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

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