Markets & Finance

NIC Bank enters into asset leasing with new subsidiary

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NIC Bank managing director John Gachora (left) with the bank’s executive director corporate business Alan Dodd during the launch of the NIC Leasing Limited Liability Partnership on February 24, 2015. PHOTO | DIANA NGILA

Listed mid-tier bank NIC has become the first bank to enter leasing business in the country underlining the growth potential in the industry.

The bank has established a subsidiary to enter the asset-hiring business as lenders are not allowed by law to rent out equipment and real assets.

“Though still in its infancy, with an estimated penetration rate of six per cent, compared to global rate of 38 per cent, we are optimistic leasing will continue growing in our country, spearheaded by the government,” said John Gachora, the bank chief executive.

NIC Leasing Ltd Liability Partnership (LLP) is a partnership between the bank and its wholly-owned subsidiary, Mercantile Finance.

Leasing is gaining traction in the country with the government earlier this month announcing it will be renting medical equipment worth Sh38 billion to be supplied to the counties.

READ: Why ministry leased Sh38bn medical equipment

In 2013, the Treasury unveiled a Sh3 billion motor vehicle leasing programme underlining the potential in the leasing business.

READ: Toyota Kenya wins Sh3bn police deal amid rivals’ protests

Under a lease contract, a company hires an asset from a lessor to whom it makes rental payments for the duration of the lease. At the end of the term the company has an option of returning the asset, buying it or renewing the lease.

Leasing helps the company avoid acquiring a depreciating asset, but ensures it derives value from the same asset.

Besides the rental income, the leasing firm also bets that the residual value of the asset at the end of the contract will be higher than anticipated, allowing it to dispose or re-lease at a profit.

NIC hopes to ride on its history in asset financing to grow the lease business.

“Previously, we would link customers with leasing companies and provide the financing. With NIC Leasing, we are now able to provide the equipment and the financing all under one roof,” said Mr Gachora.

NIC’s entry comes at a time other players in the sector have been involved in capital raising underlining the potential in the business.

In October last year, Vehicle and Equipment Leasing Limited (Vaell) signed a Sh356 million financing deal with Mauritius-based Innovare Finance to hire out machinery for use in agro processing.

Vaell was also contracted to lease machinery to a consortium of Tanzania mining firms in a deal worth Sh350 million. The machinery to be leased included excavators, tippers, wheel loaders, breakers, graders, drills and compressors.

READ: Leasing equipment firm overcomes challenges to expand

In 2012, ALIOS Finance Kenya, a leasing firm, obtained funding from World Bank’s private sector financing arm IFC, Norfund and Commercial Bank of Africa.

The company also launched a commercial paper in the same year through Dry & Associates.

Kenyan banks have been diversifying their business as they seek to maintain growth records in difficult economic times marked by high interest rates.