Demand in such financial product as leasing for entrepreneurs is preconditioned by the need for acquiring and upgrading fixed assets. Accordingly development of leasing activity depends on orientation of enterprises at the market and the wider economy on investments in key assets. Investments predetermine total economy growth and this gives an opportunity to create savings and use them in the future.
According to statistics data scopes of key assets in the economy of Kazakhstan at the end of 2010 were estimated by total amount of 26,4 trillion tenge, at the end of 2014 – already 47,0 trillion tenge, increment was 78% .
However, growth of key assets by book value was not so dynamic, for five years they grew only by 40%. It is worrisome year-on-year increase in wear factor of key assets: which in 2010 was less than one third (32,5%), and in 2014 almost a half (47,1%) of the cost of fixed assets .
It should be noticed that depreciation extents are not balanced by adequate extents of commissioning new fixed assets. During the recent three years coefficient of renewal was only decreasing and in 2014 was 10,2%, whereas cost of new fixed assets brought into operation in 2014 turned out to be less than the previous year index by 184 milliard tenge or 3,7% .
Thereby based on the listed above data it is clearly seen that enterprises need financing including leasing which may be used for renewal and extension of key assets.
Statistics analysis shows that bank loans remain the main source for debt financing for the entrepreneurs. Herewith it is not always beneficial for banks to grant long term credits and in particular loans for acquiring fixed assets, since the most frequently main financing source for the banks themselves are still deposits which people prefer not to open for long terms.
During 2010-2014 banks were increasing extents for crediting economy and entrepreneurial sector. For five years annual extents of loans for business purposes increased by 2,4 times from 3,3 trillion tenge up to 8,0 trillion tenge.
Loans for procuring key assets reached their maximum value in 2013 making 536 milliard tenge or 8,8% of the total aggregate of loans granted for business purposes. As statistics shows exactly this group of loans was the first suffering from reduction of liquid funds flow in second tier banks: in 2014 loans allocated for fixed assets reduced to 477 milliard tenge, and their share reduced to 5,9%.
If one compares extents of bank loans granted for key assets and scopes of bringing new key assets into operation it becomes obvious that banks may not meet the demand of the companies for long term financing to the fullest extent. In this situation the government has to take measures to cause the banks issuing long-term money through conditioned funding on account of National Fund or Republican Budget or subsidizing fee rate by loans for investment purposes. For instance during 2014-2015 period the State placed in banks 200 milliard tenge for crediting small and medium size business in the processing industry out of which at least 50% the banks should allocate for acquiring fixed assets by entrepreneurs. Subsidizing is carried out only by loans to be used not less than 70% for investment purposes. During 2010-2014 period such loans were issued to the total amount over 1 trillion tenge.
There is a need for developing alternative financing types for procuring key assets apart from crediting which will be beneficial for market players. Optimal decision is leasing – “type of investment activity using which a finance lessor undertakes to transfer the acquired title from the seller and conditioned by the agreement leasing subject to the lessee for a certain payment and under certain conditions for temporary possession and use for a long term for entrepreneurial purposes”.
Leasing has been rather long and widely used in the world practice. What are advantages and disadvantages of this financial instrument in comparison to alternative methods of acquiring key assets such as bank loan or purchase at the cost of own funds?
Leasing carries out a whole group of functions for companies: financial, production, sales, function of using tax relief and amortizing preferences.
Many manufacturers of equipment and transport vehicles as well as dealer networks themselves in order to increase sales volumes of their own products are concerned in developing leasing. For instance in Kazakhstan on the basis of the “AstanaMotors” company which is occupied in sales of motor transport and during recent years is entering the market of assembling its own cars leasing company “AstanaMotorsLeasing” is operating. At dealer networks, also companies are operating to sell cars by installment.
On the whole interest shown on the part of the buyers and the suppliers favors development of leasing market in Kazakhstan. According to data of studying the enterprises carrying out leasing activity accomplished by the Committee for statistics of the Ministry of National Economy of the Republic of Kazakhstan in 2014 total value of financial leasing agreements was 128,6 milliard tenge (695 million US dollars). Number of new deals made by leasing companies in 2014 exceeded 5600 transactions. This market shows annual growth thereby for the recent five years annual value of agreements increased by 2,67 times, the number of agreements – by 2,73 times (see the Figure 1).
