Featuring: *Lease Financing in Uganda *Finance Lease and Operating Lease Main Menu Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 This presentation is designed and organised by the New Vision Internet Department. Editor Davis J. Weddi Leasing, the hope for business development By Alex Balimwikungu In Uganda, leasing has evolved considerably during the last 40 years. Leasing is a mature industry in developed economies, the US being a leader both in volumes and market penetration. Moses Kibirige, the general manager, dfcu – development finance, says leasing, in simple terms, is a means of helping businesses use plants, equipment and vehicles without having to find capital to purchase them immediately. Leasing has been an important source of medium and long-term financing for companies in developed economies and those with economies in transition. He says leasing is advantageous for all parties involved. With limited financial resources and no collateral, a lessee (borrower) can acquire equipment that increases the company’s productive capacity and as a result, its profitability. Even then, a lessor’s financial risk is less than an institution providing working capital because the lessor maintains ownership of the leased asset through the end of the lease agreement. This allows the borrower to hold greater control over their investment through regular monitoring of the asset. In developing economies, leasing is the vehicle for financing small and medium enterprises (SMEs). Today, a large proportion of the world’s private sector investment is financed through leasing. Kibirige affirms that in Uganda, leasing is not an entirely new concept. He mentions that in the 60s and 70s few commercial banks, through financial subsidiaries, did asset financing, mainly through hire purchase and some lease financing. He explains that the economic decline of the 70s and early 80s and breakdown of law made any form of equipment leasing unprofitable and risky. Lessors abandoned it. In 1994, the Uganda Leasing Company Limited was established by dfcu, Nile Bank, the International Finance Corporation, the Commonwealth Development Corporation and DEG – German Development Company. He adds that dfcu acquired Uganda Leasing Limited in 1999 to form dfcu Leasing Company Limited. Effective this year, the leasing activities will be conducted through dfcu Limited rather than dfcu Leasing Company. One of the manufacturing companies, Spa Packaging, financed by dfcu “Our leasing services target SMEs, which comprise over 90% of all Ugandan businesses, provide over 50% of the jobs and contribute about two thirds of the national income,” he notes. Kibirige adds that the Ugandan leasing industry is still in its infancy, with leasing representing less than 1% of private sector capital formation. “dfcu controls over 80% of the Ugandan leasing market and the main sectors it has funded through it include agri-business, health, education, manufacturing, transport, tourism, infrastructure and energy through the Uganda Energy Fund. Micro projects like bee-keeping, honey processing and mushroom growing have been funded too,” Kibirige says. He, however, notes that the financing of SMEs is hampered by the high cost of capital, non-availability of medium-term financing options and the lack of diversification of financial products. “To the economy, leasing offers a way to modernise production, increases the total capital investment, creates competition in the financial market place and also creates and increases the sale of equipment,” explains Kibirige. He says to the individual, leasing is the ideal option since it funds new businesses with limited capital and credit small businesses to quickly boost their operations. The lessors can own the assets and use the leased asset as the primary security. The lessee (borrower) does not require any other security for the borrowing except in exceptional circumstances. Kibirige adds that leases provide longer duration financing, often with terms from one to five years, have their repayments structured to follow cash flow of SMEs and require less time to process. But there are a number of challenges to the industry: *Facilitating the development of an effective legislative environment for leasing in Uganda; *Dispute resolution and court system – improvement in the operations of the commercial courts would facilitate the enforcement of legal contracts and save time and costs. *Funding – Having access to relevant funds to finance leasing is critical. *Providing training and consulting to local enterprises and financial institutions interested in using or offering leasing in Uganda. *Building business opportunities for local enterprises and foreign equipment suppliers as well as foreign leasing investors. *Conducting a national public awareness campaign to educate private enterprises, financial institutions and regulatory agencies about leasing.