How commercial banks are killing leasing industry

The Central Bank of Kenya building in Nairobi. FILE 

By MARVIN SISSEY

In Summary

• Some lenders are contravening rules and encroaching on this nascent industry.

 

That banks in Kenya have a good appetite is an open secret. However, for the vital role that these institutions play in the economy, such healthy appetite is in many instances excused as a necessary evil. It is only when this appetite turns to avarice that tongues start wagging.

By appetite, I am not referring to the ever-increasing interest spreads between cost of money and interest offered to borrowers. The legality of such actions remains intact.

My interest today is in the finer detail of ethical business within the scope of regulation. Banks are expected to operate within the strict guidelines of the Banking Act (Chapter 488), the Central Bank of Kenya Act (Chapter 491) and other peer-based self-regulation rules set up by the Kenya Bankers Association.

Among all businesses, banks have one overlying advantage — access to low-cost, almost interest-free deposits from the public. It is this reason that enables banks to participate in the financing business where money itself is their stock.

Commerce or trading business is that which involves the exchange of goods. To even the playing field, financing institutions like banks are normally prohibited from trading while trading institutions, which includes most of the rest of the businesses, can only access direct public funding after undergoing thorough share input via complex processes overseen by the Capital Markets Authority; a practice that is a rarity rather than the norm.

The Banking Act, Part III Section 12 (a) states: “A bank shall not engage, alone or with others, in wholesale or retail trade, including the import or export trade, except in the course of the satisfaction of debts due to it.”

The Central Bank of Kenya Act, Chapter 491 Part IX Section 52, besides as well prohibiting banks from commercial trading activities, specifically bans banks from purchasing, acquiring or leasing such immovable property as an investment (to protect banks from dealing in real estate) except for its own business requirements.

My argument is that by engaging in some classes of the leasing business, some banks are not only directly contravening this rule, they are also encroaching on a nascent industry and threatening to bring it to ruin.

Let me explain. A lease is simply a rental. Hence an asset lease agreement is basically an arrangement where the borrower (lessee) agrees to use an asset that belongs to the owner (lessor) for a specified period and pay. Shorter periods are called hires while longer ones are called leases.

It is common for most businesses and even government to lease assets that generally depreciate in value and which need to be replaced after a few years.

The Kenyan government forayed into this leasing arena by leasing police vehicles from Toyota Kenya in a deal worth more than Sh6 billion. When it comes to most movable assets, there are basically two types of leases; a financing lease and an operating lease.

Assume X is interested in an asset, say a vehicle. X goes to a dealership and chooses the vehicle. She then goes to a bank for financing. The bank agrees to pay on behalf of X but gets the vehicle as an asset on its books co-owned by both parties. X, however, assumes usage of the vehicle and expects to actually own the car at the end of her paying up the cost.

Meanwhile, she recognises the asset in her balance books together with the corresponding liability (or debt accruing). This is a finance lease which is an asset loan and is fundamentally the preserve role of banks.

But say X is interested in the same vehicle. But she is not interested in owning the vehicle since she just wants to use it for say, three years. She would like to pay for what she uses rather than for full ownership.

She also doesn’t want the headache of disposing the vehicle after the three years since that is not her core business. She does not even want to bother about maintenance and insurance during the three years she will be using the car.