Leasing and Loans: Chalk and Cheese
In many sectors of the Kazakh economy at least 50% of fixed assets are worn out. This problem can be solved by developing the domestic market of leasing services. Even though Kazakhstan has adopted a proper legislation basis and a system of tax preferences and is offering state support to the sector, the current situation in the market does not satisfy the main players.
The Nature of Leasing
Under leasing, enterprises can buy and renew their fixed assets. Leasing is a financial service, but it is different from a bank loan. The clients borrow money from the bank, whereas they directly buy a vehicle or equipment from a leasing company. One of advantages of leasing is that a system of additional securities is applied for loans, but the leaser does not demand anything as a security except the very object of leasing. Experts say that receiving a loan takes less time, although leasing is always cheaper. For example, a security should cover 100% of a loan, but leasing does not need a significant security. Moreover, leasing companies are moving away from the practice of requiring security. During the period of leasing equipment or vehicles are owned by the leaser, but when the lessee pays off the cost of the fixed assets he or she becomes the owner of them.
In addition, while dealing with a leasing company the clients free themselves up from the necessity of choosing suppliers or buying equipment. This entire job is the responsibility of the leaser, who has accurate information about producers and contracts with reliable partners. For example, according to leasing companies, about 40% of their clients are sent by suppliers, 20% by insurance companies and other partners, 20% are repeat customers and only 20% are attracted directly.
There are about ten major players in the Kazakh market of leasing services at the moment. The KazAgroFinans state leasing company, specialising in funding the lease of agricultural vehicles and equipment, controls about 40% of the market. The rest of the market is mostly shared by subsidiaries of second-tier banks, including BankTuranAlem, Halyk Bank, Temir Bank, Bank CenterCredit, Alliance Bank and others. Even though second-tier banks themselves can offer leasing services, the president of TuranAlem ORIX Leasing (owned by Bank TuranAlem and the Japanese ORIX leasing company), Ms Lazzat Asabayeva, believes that specialized companies have greater experience and possibilities in this sphere.
Other market players are the Leasing Group (which is thought to be “independent”), Raiffeisen Leasing Kazakhstan and the Development Bank of Kazakhstan Leasing. Raiffeisen Leasing Kazakhstan is a subsidiary of the major European bank Raiffeisen. The set up of the latter has not been welcomed enthusiastically by private players. For example, the chair of Halyk Leasing, Mr Yerlan Karzhaubayev, believes that a subsidiary of the Development Bank of Kazakhstan entering the market is not fair play by the state.
The priority sectors for leasing companies are the agriculture, construction, transport and oil and gas sectors. Leasers mainly focus their work on small and medium-sized businesses. According to the Association of Kazakhstan’s Financiers, this subsector accounts for 95% of the total number of leasing contracts. The head of the Leasing Group, Timur Taipov, said that his company was actively cooperating with start-up businesses, but that this did not damage the quality of its portfolio because risks were properly assessed.
The development of the non-extractive sector creates the need to improve infrastructure and logistics. The head of Raiffeisen Leasing Kazakhstan’s business development department, Timur Akhmetkaziyev, said that new companies found their niches in catering for this marketing. In particular, his company does not compete against any existing players (who mainly focus on retailing), because it focuses on funding projects, which requires individual assessment of projects. In contrast to retailing, where risk management means that the leaser from the very beginning proceeds from the assumption of a possible default by the client, resulting in potential losses being covered by setting high interests, viability and cost recovery matter in project funding.
In general, many experts believe that it is not quite correct to compare leasing companies’ market shares because they all work in different subsectors. It should be noted that leasing activities are not licensed or regulated by the Financial Control Agency, so the statistics of leasing companies are not transparent and it is hard to find market figures. According to some estimates, the leasing market in this country totalled $400m-$450m in 2006. The World Bank estimates this figure will reach $600m in 2007. However, according to the Financial Control Agency, the leasing market is growing steadily at least by 20% a year.
By comparison, this market totals about $3bn in Russia. Of course, the size matters, but more important is that the share of leasing services in the total investment in fixed capital was 5-6% in Russia, 30% in Eastern Europe and was only 1.5% in Kazakhstan in 2004. This means that leasing services penetration in Kazakhstan is very low.
Moreover, it should not be forgotten that the leasing sector is at its initial stage of development in Kazakhstan and the country’s economic growth rates make it possible to hope that it will occupy an appropriate niche. Specialists from CIS countries admit that this country has created the most favourable legislation basis in the CIS for this.
Where Does Leasing Start?
The state plays a significant role in developing leasing services in Kazakhstan and stimulates this process through offering tax preferences. Experts say that these tax privileges are the country’s competitive advantage in the leasing sector. For example, VAT is not imposed on a number of imported goods; there is the possibility of using accelerated depreciation of fixed assets and premiums paid to the leaser are exempt from corporate income tax and VAT. This makes it possible to reduce interest which makes leasing cheaper than a loan. Moreover, the client acquires the product without VAT. The Law On Financial Leasing, adopted in 2000, offers certain preferences to leasing companies.
However, the practice has produced a number of problems between the leaser, the client and state bodies. These problems were linked to interpreting the law and defining leasing as a service which has different tax privileges. For example, according to the law, the term of leasing had to be at least eight to 16 years. That is why, leasing companies failed to conclude deals which had a shorter term and the lessee obtained the right to own vehicles and equipment (which is what leasing means) after that term expired. However, often the service life of fixed assets is ten to 20 years, i.e. after eight to 16 years vehicles or equipment cannot be exploited anymore, which turns out that the lessee just leased them for the period of the contract.
As a result, in 2004 a number of amendments were made into legislation, the most important of which was the definition of financial leasing with the reduction of its minimum term to three years. In addition, the same year the Kazakh government endorsed a list of types of equipment that were exempt from VAT if they were imported to the country through leasing.
“Unfortunately, the list turned out to be very short, although initially it was far longer,” Lazzat Asabayeva said. “We want to expand the list. This decision will be a great impetus to developing the market because leasing would have a number of advantages over bank loans for the client.”
Another omission, singled out by leasers, is the absence of a legislative basis for operating leasing. In common international practice, if funding is to be carried out within a year leasing companies have the possibility of offering operating leasing. Contracts to be carried out over less than three years cannot be regarded as leasing contracts in Kazakhstan.
Another problem is the absence of the possibility of transferring the object of leasing to another lessee. For example, if in less than three years of the start of the leasing contract accounts were settled with the leasing company due to the bankruptcy or default of the lessee, then the law does not regard the contract as a lease. Consequently, no tax privileges are envisaged for it. As a result, the leasing company faces financial losses. That is why market players favour the adoption of the term of “secondary leasing”. This will make it possible to lease fixed assets seized from faulty lessees again. This, in turn, will minimise the risks for leasers.
Another point stressed by leasing companies is linked to subleasing, when the leaser does not have the vehicles or equipment which are being leased but instead rents them. Timur Akhmetkaziyev said that if subleasing had been recognized as a leasing service, then the premium would have been exempt from corporate income tax and VAT under the Law On Financial Leasing. Meanwhile, by calculating premiums without these taxes, the leasing company runs a risk of the tax service not recognising this operation as leasing and the leaser facing losses.
Anyway, despite the number of disputable points at this stage, leasing is turning into a financial instrument that is receiving increasing demand in Kazakhstan. Nevertheless, when the point is to grow small and medium-sized businesses are choosing leasing over a loan more and more often. With growth in production and the necessity to renew fixed assets, the demand for it will continue to grow and the service itself will become more and more popular.
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