From time to time we will be publishing blogs containing useful information for the Global Commercial Finance Industry, as well as information concerning our services. We will be announcing new blogs on LinkedIn and Facebook as they are published.
Use of Leasing Laws in Selected Sub-Saharan African Countries – When Does a Leasing Law Make Sense? (Published on May 11, 2021) – Recently, alongside a local expert, one of our Principals was engaged in drafting a leasing law in one Sub-Saharan African country. At the same time, another Sub-Saharan African country asked one of our Principals to advise them on enacting a leasing law. We recommended against a leasing law. Why did we make that recommendation in the case of one country while being engaged in drafting a leasing law in a neighboring country?
The answer is that the country where we advised against enacting a leasing law follows English Common Law, whereas the country where we were engaged to write a leasing law follows French Civil Law. English Common Law derives from judicial precedents. French Civil Law derives from written policies. Leasing laws work best in countries that follow French Civil Law.
In Sub-Saharan Africa, there are leasing laws on the books in several examples of countries that follow English Common Law. The enactment of leasing laws in these countries may have caused a decline in leasing volume in those countries. Why?
First, leasing is a transaction based on a contract, a lease agreement. Even in countries following French Civil Law, there must be the Principle of “Primacy of Contract.”
Second, leasing laws can incorporate regulatory and supervisory provisions that depress leasing volume, as is the case in other Sub-Saharan African countries. Examples include licensing requirements, initial capital requirements, and provisioning rules that existing players and new entrants might find excessive.
Third, in English Common Law Countries, it is necessary to determine the priority of a leasing law relative to other laws that apply to leasing. Examples include tax laws, commercial laws, and bankruptcy laws.
One neighboring country in Sub-Saharan Africa that follows English Common Law has no leasing law. That country has one of the fastest-growing leasing markets in the Region.
For the country that follows English Common Law, we recommended incorporating a leasing framework, using Chapter 2A, entitled “Leasing,” of the United States Uniform Commercial Code as an example, and incorporating the framework into their existing Law on Contracts. By doing this, the country will avoid having to enact a stand-alone law applying only to leasing, where statutes applying to other commercial obligations don’t exist. At the same time, it will prevent amendments that have resulted in a decline in leasing volume in neighboring countries. Finally, and most importantly, leasing a form of a contract.
Aperio prides itself on our flexibility, recommending solutions that best fit the needs of the client.
Using Cashflow as a Source of Repayment, The Example of Della Fattoria Bakery - (Pubished in February 2021) - Cash flow is a much more reliable source of repayment than the collateral value of assets owned by a lessee. Unfortunately, many financial institutions continue to emphasize collateral as the primary source of repayment, over cashflow.
Della Fattoria Bakery produces artisan bread in a wood-fired oven located behind their family's home. They sold much of their bread at a farmers' market in San Francisco, California. Although they usually sold out their bread in 1 hour, they needed to stay in their booth for entire 4 hours that the farmers market was open, a waste of time and they were losing the opportunity to make more money during the time the market was open. They looked for a way to sell additional baked products. Della Fattoria came up with the idea of opening a cafe near their home, and installing a pastry oven at the cafe, that could both supply the cafe and provide pastries to sell at the farmers market. They could show that they could generate sufficient cashflow from selling pastries at the farmers' market, in addition to their artisan bread, that could support the operations of the cafe. In other words, the money they made from operating the cafe itself was "free" money, serving as additional sources of repayment for the lease.
One of the Principals of Aperio arranged a lease transaction for over $100,000.00, consisting of a pastry oven and required accessories, allowing them to open the cafe. The Founder of Della Fattoria passed away recently, and the business is now being run by her children.
Della Fattoria is an example of both a successful family run business as well as the use of financial leasing to support their growth, where the credit came from their cashflow, rather than collateral.
IFC Global Leasing Toolkit (Published in 2011) - Co-authored by the 3 Principals of Aperio Associates, under contract with the International Finance Corporation, the IFC Global Leasing Toolkit is a comprehensive guide to starting and operating a leasing entity. A link to the Introduction of the Toolkit can be found here. In addition to standard leasing subjects the Toolkit contains 4 "Focused Toolkits," covering specific leasing markets, as well as regulation and supervision of leasing entities. The Focused Toolkits include: Leasing of Agricultural Equipment; Leasing of Sustainable Energy Equipment; Regulatory and Supervisory Matters Applying to Lessors Globally; Islamic Leasing ("Ijarah").