Figure 1 - Number and value of financial leasing agreements by years
In the structure of the market majority share by leasing subject is taken by sectors financed by state owned leasing companies. First of all it is agricultural machinery and cattle, machine building and metallurgical equipment as well as medical devices. Thus, the share of other machines and equipment in 2014 was 83% of the total volume of deals increasing by 3 percentage points (p.p.). Private leasing companies more frequently compete in sectors of motor transport and construction machinery which although have a small share in comparison to industry branches financed by state owned companies but are key figurants for the market, share of motor transport n 2014 was 15%, which exceeds the last year figure by 3 percentage points (see the Figure 2).
Figure 2 – Distribution of value of financial leasing agreements by leasing subject
The most attractive industries were agriculture, forestry and fishing industry - 58% of the total value of financial leasing agreements, processing industry - 11%, transport and warehousing - 10%, information and communication - 7%, health care and social services - 3% (see the Figure 3).
Figure 3 – Distribution of value of financial leasing agreements by economy sectors
In 2014 the most active were leasing organizations in Astana, Almaty cities and Akmola region , the value of leasing agreements of which was accordingly 67,4%, 23,1% and 7,3% in the republic-wide volume (see the Figure 4).
Figure 4 - Distribution of value of financial leasing agreements by economy sectors
Leasing is predominately a source for providing long term financing for entrepreneurs to procure fixed assets. According to data for 2014 year 64% of funds by leasing were attracted for a period over 6 years, 36% - from 3 to 6 years (see the Figure 5).
Figure 5 - Distribution of value of financial leasing agreements by economy sectors
Remaining the source of relatively inexpensive financing 2012 for the recent years financial leasing becomes more expensive. During 2013-2014 period 75% of agreements were signed by interest rate from 10% to 14%, less than 20% - by interest rate up to 10% (see the Figure 6).
Figure 6 - Distribution of financial leasing agreements by interest rates
Within the structure of new deals, a reduction of share occupied by small and medium size enterprises (SME) is noticed from 81% in 2013 to 73% in 2014. This is explained by loss in growth dynamics of the total amount of new deals by the largest player predominantly financing exactly this client category. Excluding state owned companies the SME share in the structure of new deal volume was 40%. For some players this segment is the key one however, on the whole market players show adequate flexibility and structure of deals from year to year may vary to a significant extent.
There are about a dozen of active players at the market though the most number of deals are made by state owned companies operating within the framework of programs for supporting business and social area through lease financing. Namely these three companies partially owned by the government: “BRK-Leasing”, “KazAgroFinance” and “KazMedTeh” by volumes of new business became leaders in 2014. Herewith state finance lessors are mainly operating in the sectors where activity of private leasing companies remains quite low. The task is to support certain economy sectors including use of leasing tools.
Absolute leader in the market is “KazAgroFinance”. As of the moment, this is the only company with large volumes of new leasing deals in the agriculture area. KAF share covers about 70% of new business in 2014 and 74% of aggregate current portfolio. According to the end of 2014 growth in KAF lease portfolio was about 30% comparing to the previous year.
“BRK-Leasing” provides business support within the framework of the program “Operational efficiency - 2020”; the company is focused on investing in large scale projects which conform to strategy of accelerated industrial and innovative development of the country. Herewith priority is given to manufacturing industry, projects in the area of production and transport infrastructure.
“BRK-Leasing” in many ways ensures representation of its industry segment in the structure of leasing market in particular sector of machine building and metallurgical equipment. During the last year, the company significantly increased the volume of new business becoming one of the key drivers at the market. However, a reduction in portfolio was noticed.
“KazMedTeh” finances purchase of medical equipment by hospitals. This segment of leasing market is still underdeveloped by other players. Increase in lease portfolio of the company in 2014 was 70% after double up growth in 2013 — this is partly linked to the fact that the company has been operating at the market since relatively recently.
In addition to operation of the mentioned companies the Government of Kazakhstan encourages development of financial leasing and increasing its accessibility within the framework of Integrated Program business support and development “Road map of business 2020” through using a tool for subsidizing fee rate as well as through “Damu Entrepreneurship Fund” which places financial assets in private leasing companies for further financing of SME subjects on preferable terms. As of August 2015 subsidizing covered 227 leasing agreements with estimated value 11,6 milliard tenge (62 million US dollars). Using assets allocated by “Damu” Fund 294 enterprises were financed to the total amount of 8,1 milliard tenge (44 million US dollars).
Therefore, leasing due to its advantages is increasing its presence at the market of financial services in Kazakhstan. Finance lessors are increasing volumes of financed deals whereas entrepreneurs are more often requesting leasing at procuring fixed assets. Increase of deterioration coefficient of key assets shall encourage entrepreneurs as well as the Government to use this financial instrument in a wider extent.