Financial Lease Regulations, 2013

LESOTHO Government Gazette EXTRAORDINARY Vol. 58 Thursday – 25th April, 2013 No. 22 CONTENTS No. Page LEGAL NOTICE 39 Financial Lease Regulations, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Published by the Authority of His Majesty the King Price: M31.00

LEGAL NOTICE NO. 39 OF 2013 Financial Lease Regulations, 2013 Arrangement of Regulations Regulations PART I - PRELIMINARY

1. Citation and commencement
2. Interpretation
3. Application PART II - FINANCIAL LEASE SERVICE
4. Types of financial lease
5. Characteristics of a financial lease
6. Freedom of contract
7. Rights and duties of lessee
8. Rights and duties of lessor
9. Duties of supplier
10. Effectiveness between parties and as against third parties
11. Lessee as beneficiary of the supply agreement
12. Acceptance of assets
13. Risk of loss
14. Irrevocability and independence
15. Exclusion of liability of the lessor
16. Preemptive notice and registration of financial lease.
17. Remedies for delivery contrary to supply agreement
18. Transfer of rights and duties
19. Priority of liens
20. Warranty of undisturbed possession
21. Default or failure to perform a duty
22. Notice of default
23. Damages for default
24. Liquidated damages
25. Termination
26. Possession and disposition at end or termination of possession 135

PART III - FINANCIAL LEASING COMPANY 27. Restriction on scope of business of leasing company 28. Supervision of financial leasing company 29. Licensing of financial leasing company 30. Special licensing requirements for banks to engage in financial leasing 31. Capital requirements 32. Risks management 33. Credit risk management 34. Systems and processes to evaluate probability of default 35. Defaults 36. Residual risks management 37. Liquidity risks management 38. Market risks management 39. Operational risks management 40. Legal risks management 41. Reputational risks management 42. Strategic risks management PART IV - MEASURES FOR LEASING COMPANY RISK MANAGEMENT 43. Risks rating 44. Preventive supervision 45. Transparency 46. Fair business practices 47. Liquidation of a failed leasing company PART V - PENALTY 48. Penalty 136

LEGAL NOTICE NO. 39 OF 2013 Financial Lease Regulations, 2013 Pursuant to section 27(1) read with 71(1) of the Financial Institutions Act, 2012 1 , I, DR. RET◊ELISITSOE MATLANYANE Commissioner of Financial Institutions, make the following regulations - PART I - PRELIMINARY Citation and commencement

1. These regulations may be cited as the Financial Lease Regulations, 2013, and shall come into operation on the date of publication in the Gazette. Interpretation
2. In these regulations, unless the context otherwise requires - “Act” means the Financial Institutions Act, 2012; “asset” means all property that is non-consumable and includes personal prop￾erty, goods and equipment that can be legally sold or imported into Lesotho, that becomes the subject matter of a financial lease agreement, whether or not the asset has become a fixture to or incorporated in land, and includes immovable property, natural resources, trade-marks and copyrights or other moral rights to intellectual property, computer software, but does not include shares, investment securities, any financial instrument, government bonds and securities, or any other moveable asset whose free circulation in Lesotho is restricted by law; “financial lease” means a contract between a lessor and lessee, having as its main purpose the conveyance of use of an asset, with or without an option to purchase all or part of the asset, as specified under regulation 5 and includes, a sub-lease, sale and lease back transaction and micro-lease. 137

“lessee” means a person who enters into a financial lease with a lessor and in￾cludes its successor, assignee and sub-lessee; “lessor” means a person who enters into a financial lease with a lessee, and whose company is licensed under regulation 31 to provide a service of finan￾cial leasing; “micro-lease” means where an asset may be a low-cost item used for micro-en￾terprises; “parties” means the lessor and lessee; “person” includes a legal, private or public entity; “provisional licence” means an authorisation to conduct a financial leasing busi￾ness as provided for under regulation 29; “undisturbed possession” means the right of a person in possession of a property to enjoy the property without unlawful interference or disturbance; “sale and lease back transactions” means where a lessee, in an additional ca￾pacity as ad-hoc supplier of an asset, sells the asset to a lessor and leases it back from the lessor; “sub-lease” means where a lessee can also operate as a lessor for the benefit of a second and subsequent lessee; “supplier” means a person from whom a lessor acquires an asset for lease under a financial lease; “supply agreement” means an agreement under which a lessor acquires an asset for lease under a financial lease whether the acquisition is by way of sale, sup￾ply or purchase. Application 3. (1) For purposes of this regulation, “centre of main interest” means - (a) in the case of a company, a place where the company’s 138

registered office is located; and (b) in the case of an individual, a place of the individual’s business, employment or professional practice. (2) These regulations shall apply to - (a) a financial lease transaction if - (i) an asset is within the territory of Lesotho; (ii) the center of main interest of a lessee is within Lesotho; or (iii) a lessor is placed outside Lesotho and a lessee has its center of main interest in Lesotho. (2) A leasing transaction intended to be a financial service shall be subject to these regulations and shall be identified as a financial lease. (3) These regulations shall not apply to a hire-purchase agreement. PART II - FINANCIAL LEASE SERVICE Types of financial lease 4. (1) There are two types of a financial lease - (a) a capital lease; and (b) an operating lease also known as a true lease. (2) A financial lease becomes - (a) a capital lease if the rentals and other funds payable under the lease take into account the amortisation of the whole or a substantial part of the investment of the lessor; and (b) an operating or true lease if the rentals and other funds 139

