Leasing is the most viable form of financing for SMEs – expert

With many businesses grappling with the negative effects of the COVID-19 pandemic, leasing has been put forward as the most viable form of financing for businesses eyeing growth, according to the president of the Uganda Leasing Association (ULA), Adad Iraguha.

As the country and economy slowly emerge from the lockdown period that saw business activity reduce by more than half across a majority of sectors, it has become pertinent for businesses and financiers alike to seek more innovative ways of financing capital assets.

Speaking during a webinar organised by Absa Bank Uganda, Iraguha, who is also the bank’s head of Commercial Asset Finance, said leasing is the most viable for Small and Medium Enterprises that hope to thrive after the pandemic and the lockdown.

“In terms of transaction costs, if you look at a loan and a lease, a lease is a much cheaper source of capital because you don’t require security as the asset you are leasing becomes the collateral,”Iraguha said.

He added that leasing offers several tax advantages, for example, with Value Added Tax (VAT), which is not paid upfront but spread out over a given period, thus leaving business cashflows less strained.

This, he said, could be one of the best ways to address some of the challenges facing Small and Medium Enterprises (SMEs) specifically, which are the biggest drivers of economic growth in Uganda but lack resources and are unable to compete against larger businesses in terms of expenditure.

With the opportunities that have opened up as a result of import substitution, entrepreneurs are going to need capital assets such as plant and machinery, motor vehicles, solar equipment and so on to take full advantage of the markets, while minimising acquisition costs.

“We have been using asset financing right from when the company started 15 years ago, from the first truck to a fleet of over 100 trucks. It is the cheapest financing option one can use and is suitable for startups, unlike other options,” said  Maria Namusoke, the Managing Director of Markh Investments, a private logistics firm.

Despite leasing being a cheaper source of funding, the option constitutes less than 5% of the total bank portfolios in Uganda, which is mostly attributed to the fact that it is the only form of credit in Uganda that is taxed and lacks definitive legislation.

To this, Iraguha noted, “Compared to mature markets, leasing accounts for more than 80% of all financed assets, while in East Africa, it accounts for less than 10%. In Kenya, however, the government passed a law that requires all medical equipment and motor vehicles be leased.”

He attributed the low penetration in Uganda to a lack of legislation on leasing, which diminishes investor confidence due to economic uncertainty, which in turn limits the industry to commercial banks and a few leasing companies.

There is, therefore, a need to revise the tax policy towards the product and develop a legislative framework to govern financial leasing transactions, he said.