I.      Introduction

 

In these series of legal briefs, the legal frameworks of Ethiopia vis-à-vis capital goods leasing business and its salient features will be highlighted. This is the First Part and it covers the laws and regulations governing leasing business in Ethiopia and lists out the legal form and the licensing requirements, which lessors who wishes to engage in these businesses should fulfill. In addition, the salient features of share companies, which are the prescribed legal form for lessors, are identified.

 

II.  Ethiopian Laws and Regulations Governing Capital Goods Leasing Business

 

The main legislation governing leasing is the Capital Goods Leasing Business Proclamation (No.103/1998) as amended by Proclamation No. 807/2013, [hereinafter referred to as "the Leasing Proclamation"]. The Investment Proclamation No. 1180/2020 (herein after referred to as "Investment Proclamation") and the Investment Incentives and Investment Areas Reserved for Domestic Investors (Council of Ministers Regulations No. 270/2012 as amended by Regulations No. 312/2014), [herein after referred to as "Investment Incentives"] also regulates some aspects of the leasing business, especially where the investment involves foreign investors.

 

In addition, the Proclamation on Registration and Control of Construction Machinery [herein after referred to as "Proclamation No. 177/1999"] regulates issues relating to registration and control of construction machineries. Furthermore, the pertinent provisions of the Civil Code of Ethiopia (1960) and the Commercial Code of Ethiopia (1960) are also applicable to matters not covered by the above-mentioned specific capital goods leasing legislations.

 

So far, ten directives are issued by the National Bank of Ethiopia [herein after referred to as "NBE"], some of these directives are aimed at repealing and replacing previously promulgated directives. The Ministry of Trade and Industry (herein after referred to as "MoTI") has also issued two directives on registration of lease agreements.

 

III.  Rationales for Leasing Laws of Ethiopia

 

The preamble of the Leasing Proclamation has given three reasons that necessitated its enactment.  These are:

·      To create an enabling environment for the establishment of alternative sources of financing for investors who have the desire, knowledge and profession to participate in various investment activities but could not act due to lack of capital;

·      Lessors of capital goods are assumed to fill a gap that is not addressed by the existing financial institutions; and

·      Existing laws concerning capital goods leasing business are found to be incomplete.  

 

IV.  What are Capital Goods?

 

The Leasing Proclamation has defined what it meant by the term "Capital Goods" as "any equipment or machine that may be used to produce products or to provide services and includes accessories". Proclamation No. 177/1999, defines “Machinery” as "any machinery built for construction purposes and designated as such by the directive to be issued by the Ministry of Works and Urban Development (MWUD)". MWUD is currently renamed as the Ministry of Urban Development and Construction (MUDC). The specific designation of the capital goods can be found in a list issued by the Investment Board and MUDC.  

 

V.    Legal Form for Lessors

 

A lessor is defined as "a person who, under the lease agreement, provides to the lessee the right to use the capital goods in return for rent for an agreed period of time" (Article 2(7) of the Leasing Proclamation).

 

As our main emphasis is on the capital goods finance leasing business, we will see the legal form and the legal requirements that should be fulfilled to undertake this type of business. NBE has issued two Directives with the aim of stipulating the legal form and the legal requirements that should be fulfilled by companies intending to undertake capital goods finance business. These are the Requirements for Licensing of Capital Goods Finance Business Directives No. CGFB/02/2013 and the Minimum Paid Up Capital Requirements Directive No. CGFB/07/2017.  

 

As per these Directives, the company to be established to undertake capital goods finance business has to be a Share Company. Share Companies are required to be formed by fulfilling the requirements provided by the Commercial Code of Ethiopia of 1960 (in particular as per the provisions of Articles 304 to 509) and the Commercial Registration and Business Licensing Proclamation 980/2016 (as amended), and the Regulations and Directives issued as per this Proclamation. 

 

As per the applicable Ethiopian Laws share companies, are to be established by minimum of 5 shareholders and these companies can be formed among the shareholders or by public subscription. The founders of the share company, who are defined as "persons who signed the memorandum and articles of association and subscribe the whole capital, persons who sign the prospectus, bring contribution in kind or persons who initiated and facilitated the formation", are entitled to allocate special shares in the profit of the company upto 20% for period not exceeding three years.