payable under the lease do not take into account the amortisation of the whole or substantial part of the investment of the lessor. Characteristics of a financial lease 5. A financial lease shall, among others, have the following key features - (a) identity of a lessee, lessor and supplier; (b) a comprehensive description of an asset to be acquired under the financial lease; (c) rentals and other charges payable; (d) duration of the financial lease; (e) estimated residual value or the option to purchase the asset; (f) terms of delivery of the asset; (g) terms upon which ownership of the asset may an transferred to the lessee; (h) description of general rights and obligations of the parties; (i) statement that the parties have entered into the financial lease agreement; (j) a warranty by a supplier that the asset is free from defect and is fit for the ordinary purposes for which the asset for that des￾cription is used; (k) conditions of termination of the financial lease including dam￾ages due in the case of termination before the lease term expires; (l) terms upon which rights may be transferred to a third party; (m) warranty of an undistributed possession; and 140

(n) other necessary requirements applicable to a financial lease in keeping with best practice. Freedom of contract 6. A lessor and lessee shall be free to determine the content of a financial lease and may agree upon the terms and conditions of the financial lease. Rights and duties of lessee 7. (1) A lessee shall - (a) specify an asset, quantity, price, mode and terms of delivery, installation and maintenance of the asset; (b) select a supplier; (c) receive the asset directly from the supplier; (d) assume the right to use or possess the asset acquired by a lessor; (e) pay to the lessor, rentals and other charges payable under a financial lease, whether or not such rentals take into account the amortisation of the whole or substantial part of the investment of the lessor; (f) use and take proper care of the asset, reasonably in the light of the manner in which that asset is ordinarily used, and keep the asset in the condition in which it was de￾livered, subject to wear and tear; and (g) fully perform all of the lessee’s obligations as pro￾vided in the financial lease. (2) When a financial lease sets forth a duty to maintain an asset or the manufacturer or supplier of the asset issues technical instructions for the use of the asset, the compliance by the lessee with such agreement or instructions shall satisfy the requirements of subregulation (1)(f). 141

(3) When a financial lease comes to an end or is terminated, a les￾see, unless exercising a right to buy the asset or to hold the asset on a financial lease for a further period, shall return the asset to a lessor in the condition spec￾ified in subregulation (1)(f). (4) In a capital lease, when an asset subject to a lease is damaged without fault of a lessee or lessor before the asset is delivered to the lessee, the lessee may demand inspection and either accept the asset with due compensation from the supplier for the loss in value or seek such other remedies as are provided by law. (5) In an operating lease, when an asset subject to a lease is damaged without a fault of the lessee or lessor and before the asset is delivered to the les￾see- (a) if the loss is total, the lease is terminated; and (b) if the loss is partial, the lessee may demand inspection and either treat the lease as terminated or accept the asset with due allowance from the rentals payable for the bal￾ance of the lease term for the loss in value but without further right against the lessor. (4) The supplier shall not be liable to both the lessor and the lessee in respect of the same damage. Rights and duties of a lessor 8. (1) The lessor shall - (a) provide the business of financial leasing; (b) upon request of a lessee, enter into a supply agreement with a supplier of an asset selected by the lessee; (c) grant the use of the asset to the lessee with or without an option to purchase in exchange of the payment of rentals and other charges by the lessee; (d) pay the purchase price to the supplier; 142

(e) compensate all damages suffered by the lessee where the leased property is not delivered on time as a result of a breach in the supply agreement by the lessee; and (f) fully perform all the lessor’s obligations as provided in the supply agreement. Duties of supplier 9. (1) Subject to regulation 11(2) a supplier shall deliver an asset to the lessor under terms, specifications and conditions set out in the supply agree￾ment. (2) A warranty by the supplier in a supply agreement to the effect that the asset, upon delivery is free from defect and is fit for the ordinary pur￾poses for which the asset of that description is used is enforceable only against the supplier. Effectiveness between the parties and as against third parties 10. Except as otherwise provided in these regulations - (a) a financial lease is effective and enforceable according to its terms and conditions between the parties; and (b) the rights and remedies of such parties are enforceable against purchasers of the asset and against creditors of the parties, in￾cluding an insolvency administrator. Lessee as beneficiary of the supply agreement 11. (1) A lessee under a financial lease shall be a beneficiary of the sup￾ply agreement. (2) In a financial lease, the duties of the supplier set out in regula￾tion 9 and the supply agreement shall also be owed to the lessee as if the lessee were a party to that agreement. (3) A lessor shall, at the request of a lessee, assign his rights to en￾force the supply agreement to the lessee, and if the lessor fails to assign his rights, 143

the lessor is deemed to have assumed the duties of a supplier. (4) The rights of a lessee under this regulation with respect to a sup￾ply agreement that was approved by the lessee, shall not be affected by a varia￾tion of any term of the agreement unless the supply agreement is consented to by the lessee. (5) If a lessee did not consent to the variation, a lessor is deemed to have assumed the duties of the supplier to a lessee that were so varied to the ex￾tent of the variation. (6) A lessor and supplier shall not impose upon a lessee, the obliga￾tion to waive or vary the effect of the provisions of subregulations (2) and (3). (7) Nothing in this regulation shall entitle a lessee to negotiate a modification, termination or rescission of the supply agreement without the con￾sent of the lessor. Acceptance of an asset 12. (1) In a financial lease transaction, acceptance of an asset occurs when a lessee - (a) signifies to a lessor or supplier that an asset conforms to the supply agreement; (b) fails to reject the asset after a reasonable opportunity to inspect it; or (c) uses the asset. (2) Unless the parties agree otherwise, after a lessee has accepted an asset, the lessee is entitled to damages only from the supplier if the asset does not conform to the supply agreement. Risk of loss 13. A risk of loss passes to a lessee when a financial lease is entered into, but if an asset is not delivered, partially delivered, delivered late, or fails to conform to the financial lease and the lessee enforces its remedies under the financial 144

