Volume 1, Issue 2

June 2006

Newsletter of the Tanzania Bankers Association

...the banking community at your service

Inside this issue:

Vice-Ch a ir m a n s St a t em en t
Leasing in Tanzania
Accounting for Leasing in Tanzania

Tanzania Bankers
Association

TBA Newsletter

Page 2

A word from the

Editor:

Inside this issue:

ear Readers,

With much pleasure I am inviting you to read and enjoy our

second issue.
The Tanzania Bankers Association
would like to express its gratitude to those who
took an initiative to read our first issue. It is our
hope that these series of our newsletter are serving the intended purpose.

Page 3:

Vice Chairman s Message on

Leasing

Page 4:

Arden Kit omari: Get t he Fact s

Page 5:

TBA Members news

Page 9:

Moyo V. Ndonde: The Tanzania

Leasing Project: Developing
Leasing as a Financial Product

Page 10:

Cover Story:

This issue comes with a theme that is intended to

enlighten readers and the general public of the
potential finance leasing as a product to be offered by Banks, Members of the Tanzania Bankers
Association.
It s high t ime now Tanzanian ent repreneurs and
banks venture into other financial products and
services that would speed up the economy and
ultimately contribute towards poverty reduction
in t his era of new vigour, pace and st rengt h (ari
mpya, nguvu mpya na kasi mpya) .
It is a challenge to both the Government and
Bankers Association to take up this agenda and
implement a framework that would allow leasing
to flourish in the economy.
On my own behalf, I sincerely commend International Finance Corporation (IFC) and particularly
its leasing project, Tanzania Leasing Project
(TANZALEP) for its efforts to advocate for an
enabling environment for Leasing in Tanzania.

I thank you all and enjoy reading!!!

Felix Kibodya: Finance Leasing in

Tanzania, another opportunity to
Tanzania s entrepreneurs and
banks
Page 12:

Joass O. Lyatuu: Accounting for

Leasing

Page 15:

TBA Public Lecture pictorial

coverage

Page 16:

Need a laugh?, t here we go

Edit or ial Boar d:

Pascal L. Kamuzora

TBA Secretariat

Chairman

Arden Kitomari

National Bank of Commerce

Member

Twisa Mwambona

Azania Bancorp

Member

Juanita Mramba

Standard Chartered Bank

Member

Wasia Mushi

Eurafrican Bank

Member

Tuli Msirikale

CRDB Bank

Member

Christine Manyenye

Exim Bank

Member

Tuse M. Joune

TBA Secretariat

Editor

Page 3

Volume 1, Issue 2

TBA Vice Chair man s Message on Leasing

Mr. Charles G. Singili

Vice Chairman of the Tanzania Bankers Association &
Chief Executive Officer of Azania Bancorp.

et me t ake t his page t o invit e you t o read our second publicat ion
of Newslet t er. Previous readers hope you enj oyed . To our new
readers, our mission is t o ensure t hat t he banking sect or plays a more act ive role in t he quest for continued sustainable economic performance in the country.
This Newslet t er is disseminat ed as a means t o communicat e wit h st akeholders from all sect ors of t he
economy and t he general public. While t he general format of t he Let t er does not change very much,
this time we have chosen to pick a theme that will go with it. This is about Finance Leasing.
As an act ivit y and a product t hat is associat ed wit h economic empowerment and povert y reduct ion,
bankers in Tanzania have grown part icular int erest t o provide a variet y of forms of finance leasing as
product s in t heir services. Admit t edly, however t his int erest has been curt ailed by a number of framework fact ors which we have carefully select ed and asked expert s t o give insight s in t his quart er s
columns.
As you will note, there are three specialized articles, covering logically arranged topics from Developing
Leasing as a Financial Product which gives an idea of what are t he effort s done by t he Int ernat ional Finance Corporat ion (IFC) t hrough it s proj ect , Tanzania Leasing Proj ect (TANZALEP) in order t o facilit at e
an enabling environment for finance leasing in Tanzania; Legal point of view on Leasing and what should
be done t o creat e a bet t er Legal Framework for Leasing in Tanzania and t he last one is Account ing in
Leasing which gives a technical insight on how to manage accounting in Leasing.
It is ease t o sum t he key issues and t he suggest ed solut ions relat ing t o t his t heme as follows: There is
need t o est ablish an appropriat e leasing Framework; review t ax t o encourage leasing companies and
banks; and need to embark on capacity building on finance leasing.
On behalf of t he TBA Management we t hank you all for your t ime and cont ribut ion t o make t his
newsletter a success.