 

The shareholders meeting of the share company (that could be ordinary or extraordinary as well as special meetings) is the highest organ of the share company and it is entitled to decide on all aspects of the company except to what is specifically reserved for the board of directors and the management of the share company. The board of directors whose number is between 3 to 12 members are to be appointed by the shareholders meeting and in the case of capital goods finance business share company, the board of directors will be appointed by the shareholders meeting, which needs to be approved by NBE.

 

Issuance of debentures and conducting of debenture holders’ meeting is also allowed for share companies. The proper maintenance of books of accounts and the appointment of auditors is also mandatory. Capital increase by issuance of new shares by fulfilling the requirements of the law is allowed for these companies. The capital increase can be done through public subscription.     

 

In case of capital goods finance companies, the minimum paid up capital of Birr 200 million shall be deposited in bank in the name of the under formation share company, in case where the company targets lessees having capital goods finance requirement upto Birr 1 million per single lessee. In case where the target per single lessee is Birr 30 million, then the minimum capital requirement will be raised to Birr 400 million.

 

The Leasing Proclamation has given NBE the mandate to issue directives on capital, fitness and qualification of the directors and chief executive officer, reserves and provisions to be maintained as well as measures to be taken to ensure the adequacy of risk management, safety and soundness of capital goods finance share company. Hence, the share company to be established to undertake capital goods finance business should also fulfill the requirements as provided in these directives of NBE.

 

VI.  Licensing Requirements for Lessors

 

As stated herein above capital goods finance business includes only financial lease and hire purchase. The license to operate capital goods finance business needs to be secured from NBE. On the other hand, a lessor that wants to operate an operating lease business is required to obtain a license from MoTI.

 

The criteria for obtaining licenses from MoTI or NBE are to be determined by the respective directives to be issued by these two government organs (Articles 3 and 4 of the Leasing Proclamation).    

 

Where the lessor invests in investment areas that make it eligible for incentives or in case where the lessor jointly invests with foreign investors, or where the investment if fully foreign owned, it is required also to obtain a license from the Ethiopian Investment Commission (Article 4(1)(a), (b) and (d) of the Investment Proclamation). 

 

It should be noted capital goods finance leasing business is the only financial sector open to foreign investors who fulfill the above detailed legal requirements.

 

VII.         Are Two Licenses Required to Operate the Leasing Business? 

 

In order to enjoy investment incentives, the lessor is required to obtain an investment permit from the Investment Commission. On the other hand, capital goods leasing business falls under the jurisdictions of the MoTI and NBE. MoTI is also obliged to register lease agreements. Hence, it can be concluded that it is advantageous for the lessor to acquire both the Investment Permit and Operating Lease Business Trade License and Capital Goods Finance Business License, respectively, from the Investment Commission, MoTI and NBE.

 

It should be noted that a company licensed by MoTI to engage in operating lease business can not undertake capital goods finance and a company licensed by NBE to engage in capital goods finance cannot engage in operating lease business [Articles 3(2) cum 4 (3) of the Leasing Proclamation].

 

In relation to construction machines, as per the Proclamation No. 177/1999, MUDC is empowered to: register construction machines, issue ownership certificates, and supervise the manner they are brought in and out of the country; issue identification marks for construction machines and ensure that the marks are affixed to the machines; determine the place and time for the inspection of construction machines; inspect construction machines and issue fitness certificates; and ensure that unfit construction machines are not used for construction purposes; and collect fees determined by the Regulations, which will be issued in accordance with this Proclamation, for the services it renders (Article 4 of the Proclamation No. 177/1999).

 

From the provision of Article 4 of the Proclamation No. 177/1999, it can be understood that, although MUDC is not authorized to issue operating licenses for lessors, it is empowered to register construction machineries and perform other related tasks.

 

However, it should be noted that the right of MUDC to register security rights in relation to construction machineries and equipment, is transferred to Collateral Registry Office, as per Article 91 (1) (b) of the Proclamation on Movable Property Security Right Proclamation No. 1147/2019.         

End of Part I

Posted April 25^th 2020