lease, the lessee may treat the risk of loss as having remained with the supplier. Irrevocability and independence 14. (1) In a capital lease, the duties of a lessor and lessee become irrev￾ocable and independent when an asset subject to the lease has been delivered to and accepted by the lessee. (2) In an operating lease, a lessor and lessee may agree to make any of their duties irrevocable and independent by specifically identifying each duty that is irrevocable and independent. (3) Except as otherwise provided in these regulations, a duty that is irrevocable and independent shall be performed, regardless of the performance or non-performance of any other party, unless the party to whom the duty is owed terminates the lease. Exclusion of liability of the lessor 15. In a financial lease, the lessor, when acting in his or her capacity as an owner within the limits of the transaction as documented under the supply agree￾ment and the lease, shall not be liable to the lessee or third parties for death, per￾sonal injury or damage to property caused by the asset or the use of the asset. Preemptive notice and registration of financial lease 16. (1) A lessor is entitled to file, upon acceptance of a financial lease by a lessee, the following information concerning the financial lease in a record registration system duly approved by the Commissioner - (a) the name and identification number of the lessee; (b) the description of an asset, including, where applicable, a serial number or number of the corresponding plate or registration number in any other public record, such as motor vehicle registration - (i) total amount of the lease receivables under the financial lease ; 145

(ii) if applicable, a statement as to whether a pur￾chase option was granted to the lessee and terms and conditions for the exercise of such purchase option. (2) An operator of a recording system referred to in subregulation (1) shall charge such a fee for registration as may be approved by the Commis￾sioner. (3) The registration system shall record affidavits of default filled by the parties, in the event of default by one of the parties. Remedies for delivery contrary to supply agreement 17. In a financial lease, a capital lease or an operating lease, when an asset is not delivered, is partially delivered, is delivered late or fails to conform to the lease, the lessee may demand a conforming asset from the supplier and seek such other remedies as are provided by law. Transfer of rights and duties 18. (1) The rights of a lessor under a financial lease may be transferred without the consent of a lessee. (2) A lessor and lessee may agree that a lessee shall not raise, against a transferee, any of its defences or rights of set-off against the lessor other than those arising from the incapacity of a lessee. (3) Nothing in this regulation shall affect a lessee’s ability to assert its rights against a lessor. (4) The duties of a lessor under a financial lease may be transferred only with the consent of a lessee, and the consent may not be unreasonably with￾held. (5) The rights and duties of the lessee under the lease may be trans￾ferred only with the consent of the lessor, which may not be unreasonably with￾held, and subject to the rights of third parties. (6) A lessee, a lessor and a third party, may consent to the transfer 146

in advance. (7) Any document containing the assignment or transfers of a fi￾nancial lease receivables or rights on an asset, shall be considered as admitted assets of an insurer carrying on short term specified insurance business, for the purposes of the Insurance Act of 1976 2 . Priority of liens 19. Except as otherwise provided by any other law - (a) a creditor of a lessee and a holder of any interest in land or per￾sonal property to which an asset becomes affixed, shall respect and be subordinated to the rights and remedies of the parties to a lease and cannot impair any interest arising under the lease; (b) a creditor of a lessor shall respect and be subordinated to the rights and remedies of the parties to a lease, and in particular shall respect the undisturbed possession of the asset by a lessee, if the lessee is complying with its obligations under the finance lease; (c) the Commissioner shall determine the formalities by which a creditor of a lessor assumes a claim position in connection with the right and remedies of the parties to the lease; (d) in the case of insolvency, re-organisation or liquidation of a lessee, the following rules shall apply: (i) the lessee, debtor in possession, or trustee under liqui￾dation, may reject an asset on the grounds of the evi￾dence that the asset is not necessary for the continua￾tion of the business of the lessee; (ii) where the lessee, debtor in possession or the trustee under liquidation rejects an asset under paragraph(i) the lessee, debtor in possession or the trustee under liquida￾tion shall immediately return the asset to a lessor in the same conditions as the asset was received except for fair wear and tear; 147

(iii) where the lessee or debtor in possession, or the trustee fails to reject a lease of the asset, then the rentals shall be payable as priority operating expenses while the busi￾ness is under receivership or pending liquidation; and (iv) if the lessee or debtor in possession, or the trustee under liquidation fails to pay the rentals when due, the lessor is entitled to repossess the asset and dispose of the asset as set out under these regulations; (e) nothing in the assignment of a lease shall impair the right to undisturbed possession of a lessee, and/or increase the amount of the lessee’s obligations under the lease, except in cases of de￾fault by lessee; (f) in the case of insolvency, re-organisation or liquidation of a lessor: (i) the lessor in possession of a financial lease or the trustee shall keep the asset free of any lien; (ii) a creditor of the lessor may be paid at an equal rate and pace, according to the legal priority orders, and by means of an assignment of a lease; and (g) all assignees of the lessor in good title shall respect the right of the lessee to keep the asset if the lessee complies with all its ob￾ligations under the lease. Warranty of undisturbed possession 20. (1) A lessor shall warrant that the lessee undisturbed possession from a person who has a superior title or right or who claims a superior title or right and acts under the authority of a court, where such title, right or claim de￾rives from a negligent or intentional act or omission of the lessor. (2) A lessee who furnishes specifications to a lessor or a supplier shall not hold the lessor or supplier liable against any claim of infringement that arises out of compliance with the specifications. 148

