Capital Goods Finance Operational Modality Directives No. CGFB/10/2019

የኢትዮጵያ ብሔራዊ ባንክ NATIONAL BANK OF ETHIOPIA ADDIS ABABA

LICENSING AND SUPERVISION OF THE BUSINESS OF CAPITAL GOODS FINANCE COMPANIES

Capital Goods Finance Operational Modality Directives No. CGFB/10/2019

Whereas, there is a need to ensure that the operation of capital goods finance companies aligns with and supports the growth and development policy objectives of the Government;

Whereas, the main drive for allowing foreign nationals to invest in the capital goods finance sector and providing tax incentives including duty free privilege is to support the growth and development of small and medium enterprises (SMEs) and improve the manufacturing sector;

Whereas, it is important to promote market discipline and encourage participation of private investors in the capital goods finance sector by putting in place enabling legal framework,

Now, therefore, in accordance with the powers vested in it under article 18 (4) of Capital Goods Leasing Business Proclamation No. 103/1998 as amended by article 6 of the Capital Goods Leasing Business (Amendment) Proclamation No.807/2013, the National Bank has issued these directives.

1. Short Title

These directives may be cited as “Capital Goods Finance Operational Modality Directives No. CGFB/10/2019”.

2. Definitions

For the purpose of these directives, unless the context requires otherwise:

2.1 “company” means a capital goods finance company licensed by the National Bank;

2.2 “capital goods finance” includes financial lease and hire-purchase;

2.3 “capital goods finance portfolio” means the sum of outstanding hire purchase receivables (net investment in hire purchase) and financial lease assets extended to lessees.

2.4 “foreign company” means a capital goods finance company licensed by the National Bank wherein the shares are partly or wholly owned by foreign nationals or organizations fully or partially owned by foreign nationals;

2.5 “large business” means an enterprise or business that does not fall under the definition of small and medium enterprise as provided under article 2.9 of this directives and has employees greater than 100 and/or total capital exceeding Birr 20 million (Birr twenty million).

2.6 “lessee” means a person who, under a lease agreement, obtains capital goods from a lessor and has the right to use the capital goods, against payment of rent for an agreed period of time;

2.7 “manufacturing sector” means a mechanical, physical, or chemical conversion of a raw material, substance, or component by using equipment, machinery, or labor into final or intermediate goods that worth a better value;

2.8 “National Bank” means the National Bank of Ethiopia;

2.9 “small and medium enterprise” means an enterprise that operates with 6 (six) to 100 (hundred) employees including the owner, his/her family members and other employees and has a total capital ranging from Birr 500 thousand (Birr five hundred thousand) to Br 20 million (Birr twenty million).

3. Lease Interest Rate :

3.1 The lease interest rate on capital goods finance provided to lessees shall be freely determined by each company.

3.2 The Board of Directors of each company shall set in writing lease interest rates.

3.3 The lease interest rates set by the Board of Directors of each company shall be based upon explicit and clear criteria to be set in writing.

3.4 The lease interest rates set by the Board of Directors of a company and the criteria upon which they are based, as well as any subsequent changes and the criteria upon which the changes are based shall be submitted to the National Bank of Ethiopia within five working days.

4. Target Market

4.1 Providing Leasing to Small and Medium Enterprises

4.1.1 A company that has been established by meeting the Birr 400,000,000 (Birr four hundred million) paid-up capital requirement to serve lessees having relatively higher capital goods finance need shall primarily focus and provide its capital goods finance service to Small and Medium Enterprises.

4.1.2 A minimum of sixty percent (60%) of the outstanding capital goods finance portfolio of a company shall constitute at any time a capital goods finance provided to Small and Medium Enterprises.

4.2 Providing Leasing to the Manufacturing Sector

4.2.1 A company that has been established by meeting the Birr 400,000,000 (Birr four hundred million) paid-up capital requirement to serve lessees having relatively higher capital goods finance need shall primarily focus and provide its capital goods finance service to enterprises/businesses engaged in the manufacturing sector.

4.2.2 A minimum of sixty five percent (65%) of the outstanding capital goods finance portfolio of a company shall constitute at any time a capital goods finance provided to the manufacturing sector.

5. Use of Foreign Currency for Financing Import of Capital Goods

A foreign company may directly access and use its foreign currency invested capital for the purpose of financing import of capital goods.

6. Prohibition

6.1 A foreign company shall not borrow funds from the domestic financial system in any manner.

6.2 Notwithstanding the provision stated above, a foreign company can borrow from foreign sources in accordance with National Bank Directives No. FXD/47/2017 issued for Amendments on External Loan and Suppliers Credit Directives No REL//05/2002.

7. Effective date

These directives shall enter into force as of the 25th day of February 2019.

Yinager Dessie (PhD) Governor