The Financial Services Institute (FSI), the training arm of the Egyptian Financial Supervisory Authority (EFSA), is preparing a training plan for financial leasing companies that will allow them to continue to operate by bring them in accord with new amendments to the financial leasing law.
FSI Executive director Shahinaz Rashad said the training programme will include two parts, a programme for credit management and another for risk management.
The amendments to the financial leasing law that is being prepared will include adding consumer finance to the authorised financial leasing activity. Consumer finance is obtained by individuals for purposes not related to starting a commercial activity.
Generally, financial leasing companies link potential tenets to landlords who buy capital assets like land, buildings, equipment, and vehicles, Rashad explained to Daily News Egypt.
Leasing contracts stipulate that tenants make payments according to the rental terms over the duration of the lease. At the conclusion of the lease, tenants have the right to either return the asset to the landlord or purchase it. In most cases, rent portions cover the total value of the asset, and tenants pay a symbolic value to complete the purchase of the asset.
The FSI recently returned from a trip to journey where authorities at the institute conducted a study of other national policies regarding operational leases and financial leases, according to Rashad.
The credit management programme depends on the application of the “impact asset” rule in financial leasing companies, where it is suitable for activities of financing individuals and microenterprises, which the new amendments in the financial leasing law aim to serve.
The amendment aims to remedy the lack of incentive for banks to finance individual projects as they apply the “asset base” rule, which depends on assessment of existing cash flows for a project. This is a condition that does not suit the nature of microenterprises that do not have established capital revenues.
Rashad said the impact asset rule is based on financial leasing companies accommodating all aspects of the asset that they will be renting, like a sewing machine, in terms of cost and production capacity and average daily and monthly revenue. This is based on the accumulated expertise that resulted from financing the same machine hundreds and thousands of time before.
She pointed to the successful case of Sri Lanka, which was reviewed during the FSI study in Germany, where financial leasing companies offer funding for various assets such as passenger cars, Tuk Tuks, farm equipment, motorcycles, tractors, and durable goods.
The second part of the training programme is designed to enable companies to apply rigorous risk management systems when financing individuals and microenterprises through operation and finance leases.
When a company will lease a sewing machine through financial leasing for three years, the company estimates the value of the machine when the client returns it after the period of the contract, to sell it to any other party.
This requires drawing an accurate assumption of the value of the machine after three years to avoid loss if the real value of the asset drops below the assumed value after that period.
Rashad called upon the government to establish holding companies to provide financing for small, medium, and micro enterprises in the fields of agriculture and industries such as textiles and business.
Rashad expects that the success of this experience may encourage private financial leasing companies to follow suit, instead of focusing only on real estate financing. She said that Egypt can benefit from the experience of the German economy, where financial leasing contributes to more than half of investments in small and medium enterprises (SMEs). It will also focus on financing industrial machinery, farm equipment, and passenger cars. Real estate accounts for only 5% of the leasing activity.
Rashad believed that these measures will increase demand for production equipment, which will attract international factories specialised in the production of such equipment to invest establishing local factories.
The value of financial leasing contracts through 2015 rose by 178% to EGP 19.4bn compared to EGP 7bn in 2014, according to a EFSA statement.The number of contracts also increased from 2,329 to 2,720, a ratio of 17%.
Real estate and land activity accounted for the majority of contracts with a value of EGP 8.7bn, 45% of the total value of contracts. Contracts for heavy equipment followed with a total value of EGP 6bn.