(3) Except as otherwise provided by these regulations, the sole rem￾edy for a disturbance of the undisturbed possession of the lessee is an action for damages against the lessor. (4) The lessee shall not have the right to file for an interdict or any other claim other than for damages. Default or failure to perform a duty 21. (1) The parties may agree to the events that constitute a default or otherwise give rise to the rights and remedies specified in the law and described in subregulation (2). (2) In the absence of an agreement, default occurs when one party fails to perform a duty arising under the financial lease or these regulations. Notice of default 22. (1) An aggrieved party shall give a defaulting party notice of de￾fault, notice of enforcement, notice of termination and a reasonable opportunity to cure the default. (2) The aggrieved party may give notice - (a) by means of filing an affidavit that shall be made avail￾able to the Commissioner; or (b) by personal delivery, certified mail, facsimile or electronic mail. (3) The defaulting party may contest to the notice on the grounds of evidence of full compliance which shall also be filed in the registration system. Damages for default 23. Upon default, the aggrieved party is entitled to recover such damages as will, exclusively or in combination with other remedies provided by the law or the financial lease, place the aggrieved party in a position in which it would have been had the agreement been performed in accordance with its terms. 149

Liquidated damages 24. (1) When a financial lease provides that a defaulting party is to pay to the aggrieved party, a specified sum or a sum computed in a specified man￾ner for such default, the aggrieved party is entitled to such sum. (2) The sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the default. (3) The court shall, in awarding damages for default, take into ac￾count subregulations (1) and (2) and the court shall ensure that liquidated dam￾ages are not made effective for an amount which is grossly excessive. (4) Where the court finds a violation to the restrictions set out in subregulations (1) and (2), the Commissioner may impose, to the party that ben￾efitted from a grossly excessive amount of damages, a compensatory fine for an amount equal to the excess of damages. Termination 25. (1) A financial lease may be terminated by operation of law, by op￾eration of the default of the supplier to deliver the asset in good condition, by agreement of the parties or by an aggrieved party upon fundamental default by a lessee or a lessor. (2) After an asset subject to a financial lease has been delivered to and accepted by a lessee, the lessee in a financial lease may not terminate the fi￾nancial lease upon fundamental default by a lessor or the supplier but is entitled to such other remedies as are provided by the agreement of the parties and by law. (3) In the event of a fundamental default by a lessor in respect of the warranty of undisturbed possession referred to in these regulations, the les￾see in a financial lease may terminate the financial lease. (4) Upon termination, all duties under a financial lease that are ex￾ecutory on both sides, except for duties intended to take effect upon termina￾tion, are discharged but any right based on prior default or performance survives. 150

Possession and disposition at end or termination of possession 26. (1) After a financial lease comes to an end or is terminated, a lessor has the right to take possession of an asset and a right to dispose of the asset. (2) In the event that a lessor has filed an affidavit of default and the affidavit is not contested, then the lessor may take possession of the asset with￾out resorting to judicial process, and can immediately dispose of the asset. (3) No claim or injunction to limit these rights shall be admissible by any court of law. (4) A lessor shall have an absolute right to dispose of an asset with￾out prejudice and without delays. (5) In the case where a lessor has taken possession of an asset with a clerk of court, or if the lessor failed to comply with the obligation to give no￾tice in conformity with these regulations, including but not limited to when the lessor has not filed the affidavit of default, then a lessee shall be entitled to dam￾ages. (6) The court shall ponder the amount of damages in equity. (7) In the event that the lessee has contested an affidavit of default, a lessor shall seek the intervention of a court of law to take possession of the asset. (8) The court shall decide whether to authorise the lessor to take possession of the asset in a term not exceeding of thirty days following the date of the lessor filing the claim. PART III - FINANCIAL LEASING COMPANY Restriction on scope of business of financial leasing company 27. (1) The scope of the business of a leasing company shall be re￾stricted to financial lease, both in the modalities of capital and operating leasing. (2) A leasing company shall not be entitled to accept demand or fixed period deposits from the general public. 151

