legal framework, financial institutions and service users operate in fear-also creating a great chance for banks and other financial institutions to give loans with fear”.

Financial leasing is a system which allows people to access financial services from banks through hiring equipment of assets. This is done through the so called hiring or contractual purchase of items such as production equipment, working tools, cars and homes mortgage.

People in developed and stable economies routinely enjoy the benefits of leasing finance – especially in electronic goods such mobile phones. When selling or buying houses, and also for business, lease financing is one of the keys to success.

“We would like to see companies in Tanzania – such as Vodacom, Celtel, Tigo, and Zantel – assisting local and poorer customers in acquiring durable and reliable mobile handsets. The real estate industry could also get into similar arrangement in selling and buying homes – thereby stimulating the dormant capital on housing,” Kihiyo stated.

In regard to the treatment of leasing for local financing banks – a majority of whom are not doing leasing finance – he said:

“Leasing finance is one of the most difficult forms of financial business especially in a turbulent economy like Tanzania’s with unstable currency and an inflation rate that sometimes reached double digits …. That is one of the reasons why a majority of the local banks are not investing in this venture”.

A part from the tax benefit, Kihiyo said the lack of legal and regulatory frameworks that are necessary for financial leasing development, mobilization and proper channel of available financial resources into leasing operations is one of the limitations that prevent most of the local banks from venturing into finance leasing.

“Nonetheless, TCAS believes there should be proper protection of interests of financiers, the government and customers … There should also be clearly laid out rules and regulations, such as the right and obligations of parties, as well as the allocation of financial risks … these are not present in Tanzania”.

Recently, the programmes manage of the International Finance Corporation (IFC) under the SECO-IFC Tanzania leasing programme, Moyo Violet Ndonde, mentioned some of the achievements recorded in Tanzania since its inception towards the end of 2005.

These include increasing understanding and awareness of finance leasing, as well as its importance and benefits to the national economy and SMEs amongst stakeholders.

“During the year under review, various programme initiatives supported by Switzerland included the publication of a quarterly newsletter and the launch of a public website, as well as sensitization seminars reaching over 4500 stakeholders in Tanzania,” Ndonde noted.

The first reading of the Finance Leasing Bill had already been gone through in the National assembly, and it was expected that the Bill would be enacted by the Parliament during the next sitting this year.

She explained that the Bill includes proposals for amendments of other laws affecting leasing, as well as for the clear application of the extant tax laws on finance leasing development in Tanzania.

“About six new independent leasing firms, both domestic and international, were in the process of being established – with the expectation of more players in the future”, she noted.