The Global Leasing Toolkit is now in wide use by the Global Commercial Finance Community. Please contact us for further information on how to obtain the Global Leasing Toolkit. Development of National Leasing Legislation (Written in May 2020) - Recently, the Principals of Aperio Associates have been heavily involved in drafting financial leasing legislation, primarily in countries that follow French Civil Law. Financial Leasing is largely a product of English Common Law, that relies on judicial precedents to govern lease agreements. However, many countries use French Civil Law, which relies on written rules to govern lease agreements. As Financial Leasing has become more popular, as a means to finance the acquistion of capital equipment and titled vehicles, countries that follow French Civil Law are developing new legislation governing financial leasing, or modifying existing legislation to support accelerated growth in the use of financial leasing. With our extensive experience both establishing and managing leasing entitles, as well as working with regulatory and supervisory bodies globally, we are often called upon to assist in the drafting of leasing legislation.
Since financial leasing is largely a product of English Common Law, where lease agreements follow judicial precedents rather than written rules as is the case with French Civil Law, it is critically important to structure legislation in countries follow French Clvil Law that doesn't limit the flexibility and scope of individual lease agreements. It is precisely the fliexibility in structuring lease agreements, protecting both lessor and lessee, but without reliance on written rules, that makes financial leasing so popular in English Common Law countries such as the United States.
We have found that our combined 90+ years in the financial leasing industry, along with our experience working in many countries following French Clvil Law, has given us unique skills in helping countries following French Civil Law to develop leasing legislation that retains the flexibility of lease agreements found in English Common Law countries, while at the same time operating within written rules. We work very closely with financial institutions intent on establishing and expanding their leasing business, agencies responsible for requlating and supervising the leasing industry and the local legal community.
We have found that our approach to developing national leasing legislation has the following benefits:
- Financial institutions that are part of the process of drafting lesaing legislation.
- A legal community, critical for developing lease agreements, that understands financial leasing as well as the regulatory and supervisory framework.
- Regulators and supervisors that have a deep familiarity with financial leasing.
Please contact us for addition information on how we can be of service.
Bank Lending in Sub-Saharan Africa -
Very interesting article in the May 2nd, 2020 Edition of the "Economist."
We have some observations:
- Net interest margin of 6.8% is more than twice as high as for US banks (around 3.1% - https://fred.stlouisfed.org/series/USNIM). The article does a good job of explaining why this is so.
- We're surprised that efficiency is one reason that the article gives for banks charging high rates, because one hears a lot about all the innovations that are going on within Africa's financial system (M-Pesa, etc). The article does mention some banks trying to become more efficient. One example is the use of agents, as opposed to building branches (Kenya).
- Of the countries in Africa where we have worked, Kenyan banks seem to be doing the best job of improving efficiencies. The article seems to agree. Kenya could serve as a template for other countries.
- The article talks about interest rates pricing in risk, as they should. IFC, FSD Africa, and others, are doing a very good job in promoting means by which financial institutions can reduce risk, such as credit bureaus, movable asset registries, etc.
- However, if African banks are making so much money on business lending, why aren't they doing a better job at underwriting, so that that even more business borrowers could qualify?
- The article talks about African banks being inefficient, and thus having to charge high rates. From my reading of the atticle, the same seems to be true of borrowers, and their possible inefficiency in effctively using capital in their businesses. When I had my leasing company in California, my effective interest rate was at least 15%, and often above 20%, for 3 - 5 year money). Factoring companies in the US typically charge at least 18%, and often goes up to over 35%, and borrowers make money from using borrowed funds costing them, 18% and above. Why does a grain miller in Uganda, described in the article, complain about borrowing at 22%? In the US, the return on cash employed in a business is usually above 50%, thus making borrowing at 35% an attractive proposition. I can only conclude that the return on cash employed in grain miller's business is much lower than 50%. Otherwise, he wouldn't be complaining about having to borrow at 22%.
- The major benefit of leasing is that it helps lessee's conserve cash, as opposed to tying it up in equipment. If the grain miller is making 50% on cash employed in his business, then he should find a lease transaction with an implicit interest rate of 20% a very attractive proposition. Potentially, it gives the lessee a net interest margin of 30%. The return on cash employed in his business of 50%, less the implicit interest on the lease of 20%. Either the grain miller isn't getting 50% return on his cash, or he isn't aware of the economic benefit of leasing, or both. This example applies to an even grater degree in factoring.
- The article says that African banks are focusing more on lending to governments, as opposed to private businesses. At last year's AFSIC meeting in London I heard a lot about this, from representatives of African banks. They were talking to us, about helping to price and trade African sovereign debt. Increase lending to sovereigns can crowd out private lending, partly because the underwriting and due-diligence costs are much lower.
Aperio Associates specializes in developing and delivering workshops and seminars for commercial finance professionals who desire to improve their credit and underwriting skills, as well as ways to effectively explain the benefits of their products to potential customers.