Supervision of leasing company 28. The objectives of the supervision to leasing companies by the Commis￾sioner shall be to - (a) expand financial leasing, ensuring the performance of solid and sustainable professional providers; (b) promote International Best Business and Corporate Governance Practices appropriate to the financial leasing business and taking into account the degree of development of the financial leasing environment conditions in Lesotho; (c) evaluate risks assumed by such financial leasing companies and their risk management capabilities; (d) provide transparency serving as conduit for information to the capital markets; (e) suggest prudential metrics to make sure that a financial leasing company follows parameters aimed for the soundness of their practices and indicators; (f) provide for equitable treatment for all stakeholders involved in the financial leasing business, namely customers, vendors, lenders or depositors and shareholders; (g) ensure ethical and legal management of funds, preventing money laundering and financing of terrorism, and related corrupt ac￾tivities; (h) ensure prompt and orderly exit of failed lessors; and (i) continuously require financial leasing companies to maintain sustainable best practices so that the supervision of the Com￾missioner may be lifted as it becomes appropriate. Licensing of financial leasing company 29. (1) In this regulation, “permanent licence” means the permanent 152

uthorisation to conduct a financial leasing business on a regular basis issued under this regulation. (2) A leasing company shall be licenced as a non-deposit taking in￾stitution under the Act. (3) Pursuant to section 6 of the Act, no person may engage in a fi￾nancial leasing business unless the person has a licence issued by the Commis￾sioner, in accordance with the Act and the guidelines set out in subregulation (4). (4) Notwithstanding subregulation(2), the Commissioner may grant a provisional licence to a company already engaged in a financial leasing busi￾ness, if the company assumes the commitment to comply with the provisions of subregulations (5) to (10) within a term not exceeding 24 months from the date of the issuance of the provisional licence. (5) The provisional licence shall become a permanent licence once the provisional licence holder complies with the requirements set out by the Commissioner for a permanent licence under subregulation (6). (6) The Commissioner shall, before granting the provisional licence, verify - (a) the solvency and trustworthiness of subscribers and shareholders; (b) that a director or an officer of a financial leasing com￾pany, in exercising the powers and discharging the duties of his office shall be a fit and a proper person as speci￾fied in section 44 of the Act. (c) the adequacy of its capital structure; (d) the convenience and needs of the community it intends to serve; (e) the prospects for profitable operation; (f) the compliance of the licensee in providing continuous 153

financial leasing education to all its personnel in at least two annual training courses conducted by certified consultants and trainers in Lesotho, participation in international seminars, or certified e-learning courses; (g) the ability of the applicant to comply with the require￾ments of these regulations and the Act, and to conduct business in a sound manner. (7) An application for a permanent licence shall be made in writing and shall include - (a) an applicant’s proposed business classification code articles of incorporation; (b) a statement of the address of the head office, location of the principal and other places where it proposes to do business and, in the case of a mobile agency, the area to be served; (c) the name and address of every subscriber, shareholder, board directors, Chief Executive Officer and any officer directly reporting to the Chief Executive Officer; (d) information for purposes of assessing solvency and trustworthiness of each shareholder with a significant interest; (e) a sworn affidavit of each shareholder indicating that the shareholder has the solvency required to support the commitments assumed under the corporation by-laws, articles of incorporation and all other corporate governance documents; (f) a sworn commitment for undertaking continuous educa￾tion in the leasing and financial business, participating in seminars, events, or e-learning courses about leasing and financing; (g) such financial data, business plans and other documents 154

and information as the Commissioner may require in order to conduct the investigation during review of the application; and (h) a business plan, indicating the selected business model, resources required, corporate governance, business man￾agement and employees continuous education plans, internal controls and risk management processes. (8) An applicant shall make a presentation in person about their business plan to the Commissioner and be prepared to answer all questions put forward by the Commissioner. (9) The Commissioner shall undertake the investigation and verifi￾cation provided in the Act, as follows: (a) the completeness and validity of the documents submitted; (b) the solvency and trustworthiness of subscribers and shareholders; (c) that a director or an officer of a leasing company, in exercising the powers and discharging the duties of his office is a fit and a proper person as specified in section 44 of the Act. (d) the adequacy of its capital structure; (e) the convenience and needs of the community it intends to serve; (f) the prospects for profitable operation; and (g) the ability of the applicant to comply with the require￾ments of these regulations and the Act and to conduct business in a sound manner. (10) In ensuring and maintaining compliance with these regulations and the Act, the Commissioner shall focus on the following: 155

(a) the extent to which the intended credit policies, proce￾dures and internal controls of the applicant are designed to promote sound financing of economic activities in un￾derserved communities; (b) the extent to which the intended training and employ￾ment programmes of the applicant are aimed at promo￾ting professionalism in the financial sector; and (c) such other matters as the Commissioner may think nec￾essary and appropriate for carrying out the objectives of these Guidelines and the Act. (11) The Commissioner may, within ninety days from the date of sub￾mission of the application, grant or refuse the licence. (12) In case of a refusal, the Commissioner shall provide the applicant with a written explanation of the grounds upon which the refusal is based. Special licencing requirements for banks to engage in financial leasing 30. (1) The Commissioner shall keep track of all capital and operating leasing portfolios, benchmark them and continuously evaluate their perform￾ance. (2) A bank which intends to open a financial leasing division shall apply, in writing, to the Commissioner for a financial lease licence. (3) The application for approval shall be accompanied by a business plan, indicating the selected business model, resources required, corporate gov￾ernance, business management and employees continuous education plans, in￾ternal controls and risk management processes. (4) The bank seeking approval shall be required to make a presen￾tation to the Commissioner on its business plan. (5) Where the Commissioner approves of an application made under subregulation (4), the Commissioner shall grant the bank with a financial lease licence within thirty days after the date of submission of the application. 156

