Georgian leasing craves for fair competition
23 June, 2011
Georgian leasing craves for fair competition

No preferences, just fair competition – this is the only request Georgian leasing sector asks for Georgian government to its further development.

To be put on equal competitive conditions with banks is the only way to get an impetus to underdeveloped Georgian leasing and it may prosper and give a real relief to similarly underdeveloped Georgian Small and Medium Entrepreneurs (SME) as it does everywhere in the developed world, the sector pundits say. 34% of SME sector applies to leas

ing service in Europe while only three leasing companies are operating in Georgia at the moment starting 2003. Unfavorable legislation full of double interpretation and collisions, as well as discriminating taxation regime make a set of deficiencies drawing Georgian leasing back, a group of experts working on new leasing legislation say. The group incorporating Association of Georgian Leasing Companies and independent legal experts in close cooperation with the National Bank of Georgia, as well as ministries of justice and finances has already shaped out a draft version of a new legislation project based on the internationally acknowledged leasing standards [of UNIDROIT Model of 2008] that is supposed to be submitted to parliament soon.

Rafael Castilio-Triana, an expert with the USAID supported Economic Prosperity Initiative (EPI), recommends Georgian government to pass the law as soon as possible as for two key reasons: first of all leasing creates a wonderful effect empowering young professionals to get jobs [because they have an access to equipment to start business] and secondly it is most important for investors to come to Georgia.

“The law is compiling the best world system that includes the main [leasing] principles… If I were a member of government I would put this law immediately,” He said during the workshop on leasing held on June 20, 2011.

Georgia lags much behind its regional neighbors from leasing point of view irrespective it is leader in banking sector development in the region, Irakli Kordzakhia, a legal expert with the working group, said. According to him, Azeri economy grew 22-fold after it changed leasing regulation in 2003.  International Finance Corporation  and World Bank are making direct investments in Armenian leasing companies while international investors shun Georgian leasing as of yet due to its inclement regulation.

Georgian leasing was somewhat developing till 2007 and total leasing portfolio increased from USD 15 million of 2004 to USD 30 million in 2007, and a couple of foreign companies were interested to enter Georgian market but they changed their mind due to discriminating taxation system. The latter is a reason why Georgian leasing sector unlike banks failed  to resist the financial crisis in 2008,  its portfolio  dropped to USD 15 million again  and the sector cannot bottom out the shock as of yet.

According to Castilio-Triana one key problem with the leasing in Georgia is civil code, that creates unfair burden for leasing companies by imposing liabilities for goods quality on lessor [which is generally a financial institution] instead of a supplier/producer “who is actually responsible for the good quality in line with the best world practice,” he said. And new law suggests adoption of this practice.

The second key problem is the tax code treating the leasing companies discriminatory compared to banks that prevent leasing companies to play their role as an alternative financial tool. For example leasing companies have to pay taxes over revenues that they have not yet received or never are going to receive because tax code created fictional way of revenue calculation.

Moreover, tax code enables businessmen to deduct 100% of expenses if they take machinery through banking loans but prohibits any deduction in leasing that makes bank loan cheaper and chokes leasing. Meantime leasing is more SME-oriented globe over and assumes larger risks than banks for two reasons: first, leasing companies have the right of ownership over the equipment they finance. And since they have this ownership right they may afford to recover the value of investment even if a lessor fails while banks cannot afford a client failure. Besides, it is an open secret that banks do not finance start-up business in Georgia while leasing does.

“Tax code choked leasing very much,” Kordzakhia told Georgian Journal. “For example if we take equipment through bank loan we can deduct 100% in expenses, but if we take equipment through leasing we have not got this right. The 100% -deduction  means that 15% of profit tax that you had to pay to the state transforms in expenses and you pay by 15% less to the state that translates in the GEL 15 thousand profit in GEL 100 thousand-loan. So taking loans is cheaper than leasing.”

The law became stronger in 2009 by depriving leasing companies of the right to deduct reserves while banks enjoy this right.  Besides lessor can stop contract with the lessor any time without trouble and penalties when no bank client may dream of similar preference. While many countries make taxation preferences in leasing to boost economy Georgian leasing asks just for fair treatment.

“We ask for no privileges, we ask for just fair treatment so as to be put in equal conditions with banks and be competitive,” Kordzakhia said.

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