Lenders cast nets beyond interest income

Some of the 300 ambulances that are to be leased by the government for the Kenya Prisons Service. FILE PHOTO | NMG
Some of the 300 ambulances that are to be leased by the government for the Kenya Prisons Service. FILE PHOTO | NMG 

Stung by the interest rate controlling regime that took effect last year, Kenyan financiers are now casting their nets wide to turn the tide on declining earnings.

Banks are now increasingly looking at a piece of the leasing segment currently dominated by foreigners to shore up revenues.

The leasing sector has over the last past six years doubled to about Sh50 billion with a potential of over Sh500 billion, according to recent data from the Leasing Association of Kenya.

Financial institutions affiliated to local leasing companies include NIC Leasing Liability Partnership – owned by NIC Bank Ltd and related subsidiary Mercantile Finance Ltd, Reveries Finance Ltd – owned by Chase Bank Group and Alios Finance Ltd – owned by Alios Finance Group, which provides a wide range of asset finance products just like a commercial bank.

A fortnight ago the Co-operative Bank said it had received regulatory approval from the Central Bank of Kenya to embark on a joint venture with South Africa’s leasing company Super Group Limited.

Through the partnership Co-op Bank is seeking to expand its asset base leveraging on major infrastructure projects, increased government acquisitions of equipment through leasing, exploration and mining activities in oil and gas subsectors.

“Super Group Limited is an established global leader in leasing business based in South Africa with a market capitalisation of over $967 million (Sh99.97 billion) and operating in three continents” Co-operative Bank Group Managing Director and Chief Executive Officer Gideon Muriuki said.

Mr Muriuki said the leasing business provides an opportunity to diversify its income stream apart from also providing much needed services in a fast growing segment.

“Partnership between Co-op Bank and Super Group can be mutually beneficial and help the two organisations exploit existing synergies.

Operating leases is gaining admirable traction in Kenya with the government setting pace by recently opting to lease vehicles for the National Police Service; county government are expected to follow suit together with other nascent  sectors such as oil and gas, mining, energy and agriculture,” said Mr Muriuki.

Leasing provides full maintenance leaving clients to focus on their core business. Super Group is expected to help Co-op Bank introduce products that have attained success in South Africa, Australia and other markets where it has a presence.

The partnership has already secured its first deal after winning a bid to supply the police with vehicles.

Experts say the essence of leasing is that it does not make commercial sense to buy assets to own, whereas you can hire to use them as and when you need them.

And as the world progressively moves to Uber style economic models that are asset-light, leasing can only grow, they add.

Leasing is widely being seen a cost effective model because there is no huge capital required in procuring.

“Instead of spending all your money buying fixed assets, you can actually lease assets, you’ll be able to lease a lot more assets with the same amount of money,” Ms Edna Kihara the chairperson of the leasing association of Kenya was quoted saying recently.

“Secondly, you will be able to manage your cash flow. The lump sum requirement for capital items when you are starting up a business, will not require that. You can actually lease and then pay monthly or quarterly instalments on the cost of that equipment.”

Major consumers and drivers of leasing products are multi-nationals that have borrowed the practice from their mother countries.

However, there are now other local companies that are joining the fray: examples are East Africa Breweries, Bamburi, Safaricom and Nakumatt. Players say opportunities that are ripe for leasing disruption include school transport, and computer labs with leasing experts saying schools should stop conducting massive harambees to buy school buses and computers, yet they can easily lease at a fraction of the cost.

In agriculture, experts say, farmers can quickly mechanise food production by leasing farming equipment, irrigation kits, storage and refrigerated storage and transportation vehicles.

Experts also point out that sale and lease-back allows organisations to shed heavy cost of carrying assets in their balance sheets, but still have access to the same.

This is by disposing of the assets they already own, and then simultaneously leasing them back.

Some players feel that investors in public service transport should stop buying vehicles to own while they can simply lease.

Food handling equipment for example milk coolers and construction equipment are the more popular leasing areas, where contractors eye to cut project costs. The nascent oil industry is also emerging as one of the popular segments where leasing is a better option.

The government has embraced leasing as an alternative to acquiring moveable assets, allocating a budget of Sh4 billion and Sh1.2 billion towards financing leasing of government vehicles and medical equipment respectively during the current financial year.

With the national government setting the pace, devolved units are expected to follow suit, further creating more opportunities for financiers to leverage loan book growth on leasing products
Other sectors that are expected to drive uptake of leasing include co-operatives, manufacturing, construction, transport, mining and ICT.

Other notable players include vendor-linked leasing companies mostly owned by motor vehicle dealers. Some of these are Tsushco Capital Ltd– owned by Toyota Kenya to facilitate leasing of Toyota vehicles, Simba Leasing Ltd – owned by Simba Colt to lease Mitsubishi brands, Ryce Leasing Ltd – owned by Ryce Motors to facilitate leasing of Isuzu brands and GE Capital Ltd – owned by General Electric Company to finance hiring of GE medical equipment.

There is also Achelis Kenya Ltd – owned by Achelis company to finance leasing of construction equipment and ALS Aircraft Leasing Services – specialises in aircraft hiring besides Scania Credit Solutions Ltd – owned by Scania E A Ltd to facilitate leasing of Scania vehicle models.

There is also Pewin Leasing Ltd – Owned by Pewin Motors Ltd to facilitate hiring of vehicles under a multi-franchise agreement deal with Chevrolet, Nissan and Toyota.

Independent local leasing companies include Rentco East Africa Ltd, Vehicle & Equipment Leasing Ltd (VAEL), Crest Capital Ltd – owned by Naivas Supermarket Ltd to facilitate leasing of associated concerns, and Leasing Partners Ltd – a leasing consultancy firm owned by local partners that helps companies venturing into leasing business to develop suitable legal framework, structures, processes and systems.

There is also E-Lease Ltd – owned by former bank employees.

Independent Local leasing companies with international affiliations are Rentworks East Africa Ltd – owned by Rentworks South Africa, Fleet Africa Ltd – owned by Super Group South Africa with strong global connection in key leasing market.

Leases business in Kenya is regulated by Tax Leasing rules 2002 that recognizes three types of leases.

They include hire-purchase lease, governed by Hire Purchase Act, where the client assumes a down payment of the purchase price with an option to purchase the asset at nominal fee upon expiry of the agreement.

There is also the finance lease where the asset owner buys the equipment and leases it to the client for a significant period of the assets useful life.

The risks and rewards associated with the ownership of leased assets are substantially transferred to the client, however, the ownership of the asset remains with the asset owner.

There is the operating lease, where the client rents an asset over a time period that is substantially less than the asset’s useful life, the title and all the risks and rewards associated with ownership of assets remains with the asset owner.