(6) In the case of a refusal, the Commissioner shall issue the bank with a written explanation of the grounds upon which the refusal is based, in which case the bank may re-apply for an authorisation to amend the terms of the business plan as required. Capital requirements 31. (1) Pursuant to section 23 of the Act, the Commissioner hereby de￾termines that a financial leasing company is subject to different capital require￾ments from that of a bank, and therefore, a financial leasing company shall - (a) commence operations with and maintain at all times a minimum of core capital of not less than 5 million Mal￾oti or such other amount as the Commissioner may pre￾scribe by order published in the Gazette; (b) at all times maintain core capital of not less than 10% of its total risk-weighted assets and off balance sheet exposure; and (c) at all times maintain total capital of not less than 12% of its total risk weighted assets and off balance sheet exposure. (2) In determining risk weighted assets, financial lease receivables shall be allocated a weight factor of 50%. Risks management 32. (1) A financial leasing company shall design, adopt and put in place systems and processes addressed to identify, manage and mitigate risks. (2) A financial leasing company shall identify, measure, control and monitor all risks involved in a financial lease service. (3) The following categories of risk shall follow the best practices of risk management - (a) credit risks; 157

(b) residual risks; (c) liquidity risks; (d) market risks; (e) operational risks; (f) legal risks; (g) reputational risks; (h) strategic risks; and (i) any other risk that the Commissioner may determine. Credit risks management 33. (1) In this regulation,“probability of default” means the likelihood that a financial lease will not be repaid and will fall into default. (2) A financial leasing company shall have in place - (a) a methodology to assess, evaluate and measure their credit risk exposures; (b) a billing and collection processes; and (c) credit surveillance and delinquency management systems. (3) The methodology in place shall apply the three basic universal components of indication for credit risk - (a) probability of default; (b) loss given default; and (c) exposure at default; 158

(4) A financial leasing company shall calculate a probability of de￾fault probability of default for each lessee, pursuant to internal processes and metrics adopted by the financial leasing company that shall be consistent with the guidelines issued by the Commissioner. (5) The information about credit history of the prospective lessee and nature of the investment shall all be taken into account to calculate the PD figures. (6) A leasing company shall put in place processes to gather such information and convert them into a probability of default. (7) The methodology for gathering credit history that shall be in place, before the establishment of credit information infrastructure, should at least assume the best available information about. Systems and processes to evaluate probability of default 34. (1) A financial leasing company shall design and apply systems and processes to evaluate the probability of default, which shall, at least, address the following data - (a) cash flow generation by the applicant in the business concerned where the leased asset should be incorpo￾rated; (b) expected cash flow generation of the new leased asset; (c) vulnerabilities of the cash flow to certain specific risks factors among others, dramatic fluctuations in com￾modities prices, government price controls or devalua￾tion; and (d) collaterals valuation, including fixed, free of liens assets, and the new leased asset. (2) The Commissioner may require a supplier to provide such ap￾plicable information as may be subject to the Data Protection Act of 2012 3 . (3) A financial leasing company shall include a written statement 159

made by a credit bureau concerning the assessment on the character of the ap￾plicant, and the grounds for such judgment, which should be based on personal interviews, third party references and visits to the applicant’s premises. Defaults 35. (1) In this regulation, “loss given default” means the magnitude of likely loss on or a percentage of the exposure; and “exposure at default” means the amount actually at risk in the event of a default. (2) In a lease, exposure at default shall be the difference between the total balance due by a lessee, less the net value of realisation of the underly￾ing equipment or collateral, less net worth of the credit applicant or obligor. (3) An effective maturity of probability of default, loss given de￾fault and exposure at default shall be estimated during a timeframe equal to the total maturity of the financial lease term. (4) A financial leasing company shall, during the term of a finan￾cial lease, track payments and defaults records within its portfolio, and shall have in place processes and systems to - (a) identify delinquent accounts; (b) adopt a credit surveillance process, assessing the causal factors of each delinquency and determining actions to collect, restructure or normalise each account; (c) undertake a delinquency management strategy and exe￾cution consistent with the best practices. Residual risks management 36. (1) In this regulation, “residual risk” means the risk that contractual payments under a financial lease are insufficient to cover the amount of investment at risk by a lessor; 160

“evergreen clauses” means the contractual practice of deemed renewals of the term of the lease, unless otherwise indicated by a lessee; “third party arrangements” means essentially conditional obligations assumed by third parties to either purchase or repurchase the asset or buy-back arrangements, sale and lease back transactions entered into by asset vendors or distributors or to cover any deficiency in the net proceeds of the asset if such proceeds are not large enough to cover the amount of the residual risk exposure and includes but not limited to guarantees, repurchase agreements, put options, insurance. (2) A residual risk shall be covered by - (a) net proceeds of asset in secondary markets; (b) contractual or predictable renewals generating new contractual payments. (3) A financial lease company which assumes a residual risk in Lesotho shall have, in place, consistent information systems and processes that shall convince about their ability to conduct a short time repossession to sale to cash receipts out of the resale of a leased asset. (4) A financial lease company shall make provision for risk assess￾ment and coverage. (5) A financial lease company shall assess a third party credit risk in its metrics probability of default, loss given default and exposure at default. (6) A financial lease company shall have, in place, processes and systems to assess, evaluate and mitigate their residual risk exposure such as - (a) asset management internal department or an asset management outsourced solution; (b) information about residual risk exposures; and (c) contractual arrangements for tracking a leased asset, including but not limited to periodical inspections, maintenance agreements. 161