Charles G. Singili
Vice Chairman

PROFIT AFTER TAX & EXTRAORDINARY ITEMS

Mar. 2006

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Page 4
TBA Newsletter

Know the most profitable bank for the quarter ending March, 2006 By: Arden Kitomari, NBC

Page 5

Volume 1, Issue 2

News and announcement s: Compi l ed by Ar den Ki t oma r i , NBC

Standard Chartered rolls out new
initiative
In an endeavor to improve services to its customers, Standard Chartered Bank has rolled
out t he Ironman Init iat ive for it s Consumer
Banking staff. According to Juanita Mramba,
the Manager - Corporat e Affairs, Ironman is
a Groupwide initiative geared towards sensit izing t he bank s st aff t o put it s cust omers at
the heart of its business, thus increasing focus
on improving customer experience.

Tanzania Postal Bank opens branch at

Kijitonyama
Tanzania Postal Bank has opened an ultra
modern branch at the LAPF Millennium Tower
in Kijitonyama, Dar es Salaam. The branch
provides full banking services including a 24
hours Speed Cash ATM, Western Union Services, etc.

Bank donates 30 computers to Dar School

Eurafrican Bank has donated 30 computers
worth TZS 15 million to Kisutu Girls Secondary
School in Dar es Salaam. Speaking to the
school staff and students, the Eurafrican Bank
Marketing Manager, Wasia Mushi said the bank
has offered the computers as part of elevating
computer literacy rates amongst the students.

Barclays in USD 10 million credit deal

Issuance of long-term loans to local businesses
is currently hampered by lack of long-term deposits from customers, according to Barclays
Tanzania Managing Director, Karl Stumke. The
MD said his bank has been hesitant to issue
long-term loans not because it did not have
enough cash but because it was risky to use
the money invested in short-term deposits to
finance long-term loans. The official made the
remarks at a function whereby Barclays and
Proparco of France signed a USD 10 millioncredit arrangement that the latter will extend
to the bank. He said credit provided by the
French Development Institution would enable
the bank to start issuing long-term foreign
currency lending to businesses for capital
expenditure.

Postal Bank offers Western Union service on

Sundays
For t heir cust omers convenience, Tanzania
Postal Bank has decided to offer Western Union service even on Sundays starting early 2006
at Samora Avenue Customer Service Centre.
The Sunday business hours will be from 10:00
a.m. to 2:00 p.m

NMB leases Phoenix House in Dar, plans six new branches!

Th e Na t ion a l Micr ofin a n ce Ba n k h a s s ign ed a lon g-t er m lea s e a gr eem en t for
Ph oen ix Hou s e b u ild in g a t t h e ju n ct ion of Azik iwe a n d J a m h u r i S t r eet s in
Da r es S a la a m s cen t r a l b u s in es s d is t r ict . Th e b a n k p la n s t o u s e t h e r en ova t ed 5 ,5 0 0 s qu a r e m et er -office s p a ce b u ild in g a s t h e h u b of it s b a n k in g op er a t ion s in t h e cou n t r y a s it s Hea d Office a lon g S a m or a Aven u e h a s b ecom e
t oo s m a ll. NMB a ls o p la n s t o op en s ix n ew b r a n ch es in Mos h i, Ar u s h a ,
Mb eya , Ta n ga , Mwa n za a n d Da r es S a la a m . Th e b a n k will a ls o in t r od u ce s ever a l n ew p r od u ct s a n d cr ea t e 1 0 0 n ew job s , NMB Ch ief E xecu t ive Officer ,
Fr a n s Bos s e s a id a t th e s ign in g cer em on y. Th e NMB Ma n a gem en t is look in g
a t im p r ovin g s er vice levels for it s cu s t om er s a n d t o a d d n ew p r od u ct s in t h e
com in g yea r , h e s a id .

