BY MENGISTEAB TESHOME
Lease financing is a contractual agreement between the asset owner and the user of the asset in which the owner allows the other party the right to use the asset in exchange for a periodic payment. The lessor is the owner of the asset, the lessee is the user of the asset under the agreement, and the rent paid is known as lease rental.
Yinager Dessie (PhD), Governor of the National Bank of Ethiopia (NBE) once said that “We believe this venture has huge potential to boost the economy while providing significant financial gains for the country.”
According to documents, lack of access to capital and credit is one of the biggest barriers facing small and medium enterprises (SMEs), microbusinesses, and new ventures in developing nations even though they are crucial to economic growth and job creation. The paucity of funding required to increase productivity typically undermines such a substantial role.
The government of Ethiopia passed the country’s first leasing law in 1998 in response to the need of hastening the growth and development of SMEs by allowing access to financing and providing operational machinery and equipment to businesses. Five capital goods finance companies (CGFCs) were granted licenses by the National Bank of Ethiopia in the early months of 2014. With the further entrance of the first foreign-owned leasing company and the revitalization of an already existing leasing service, lease financing seems to be slowly progressing amidst inter and intra-institutional challenges.
In Ethiopia, despite the enormous importance of the SME sector to the national economy with regards to job creation and the alleviation of abject poverty, many of the SMEs are unable to realize their full potential due to the existence of different factors that inhibit their growth and performance. One of the leading factors contributing to the unimpressive growth and performance of the enterprises is limited access to finance.
In a similar way, comparing small and large firms the World Bank finds that small firms face more challenges in obtaining formal financing than large firms; they are much more likely to be rejected for loans, and are less likely to have external financing. In this paper, we analyze the assessment on lease financing of SMEs particularly in development bank of Ethiopia and recommend ways of addressing the lease financing.
Main functions of Development banks include: It is a specialized financial institution; it provides medium- and long-term finance to business units; unlike commercial banks, it does not accept deposits from the public; it is not just a term-lending institution. It is a multi-purpose financial institution; it is essentially a development-oriented bank. Its primary object is to promote economic development by promoting investment and entrepreneurial activity in a developing economy.
It encourages new and small entrepreneurs and seeks balanced regional growth; it provides financial assistance not only to the private sector but also to the public sector undertakings; it aims at promoting the saving and investment habit in the community; It does not compete with the normal channels of finance, i.e., finance already made available by the banks and other conventional financial institutions. Its major role is of a gap-filler, i. e., to fill up the deficiencies of the existing financial facilities. Its motive is to serve public interest rather than to make profits. It works in the general interest of the nation.
In our today’s edition, we will try to share with you the effort made by Ethiopian Development Bank (DBE) on lease financing in a bid to increase productivity through mechanization.
According to local media, German KfW Development Bank-funded and Development Bank of Ethiopia (DBE) -purchased 9 combine harvesters were delivered recently to lease finance customers with the view to enhancing agriculture mechanization.
During this 5th round delivery of the combine harvesters, DBE President Yohannes Ayalew said that the German government through KfW Development Bank has allocated 30 million euros to finance the purchase of agricultural mechanization machineries such as tractors and combine harvesters.
In the 5 rounds, the banks have delivered 41 combine harvesters, 9 tractors, and 39 implements — 89 machineries in total, to agricultural mechanization leases around Addis Ababa, Hawassa, Bure, Shahemene, Adama, Assela, Halaba, Goba and Batu, the president disclosed.
“I would also like to inform you that 61 tractors, 35 combine harvesters and 17 implements are in procurement process,” he added. According to him, DBE, which has been promoting agricultural mechanization, will further strengthen its commitment and make a difference in transforming the agricultural sector.
Out of the more than 33,000 small and medium enterprises that received training since 2021, 530 have applied for agricultural lease machineries estimated to cost 82.2 million euro, it was learned.
KfW Development Bank Director, Diana Hedrich said on her part that KfW is working in close cooperation with the Development Bank of Ethiopia (DBE). The mandate of KfW Development Bank is to finance investments such as infrastructure and equipment as well as policy financing.
“We have been active in Ethiopia for more than 50 years and currently we finance projects in a total amount of 750 million euro,” she said. “Our sectors of engagement are technical and vocational education training, private sector and financial development, rural development and agriculture, good governance, displacement and migration,” Hedrich elaborated.
KfW is supporting the Ethiopian government’s initiative to enhance agricultural mechanization and modernize agricultural practice in the country. The Agricultural Mechanization Leasing Project has been funded by Germany’s Ministry of Economic Cooperation and Development through KfW and executed by the Development Bank of Ethiopia in cooperation with the Ministry of Agriculture to accelerate agricultural mechanization and realize the potential of the agriculture sector.
DBE which was established in 1909 is a specialized state owned development financial institution; it is supervised by the Public Financial Enterprises Agency. DBE is one of the state-owned financial institutions engaged inproviding short-, medium- and long-term credits over the last hundred years. The Bank has been playing central role in promoting the over-all economic development of the country.
DBE is the only bank in Ethiopia in its kind, nature, and objective endowed; so, it is different from other commercial banks. Development Bank of Ethiopia is a specialized financial institution established to finance and provide close technical support to viable projects in line with government priority areas by mobilizing funds from domestic and foreign sources while ensuring its sustainability. In addition to project financing DBE has given great task in financing the Small and Medium Enterprises through Lease Financing program to enable them to acquire capital goods and machines.
The Ethiopian Herald January 10/2023