Liquidity risks management 37. (1) In this regulation, “amortisation” means writing off an intangible asset or investment over the pro￾jected life of the asset; and “liquidity risk” means a risk that a lessor may not be able to perform its current obligations due to insufficiency of its cash flow to pay liabilities unbalanced with its cash flow forecast; (2) A financial lease company shall mitigate a liquid risk, but if the debt markets do not offer alternatives to meet the needs of a leasing company in mitigating liquidity risks, then they shall be mitigated by the shareholders equity. (3) In order to mitigate the liquidity risk, a financial leasing com￾pany shall - (a) forecast all the cash flows arising from its portfolio, as well as the cash flows associated to the service of their debts and other liabilities; (b) calculate the average life of the portfolio and the average life of the liabilities by dividing the sum of all resulting outstanding balances by the original principal; or (c) determine net cash flows for future dates and needs aris￾ing to cover funding and liquidity in such dates just to keep the portfolio; (d) determine the tenures, interest rates and amortization schedules to negotiate a financial leasing company indebtedness, either with private funding sources or via issuance of notes, commercial papers, bonds or any other debt instrument feasible to be placed in the capital markets; (e) evaluate the gaps between the cash flows generated by the portfolio and the actual funding arrangements of such a leasing company and detect contingencies; and 162

(f) allocating enough liquid capital to cover detected contingencies. (4) In the event that Commissioner detects imminence of uncovered liquidity risk in a financial leasing company, it may impose one of the follow￾ing orders - (a) partial sale or syndication of existing portfolio in order to generate enough cash to match maturities; or (b) capital calls to company’s shareholders. (5) If the Commissioner does not apply any of the measures set out in subregulation (4), the Commissioner shall downgrade the risk rating of the corresponding leasing company. Market risks management 38. (1) In this regulation, “market risks” means the risks of losses in the value of certain financial assets or financial portfolios, due to - (a) interest rate fluctuations; (b) exchange rate fluctuations; (c) stock prices; or (d) commodities prices. (2) A financial leasing company shall be vulnerable to market risks only as far as interest rate fluctuations and exchange rate fluctuations are con￾cerned. (3) A financial leasing company shall manage markets risks by keeping them matched to its portfolio and its liabilities in terms of interest rates and exchange rates. (4) If some of the debt resources of a finance leasing company are 163

contracted with floating interest rates, the portfolio of the leasing company shall have the same amounts subject to floating rates. (5) If some of the debt resources of a financial leasing company are not contracted with floating interest rates as stated in subregulation (2), the fi￾nancial leasing company shall prove that they have hedged their exposure to in￾terest rates fluctuations, so that in such events, they can be covered against potential losses. (6) In similar terms, if the debt is contracted in foreign currencies, the corresponding exposure must be covered in the portfolio by exchange rate ad￾justment clauses, or in absence of such adjustments, the financial leasing com￾pany must have hedged its exposure to such fluctuations. (7) If any of the above mitigation processes is absent, the corre￾sponding financial leasing company shall build enough reserves, and adjust its second tier capital to cover market risks exposure or, the Commissioner shall downgrade the company in its risk ratings with an explanatory note to be pub￾lished on the website of the Central Bank of Lesotho. Operational risks management 39. (1) In this regulation,“operational risks” means the risks of losses due to - (a) internal errors by a lessor; (b) fraud; (c) inadequacy of processes; (d) inadequacy of systems; (e) inadequacy of employees, officers or people; (f) external events. (2) A leasing company shall have, in place, and continuously mon￾itor the execution of - 164

(a) internal audits (accounting and to all processes and systems); (b) continuous education for their employees. (3) If a financial leasing company does not have, in place, processes and systems that prevent operational risks, the Commissioner shall downgrade the company in the risk rating, and cause an explanatory note of the downgrade, to be published on the website of the Central Bank of Lesotho. Legal risks management 40. (1) In this regulation, “legal risks” means risks of losses arising from internal and external legal factors which may be materialised as follows - (a) a risk that a financial leasing contract and any other financial contract may not be consummated by legal reasons, due to interference or objections of counsel that prevent the completion of agreement; (b) a risk that a financial leasing contract and any other financial contract and all other financial contracts become non-enforceable due to deficiencies in the content of the contract; (c) a risk of lawsuits against the institution for lack of compliance with laws and regulations; (d) changes in the law. (2) A lessor shall have, in place, the following processes to prevent legal risks - (a) a strong counsel with authority to oversee all documents and situations affecting the lessor; and (b) a continuous legal education. 165

Reputational risks management 41. (1) In this regulation, “reputational risks” means the risks of losses resulting out of a negative percep￾tion of the public about the operations or activities of the lessor. (2) Reputational risks may lead to - (a) loss of customers or business; and (b) loss of funding sources. (3) A lessor shall have, in place, processes to manage and control the public relations of their business, and such processes shall entail having an internal department of public relations or an outsourced contractor providing such services. (4) Where a lessor fails to have the processes set out in subregula￾tion (3) in place, the Commissioner shall, in writing, order the lessor to comply. Strategic risks management 42. (1) In this regulation, unless the context otherwise requires, “strate￾gic risks” means the risks of losses associated with the loss of revenue opportu￾nities and or a deterioration of a lessor’s equity, due to - (a) adverse management decision or strategy; (b) inadequate or lack of execution of decision or strategy; (c) lack of reaction to changes in the business environment. (2) In the event that the Commissioner detects that such losses are resulting in a downward trend for a financial leasing company, the Commis￾sioner may require explanations from Chief Executive of the lessor, and ac￾cordingly rate the risk exposure of the leasing company. 166