Got a
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inf o@
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.or g

Volume 1, Issue 2

Page 6

News and announcements

Stanbic launches Business Club
Stanbic Bank has renewed its pledge to support
SMEs to facilitate their effective contribution to
t he count ry s economy. St anbic s Act ing Managing Director, Rhett Groves made the pledge at a
ceremony t o launch t he bank s Business Club,
saying the institution had a major role on
growth and development of SMEs on the continent . This club is a cust omer - bank face-toface forum where stakeholders can air their
views about how we can assist in the success of
t heir business , t he MD said.
Barclays helps in malaria war
Barclays Bank has donated USD 15,000 to World
Vision Tanzania in support of malaria projects in
Shinyanga, it was announced. The cheque was
presented to World Vision Country Marketing
Director Richard Rugemalira by Barclays Corporate Director Saif Malik at a ceremony held at
the bank s Head Office in Dar es Salaam.

UBA to join BOT run SMEs credit scheme

Unit ed Bank of Africa will soon j oin t he Small and
Medium Ent erprises Credit Guarant ee Scheme in order t o facilit at e easier access of credit facilit ies for
SMEs in t he count ry. The UBA Chief Manager
(Business Banking), Japhet Makau, t old report ers in
Dar es Salaam recent ly t hat his bank was
dedicat ed t o support ing t he SMEs in t he t ransport , construction and import / export sectors.

CRDB announces a donation of

TZS 100 million to the University of
Dar es Salaam
CRDB has announced a donation of TZS
100 million to the University of Dar es
Salaam (UDSM) in support of the construction of a lecture hall for the Faculty
of Commerce and Management. The
UDSM Vice Chancellor, Professor
Matthew Luhanga, who was in attendance, signed a Memorandum of Understanding (MOU), with the CRDB Bank Authorities to that effect and in his vote of
thanks hailed the institution for the donation.

Stanchart to spend TZS 200m on

community activities
Standard Chartered Bank says it will
spend TZS 200 million on various community activities in some regions this
year. Speaking soon after handing over
10 computers and 3 printers worth
about TZS 7 million to Heritage English
Medium School. Sanjay Rughani, the
Bank s Executive Director of Finance
said the bank had chosen three areas of
community projects, which would receive its support, namely youth, health
and education.

CRDB donates books to Kihonda School in Morogoro

CRDB has donat ed t ext and supplement ary books, sport s t -shirt s and cash t o Uluguru Secondary School in Kihonda Ward, Morogoro. Apart from t he donat ion wort h TZS 4.5 million, t he
bank also donat ed TZS 500,000 in cash t o t he Secondary School
Regional const ruct ion
basket fund t o be used t o expand and rehabilit at e schools. The donat ion was handed over
t o it s Head Teacher Julie Ng at iwa during celebrat ions t o mark t he 10th Anniversary of
CRDB.

Page 7

Volume 1, Issue 2

News and announcements

NBC joins Stanchart in
anti-hunger drive

Stanbic Bank
donates TZS 2 million

Exim Bank accepts

St anbic Bank Tanzania has

donat ed TZS 2 million t o
Rungwe Development Trust
Fund (RDTF) for t he purchase
of desks. The donat ion was
made by St anbic s act ing
Managing Direct or Rhet t
Groves and was handed over
t o Rungwe East MP, Prof.
David Mwakyusa, who is also
t he Minist er of Healt h and
Social Welfare.

MasterCard
Exim Bank has int roduced
a Mast erCard Point of
Sale (POS) machine. The benefit s of
t h i s m ac h i n e i n c l u d e On l i n e
Authorisation, Instant Credit, Secured
Transact ion, No int ernat ional calls t o
be made, Saves Money, Generat es
more business.

NBC has j oined hands wit h St andard Chart ered in raising funds t o
alleviat e hunger caused by drought
in various part s of t he count ry. A
St andard Chart ered st at ement issued recent ly said t hat t he bank,
NBC and ot her organisat ions j oint ly
launched t he Okoa Maisha (save
lives campaign) recent ly whereby
St andard Chart ered opened an account t hrough which individuals
and companies could channel funds
for purchasing food aid.

Dear TBA Members,

Please feel free t o send
tuse@tanzaniabankers.org

NBC launches new VISA

card product
NBC has int roduced a new
product t hat would allow expansion of it s cust omer base
and boost local business. The
VISA point of sale will enable VISA card holders from
all over t he world t o purchase
product s and services from
t raders offering t he product
wit hout carrying cash. NBC s
Manager of Merchant Services,
Robert Mng anya, said t hat
t he new product is ideal for
businesses wit h client s using
VISA cards from local and
foreign banks.

news/ announcement s

regarding

your

bank

t o:

info@t anzaniabankers.org

CRDB Bank gives Mbeya school

TZS 5 million items

Azania Bancorp opens

branch in Kariakoo

CRDB bank has donat ed various it ems

valued at TZS 5 million t o Samora Machel Secondary School here. The items
were handed over t o t he Regional
Commissioner John Mwakipesile at a
funct ion t o mark t he bank s 10th Anniversary.

