Regulation of Capital Goods Lease Financing Business in Ethiopia: Challenges and Prospects
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Date
2025-03-01
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Addis Ababa University
Abstract
Lack of access to finance is a significant challenge for SMEs, micro-enterprises, and new firms in Ethiopia. In today’s Ethiopia, banks often prefer to lend to larger, well-established businesses that have a profitable track record and can offer stronger security. Lease financing has strong development impact and crucial role in bridging this gap and expanding financial accessibility. Leasing provides an alternative financing mechanism that enables business to use assets without outright ownership, thereby overcoming the limitations of conventional bank loans, which often prioritize larger, well-established business with strong credit histories. In countries like Ethiopia, where lease financing is still an emerging concept, establishing a well-defined legal, regulatory, institutional, and tax framework is essential to maximize its benefits and ensure its effective implementation. This research aims to analyze the regulatory framework governing capital goods lease financing business in Ethiopia, identify the key regulatory challenges, and explore the potential reforms to enhance the sector’s effectiveness and growth. To properly address the questions, both doctrinal and non-doctrinal research methods have been employed. The findings reveal that there are significant regulatory challenges that hinder the sector’s growth. These include unclear legal position regarding the conduct of capital goods lease financing business through interest free leasing modality, prohibition of local commercial banks in the leasing sector, excessive regulation, lack of clear institutional enforcement of registering capital goods and capital goods lease agreement, lack of clarity on interpretation of duty free tax incentives provided by law, uncertainty and unpredictability of the regulatory environment regarding lease financing, and lack of organized and centralized training program to stakeholders and employees of capital good lease financing companies. The finding also reveal that while regulatory and legal barriers hinder the growth of lease financing, recent government initiatives, such as the move to enact a comprehensive Capital Goods Financing Business Proclamation and the formation of a National Leasing Association, represent significant progress. These measures indicate a strong commitment to addressing existing challenges, fostering a more structured leasing market, and promoting financial accessibility. The study underscores the importance of these developments and recommends further regulatory enhancements to ensure the sector’s sustainable growth
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Keywords
Leasing, Capital Goods Finance, Regulation, Proclamation, Directive, NBE