Leasing Sector’s Breakthrough Anticipation
08 December, 2011
Leasing Sector’s Breakthrough Anticipation

 

Changes to leasing legislation enacted starting last November are expected to have a breakthrough effect in stagnated Georgian leasing sector; they could ease life of leasing companies as well as small businesses that are viewed as key consumers of leasing globe over. They will also attract more international investors to the Georgian leasing sector.

According to Nana Mikashavidze, Head of TBC Leasing and Head of Association of Georgian Leasing Companies, obscure, non-transparent and discriminating legislation, abounding with contradictions and double interpretations is

the reason why Georgian leasing is still underdeveloped and deprived of investors while 34% of Small and Medium Enterprises (SME) in Europe use leasing.

Georgian leasing was somehow developing till 2007 and total leasing portfolio increased from USD 15 million in 2004 to USD 30 million in 2007, and couple of foreign companies were interested in entering  Georgian market but they changed their mind as soon as they took a look at the legislation regulating Georgian leasing.

Leasing in Georgia has been regulated by civil and tax codes as well a special law aimed to support leasing, approved in 2005, which contradicted with the civil code and undermined rather than supported the sector, Mikashavidze said during a roundtable organized by the USAID-supported Economic Prosperity Initiative (EPI) on November 22, 2011.

Leasing is the key tool of financing in fixed assets but in Georgia leasing resembles a bank loan at the moment and could not compete it as was discriminated by law. Due to unfavorable legislation that tied leasing companies to offer more differentiated service range Georgian entrepreneurs prefer to take bank loans that look cheaper but are less commercial in fact.

“Consumer  pays 18% of Value Added Tax (VAT) itself when takes a bank loan, while leasing companies pay VAT themselves that puts 18% of leasing interest rate equal to 14% of bank loan, plus the product we offer to consumers is completely tailored to consumers as they order definitely what they want and  can return it after the need expires while bank loans are invested completely in the assets that is not tailored to consumers requirement as much as leasing offer and after entrepreneurs need the assets no longer either cannot sell it or sell under non-profitable price, ” Mikashavidze said.

Legislation was the reason Georgian leasing sector unlike banks could not resist the financial crisis of 2008 and its portfolio halved as a result. Leasing companies could not deduct non-paid loans like banks do and had to acknowledge them as profit, non-paid penalties were also ascribed as profit for they were registered on a non-cash basis; all businesses except leasing could enjoy 100% amortization rule [meaning registration investments in fixed assets in expenses completely] that cuts down profit tax, principle of calculation of property tax was very unclear (with serious risks of interpretation) and very complex in terms of administration; a minimum discount interest rate was restricted -leasing companies were actually unable to fully deduct costs on some transactions.

Civil code maximally protected customer leaving leasing companies exposed to risks.  In case of breaching a contract on the part of a client, a leasing company had to return a difference to the client if the value of an asset exceeded the libility. The law imperatively determined the amount which was far from a real amount and was considered as a taxable income.

Although a lessee chooses a provider  the entire responsibility for supply and quality lies with the lessor.

Moreover, to regulate leasing related payments   civil code referred to tax code paragraphs on rent and hire that differ from leasing in essence and complicated tax administration to lease companies.

“Leasing is absolutely different than hire and rent, for example you cannot take three-fold of rent rate beforehand, while leasing is a non-liquid asset and allows its client to repay assets price not on monthly based payment like banks practice but based on season, it offers different payment systems tailored on business, and such legislative contradictions scared investors off and held back leasing development,” Mikashavidze said.

Unclear definition of leasing was also a problem.

To alleviate leasing sector the group incorporating Association of Georgian Leasing Companies and independent legal experts in close cooperation with the National Bank of Georgia, government and EPI shaped out a new legislation project [based on the internationally acknowledged leasing standards of UNIDROIT Model of 2008] that entered into effect starting November 1st . New law is not completely perfect as yet but only civil and tax codes regulate leasing, key contradictions put above are removed and definition of leasing is quite clear: if 70% of business activity is leasing the company may attain a status of leasing company.

Since the law is based on international standards foreign leasing and producer companies are supposed to feel more comfortable and take an interest in Georgia market irrespective its small size that will give an impetus to leasing sector and cut prices down.

“John Deer one of the largest combine/tractors producers in America is not supposed to rush immediately today but this law creates a chance that this John Deer office that already has an office in Turkey will open up an office in Georgia to get a foothold  irrespective its small size because leasing is just developing here, agriculture and medical sector trumpeted as priorities by government are just taking off  starts that requires big investments and can be interesting to foreign companies…bedsides Georgia is a regional and transit center. Providers can cut prices down by 20% to lease companies with bigger resources, while a poor farmer has no discount chance,” Mikashavidze said.

 

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