Azania Bancorp has opened a new

branch at Kariakoo business cent re
in Dar es Salaam t o enhance t he
services of it s small and medium
entrepreneurs in arguably the heart
of t he ent ire cit y s bust ing business. The Minist er for Finance,
Hon. Zakia Meghj i inaugurat ed t he
Azania Bancorp Kariakoo branch.

OR

Youth Bank applies for license

The Tanzania Yout h Bank (TYB) has formerly applied t o t he Bank of
Tanzania t o est ablish a non-bank financial inst it ut ion. TYB Chief Execut ive Officer, Dr. Salmin Ibrahim said t hat 10 founder members of t he
financial institution have set aside TZS 500m as capital.

No retrenchment at NMB CEO

The National Microfinance Bank (NMB) has pledged to retain its over 1,600 workforce and invest more
t han TZS 3 bn on st aff t raining and development , t he Bank s Chief .Execut ive Officer Frans Bosse has
said. We prefer t o incur more cost on t raining and st aff development t o creat e a commit t ed, efficient and highly product ive t eam, rat her t han ret renching , Frans Bosse said. He furt her said t hat NMB
was going to invest heavily in its infrastructure including putting up new software, introduce e-banking
and inst all ATM s.

Volume 1, Issue 2

Page 8

News and announcements

New arrangement for participation in Government Securities
The Bank of Tanzania has announced t he launch of a new
arrangement for part icipat ion
in Government Securit ies auct ions, which aims at broadening part icipat ion by direct invest ors, wit h effect from 15
March 2006. Under t his arrangement , t he mi ni mum
t hreshold for Direct Invest ors
in Treasury Bills / Bonds has
been lowered furt her from TZS
50 million to TZS 5 million.

CRDB to introduce ebanking

CRDB Bank will soon int roduce e-banking services
for it s client s, it has been
disclosed. Dubbed Int ernet Banking, t he online
service will enable cust omers anywhere access
service wit hout get t ing t o
t he banking hall via int ernet connect ed comput ers.
This was revealed by t he
bank s Business Support
Manager, Aboud Hussein
during a forum for CRDB
Bank s Corporat e and Inst it ut ional Client s, and
ot her st akeholders held in
Dar es Salaam recently.

CRDB to spend TZS 500m

on community projects
CRDB Bank will spend
more t han TZS 500 million
on Communit y based proj ect s t his year, t he management has disclosed.
CRDB Bank Managing Direct or, Dr. Charles Kimei
said t his would be implement ed as part of t he
bank s social responsibilit y. He made t he remarks
at
Chinangali Primary
School in Dodoma s Rural
Dist rict during a handing
over ceremony of a well
built by t he bank for t he
communit y. The bank also
donated sports wear.

ATTENTION!!!
Effective from the coming 3rd issue of TBA Newsletter,
t here will be a special column for readers review
notes of previous issues.
Feeling like sharing your views that will help in the
shaping of the Newsletter and its articles, please send
to: info@tanzaniabankers.org or
tuse@tanzaniabankers.org; Fax No. 2124492

Page 9

TBA Newsletter

Volume 1, Issue 2

Th e Ta n z a n i a Le a si n g Pr oj e ct : D e v e l op i n g Le a si n g a s a
Fi n a n ci a l Pr od u ct
By Moyo Viol et Ndonde, Legal Advisor/ Team Leader, IFC

Tanzania Leasing Proj ect (TANZALEP)

I. Introduction

Risk management/ reduction

The International Finance Corporation (IFC) with support of

the Swiss Government s competence centre for economic
cooperation (seco) is implementing a 2 & year project in
Tanzania to develop and support the growth of financial
leasing. The project, known as the Tanzania Leasing Project
( TANZALEP ) among other things, provides Technical Assistance and capacity building to the Government of Tanzania, in order for the Government to put in place appropriate
and enabling legal, regulatory and taxation environment for
financial leasing. Based on the Project s initial work and consultation, there is consensus that an enabling tax, legal and
regulatory framework is an essential pre requisite for leasing
development in Tanzania.

