SIGNIFICANCE AND ACTUAL PROBLEMS OF

LEASING DEVELOPMENT IN UZBEKISTAN

Done by: Zenfira Djafarova

For the sake of this article, the term “leasing” refers to financial leasing. IFC defines leasing as a three-party agreement in which a lessor pledges to acquire an asset selected by the lessee from a supplier also of the lessee’s choosing and to provide this asset in exchange for payment to the lessor for temporary use and possession of the asset. In the majority of countries in the former Soviet Union, leasing is available only for entrepreneurial (commercial) purposes. Also, most legislations stipulate that the lessor does not bear responsibility for the choice of the asset to be leased, nor the supplier. Often the term of the lease agreement coincides with the full depreciation of the equipment, and the asset is transferred to the lessee’s ownership.

Leasing companies evaluate potential leases based on the lessee’s ability to expand the business from cash flows generated through the use of the asset. This is in contrast to bank lending that typically evaluates a client based on prior credit history and the company’s balance sheet.

This is why leasing is particularly advantageous for new, small and medium-sized businesses that do not have a lengthy credit history, nor a significant asset base for collateral.

Leasing is an important source of medium- and long-term financing for companies, both in developed economies, and in countries with economies in transition. Leasing plays an important role in these countries as an effective means to increase the lessee’s asset base, particularly in private and/or new companies and in SMEs, all of which play a key role in introducing innovation and competition in the economy, and result in job creation.

Leasing is advantageous for all parties involved. With limited financial resources and no collateral, a lessee can acquire equipment that increases the company’s productive capacity and, as a result, its profitability. A lessor receives payment for its financial risk, which is lower than for working capital lending because the lessor maintains ownership of the leased asset throughout lease agreement and is able to hold greater control over their investment through regular monitoring of the asset instead of having to monitor working capital loans. For suppliers, leasing expands their market base by providing businesses a mechanism to purchase equipment without incurring significant upfront cost.

Leasing can also be an effective mechanism for jumpstarting an economy:

· Leasing offers a way to modernize production and develop small business. Leasing companies play an important role in the financing of small and medium-sized businesses, which need funds to expand but often do not have the credit history or collateral sufficient for other financing sources. Leasing gives these enterprises the opportunity to create and modernize their operation.

· Leasing increases the total capital investment in an economy. Leasing is a complementary form of financing that serves as an alternative to bank lending and increases a company’s ability to source all types of financing.

· Leasing creates competition in the financial marketplace. Leasing, which is not as risky as working capital lending, creates an alternative method of financing businesses and directly competes with bank lending products. In transitional economies, leasing complements bank financing, allowing businesses to access both lease financing and additional bank financing without increasing their collateralized debt.

· Leasing increases the sale of equipment. Leasing offers domestic and foreign suppliers a new mechanism for increasing their customer base, and access to new clientele — previously poorly financed businesses. Overall, a healthy leasing industry facilitates a country’s economic development through increased financing flows to the productive sector of the economy, growth of domestic production, and increased financial options for private business.

When analyzing the issues of creating an economically stable society, it is necessary to bear in mind the role which business and the class of owners play in the reconstruction of state, and in ensuring social and political stability. It is the middle class that is the backbone of civil society.

Leasing is an important source of medium-and long-term financing for companies, both in developed economies, and in countries with economies in transition. The development of leasing in Uzbekistan in 2002 was substantially assisted by amendments to the governance and legal framework for leasing in Uzbekistan. These amendments highlight the investment quality of leasing, equal to bank credit and other forms of capital investment. Simply stated, the recent legislative amendments have established a strong foundation for leasing, which has made leasing a more attractive and accessible financial instrument, particularly for small and medium-sized businesses.

Even though the majority of issues in the leasing sector were resolved last year, there still remain some areas for improvement for leasing in Uzbekistan.

Devaluation of the Soum: The greatest issue facing leasing in Uzbekistan is maintaining available lease capital through a period of steep devaluation of the Uzbek soum. From May 2000, there has been a slow step-by-step process to liberalize the currency regime in the country which has resulted in a devaluation of over 600% to the dollar over the past three years. This means that a lessor must index its lease agreements and payments to a hard currency to lessen its foreign exchange risk, thus increasing the cost of the deal and making the lease less attractive to the lessee. Or, the lessor must take on foreign exchange risk itself. While this issue is not solely linked to leasing, it has a significant impact on the leasing market because most of the equipment leased in Uzbekistan is imported.

Repossession Procedures: Another issue which plagues leasing is the lack of a simplified repossession procedures for leased assets. Even though the Law on Leasing strengthens the right of repossession for the lessor, practical and efficient repossession procedures are still not in place.

Accelerated Depreciation: Leasing became a strong financial instrument in Europe and the US in the 1950s,in large part due to the use of accelerated depreciation to reduce taxable income. In Russia, the leasing sector has expanded dramatically, largely due to tax benefits which allows for 3x faster accelerated depreciation on leased assets. Allowing for accelerated depreciation for tax purposes, not just for leasing, but for all forms of capital investment would provide a strong impulse for the manufacturing and service sector. Companies could faster and more efficiently recoup their investment which will give investors a stimulus to increase the amount of capital investment in the productive sector of the economy. Accelerated depreciation has been used effectively over the past 10 years in Poland, Czech Republic, and Israel to attract investment to these countries -not just for leasing but for all capital investment.

Thus, healthy leasing industry facilitates a country ’s economic development through increased financing flows to the productive sector of the economy, growth of domestic production, and increased financial options for private business.