PART IV - MEASURES FOR LEASING COMPANIES RISK MANAGEMENT Risks rating 43. (1) The Commissioner shall undertake a risk rating role in order to inform the market, the quality of risk management that a financial leasing com￾pany will be applying, in comparison to best practices of risk management. (2) A risk rating set out by the Commissioner under subregulation (1) may be challenged by a financial leasing company or third party through a short procedure as may be determined by the Commissioner. (3) A challenge to the risk ratings under subregulation (2) shall be well founded and it shall be supported by an international expert assessment that should convincingly override any risk ratings made by the Commissioner. (4) The financial leasing company aggrieved by the decision of the Commissioner under this regulation shall appeal against such a decision to the Tribunal in accordance with the section 76 of the Act. (5) The Commissioner shall design a rating scale to be compatible with other risk rating scales at international level. Preventive supervision 44. In addition to the risk ratings applicable under regulation 41, the fol￾lowing measures shall be applied by the Commissioner - (a) supervision focused on risk management; (b) review of financial information and other reports; (c) occasional random specific visits to lessors; (d) review of processes focusing on; (e) risk awareness; (f) risk mitigation strategies; 167

(g) processes; (h) implementation; (i) continuous supervision based upon information received. Transparency 45. (1) A financial leasing company shall report to the Commissioner on a monthly basis, the following financial information - (a) balance sheet; (b) profit and loss statements; (c) portfolio composition classified by PD range; (d) past due accounts and delinquency; (e) inventory of assets repossessed or returned; (f) funding information: terms and conditions of borrowing facilities. (2) In the event that a financial leasing company does not have the electronic infrastructure to transmit its financial statements via the internet, it shall apply to the Commissioner for a special procedure for transmittal of infor￾mation. (3) The lack of electronic infrastructure shall be taken into account to downgrade the risk rating of such a leasing company on the grounds of greater exposure to operational risks. (4) A financial leasing company shall prepare and submit a report to Commissioner, quarterly and electronically, their following financial informa￾tion - (a) balance sheet; (b) profit and loss statement; 168

(c) cash flow statement; (d) footnotes to all financial statements; (e) portfolio composition by probability of default range; (f) management report; and (g) auditor opinion. (5) The Commissioner shall validate, in terms of its consistency and accuracy, the information submitted to it in the report, and once validated cause it to be published on the website of the Central Bank of Lesotho. (6) A financial leasing company shall, in addition to its submittal of its Annual Report to the Central Bank and the corresponding publication on the website of the Central Bank of Lesotho, publish its Annual Report on its web￾site. Fair business practices 46. (1) A financial leasing company shall comply with the rules of fair competition and be accountable for their fair practices. (2) Without prejudice of the role of any other competition law au￾thority, the Commissioner shall undertake the following functions in connection with fair competition practices in the leasing market - (a) with respect to competition policies the Commissioner shall - (i) detect and prevent - (aa) abuse of dominant positions by any leas￾ing companies; (bb) predatory practices, i.e. practices ad￾dressed to expel out a competitor from the marketplace; 169

(ii) control and approve consolidations (mergers, acquisitions, portfolio purchases for over 75% of the assets of a single lessor); and (iii) control and prevent other practices contrary to free and fair competition; (b) with respect to customers’ and other stakeholders’ pro￾tection, the Commissioner shall - (i) open an electronic and a physical window for complaints against lessor’s abusive practices; (ii) give a lessor the opportunity to explain and amend errors or failures; and (iii) publish, on the website of the Central Bank of Lesotho, statistics of the number of complaints against all leasing companies. Liquidation of a failed financial leasing company 47. (1) When a financial leasing company fails, the following are at stake - (a) the repayment rights of its creditors or funding sources; (b) the possibility of lessees to keep undisturbed possession and to exercise purchase options, if the case; (c) payment to employees of their salaries, benefits and indemnities; (d) payment of taxes, duties and other government obligations; and (e) shareholder’s equity. (2) In the event that the risk ratings of a financial leasing company becomes lower than a threshold set out in the risk rating scale, it shall be an in￾170

dicator of an imminent failure of such a leasing company, and in such a case the Commissioner shall liquidate the company by selling its portfolio after under￾taking, among others, the following steps - (a) update and validation of portfolio information (amounts, probability of default ratings, loss given default and exposure at default metrics); (b) Initiate a competitive a bidding process inviting other lessors, banks and domestic and foreign financial institutions to bid; (c) dedicate a due diligence window for not more than 1 month; (d) evaluate bids; (e) adjudicate and transfer portfolio; (f) apply sales proceeds to pay indebtedness in legal order: (i) employees; (ii) taxes; (iii) creditors; (iv) liquidation expenses; (v) if anything left, to shareholders, subject to determination of their liability in the demise of the company. PART V - PENALTY Penalty 48. Subject to the provisions of Section 32 of the Act, the Commissioner may impose a fine to a lessor who breaches a provision of these regulations of up to two times the damages caused to the lessee, without prejudice of the rights 171

and remedies available to the lessee before the courts of Lesotho. DATED: DR. RET◊ELISITSOE MATLANYANE COMMISSIONER OF FINANCIAL INSTITUTIONS NOTE

1. Act No. 3 of 2012
2. Act No. 18 of 1976
3. Act No. 5 of 2012 Printed by the Government Printer, P.O. Box 268, Maseru 100 Lesotho 172