A leasing company/bank maintains legal ownership of the

leased asset, is able to exert greater control over the investment, can monitor assets more easily, and can apply specialized knowledge such as equipment specialization.

At this stage of the Project, and after extensive consultation with stakeholders, the
Project has submitted its proposals for appropriate leasing taxation and legal framework to the Ministry of Finance and Bank of
Tanzania, two government institutions to
which the Project is accountable. The Project has made available these recommendations to stakeholders, including commercial
and development banks that are already in
the leasing market, the technical committee
of the Tanzania Bankers Association, prospective leasing companies, institutional
investors, and various departments within
Government.
In addition to its work with Government, TANZALEP provides
leasing product /business development support to banks,
prospective leasing companies, equipment supply companies, institutional investors, and micro leasing companies. It
provides training and capacity building to professional associations, firms and regulators, and mobilizes domestic and
international investment for leasing.
The Project team is pleased that there is growing interest
amongst commercial and development banks, equipment
suppliers, and institutional investors to develop financial
leasing in Tanzania.

II. Why Financial Leasing?

IFC considers financial leasing an important product to further
capital investment, SME development, domestic production,
industrial diversification as well as infrastructure improvements, and hence overall economic growth of a country.
Leasing also helps to deepen financial markets. Leasing can
meet the objectives of various stakeholders in Tanzania,
including those of Government, enterprises, (whether large,
medium or small), equipment suppliers, commercial and
development banks, and independent leasing companies.
For Banks and leasing companies, financial leasing can meet
the following objectives, among others:

Product portfolio diversification

Leasing provides an opportunity to extend product lines and to
deepen company organizational structures. In some cases,
leasing may allow businesses to access both lease financing
and additional bank financing without increasing their collateralized debt.
Customer base expansion
Leasing can provide additional marketing channels for
financial services. Equipment suppliers can channel customers to leasing companies and banks. Banks can also
provide credit lines to independent leasing companies
once these are established.
Suitable means of financing SMEs
Due to reduced upfront costs, leasing frees up capital
for other business needs (i.e., meets enterprises cash
flow needs). Leasing enables companies to match income and expenditure, and can be tailor-made/ structured to suit the requirements of the lessee, unlike
other forms of finance.
III. The issues so far:
Developing appropriate Legal (Legislative) and Regulatory Framework
In recommending for a leasing legislative framework, in this
instance a leasing law , the Project intends that there should
be legal certainty for financial leasing operations. A law is
therefore proposed to provide legal certainty, and hence
encourage leasing investment, rather than deter operators
from the leasing market by providing unnecessary restrictions/burdens for leasing operations.
Legal certainty is necessary for leasing development, especially in order to mobilize and channel available financial
resources into leasing operations ( productive sectors ), and
to protect the interests of financiers, e.g. by providing clarity
on matters such as rights and obligations of parties and allocation of financial risk. Based on the Projects review of existing law and practice, as well as that of on-going and settled disputes in the judicial system, there is lack of clarity
and certainty for financial leasing under the existing framework.
Although there may be different means by which
to achieve legal certainty, TANZALEP believes
that the most efficient and effective way to provide legal certainty for financial leasing in
Tanzania is through enactment of a leasing law.
(Continued on page 13)

Page 10

Volume 1, Issue 2

Financial Leasing: another opportunity to Tanzania s

Entrepreneurs and Banks
Leasing:
Leasing is based on the fundamental concept that the leasing company does not
have to own an asset in order to enjoy
the benefit of it. A company can improve
its balance sheet and trade more profitably if its capital has not been locked-up in
fixed assets. The following are
the advantages of leasing:

Felix G. Kibodya
Legal Counsel NBC Limited

easing is a form of
Asset Based Finance
and which is one of the
products
offered
by
banks/ finance
houses.
Recent studies conducted
in Tanzania confirm that
the economy has developed an appetite for this
type of finance. Leasing
has direct connection to
economic growth as it
stimulates capital formation. By analogy, it is also
linked to the Government
initiative for poverty reduction or MKUKUTA.

Asset Leasing can be defined as a

contractual arrangement under
which, one party (lessor) in return
on agreed rent, uses a capital asset owned by another party
(lessee). The asset can be plant
and machinery, motor vehicle or
any other form of equipment. It is
the essence of the leasing contract
that, the equipment leased remains in the ownership of the lessor and, in this respect, leasing
differs from a Hire Purchase (HP)
Agreement.

It is the use not necessarily the

ownership that matters. For
instance, to carry fuel one does
not need to own a tanker; to
computerize a business one
may lease a hardware, etc.;
Leasing of assets leaves the company s working capital position
unimpaired; and
The lessor enjoys tax relief.
Types of Leasing:
There are two types of leasing contracts in
(ABF):
Finance Leases:
This is the common type of leases in which
banks are involved. It is a hybrid to a
traditional term-loan. It is the essence of
a finance lease that the lessor (Bank) has
no commercial interest in the transaction
other than as a supplier of finance. The
lessor pays for the equipment usually
directly to the supplier. There are three
parties to a finance lease namely, lessee
(enterprise), supplier of goods (seller) and
the
financier
(usually
a
... Leasing
bank).
Operating
Lease:
Manufacturer
and supplier of
goods can, as
a means of
developing a
market
for
their
equipment, undertake this type
of lease. This
type of lease is
not of interest
to bankers.

has direct
connection
to
economic
growth as it
stimulates
capital
formation.

The follow ing are the characteristics

of Finance Lease:

Lessor pays for the

equipment and retains ownership;
Rental paid by Lessee
will cover the capital costs of the
equipment, the lessor s expenses, interest and the
lessor s margin of profit;
There is a primary period
(usually up to 5 years) within
which the entire costs of the
lessor will be recovered.
The lessor ensures that the
primary period does not exceed the life of the asset.
This is the period of risk;
There will be a secondary and sometimes indefinite period at a nominal
rental where the lessor is not concerned with the servicing of the
equipment. He is interested in its
value or problems of obsolescence.
Ownership passes during the secondary
period and after the lessor decides to
dispose the equipment usually at
nominal value.
A typical Finance Lease Agreement
will include the following:
Schedule of the equipment
leased;

to be

Undertaking by the Lessee to pay when

due, the rent provided for in the
agreement;
Undertaking by the Lessee to keep the
equipment in good repair, to keep it
insured to its full replacement value
and to allow the Lessor access for
inspection of the equipment;
Provision of termination of the agreement in the event of default;
Provision that the equipment shall remain a movable property in the ownership of the Lessor, notwithstanding
that it may be affixed to any land or
building;

Page 11

TBA Newsletter

Indemnity in favour of the Lessor against any

claim by a third party arising out of the
condition or use of the equipment; and
Disputes resolution procedure.
Equipment to be registered in the name of
the Bank.
Security for the Finance
Lease:
The lender (Lessor) must
fully secure himself in a
finance lease against default by the borrower
(Lessee).
The collateral
cover must comply with
both, Bank of Tanzania
regulations on Credit Concentration and Other Exposure Limits as well as individual bank s Credit and
Provisioning Policy.
The
lease contract referred to
above will provide for the
collateral and must contain
specific covenants that empower the lessor to take
remedial measures immediately following default by
lessee in payment of rent .
Under
normal
circumstances, the equipment
itself is the primary form of
collateral.

Legal Audit:
If Tanzania banks intend to embark on
ABF; there will be no need for them to
secure a separate license from Bank of
Tanzania. Although financial leasing is
not specifically legislated in Tanzania,
the existing law antiquated as it is
is capable of accommodating leasing
but in a very limited form. The following is a list of the laws involved:

If Tanzania
banks
intend to
embark on
ABF; there
will be no
need for
them to
secure a

(i) Law of Contract Ordinance,

Cap.433 of 1961;
(ii) Sale of Goods Ordinance,
Cap. 214
(iii) Chattel Transfer Ordinance;
(iv) Companies Ordinance, Cap.
212;
(v) Banking and Financial Insti
tutions Act, 1991 and Regu
lations made thereunder.
(vi) Income Tax Act, 2004; and
(vii) Value Added Tax, 1998

separate

The most important aspects to

be considered in leasing are:

license

-Tax aspects; and

from Bank
of
Tanzania...

The follow ing is the form of security

used in a finance lease arrangement:
The equipment itself although there are financial risks attaching to the leasing. For,
once the equipment is installed in the Lessee s business and adopted to its use and if
subjected to minimum ware and tare, the
saleable value may be considerably less
than the purchase price. This is a factor to
be taken into account.
Chattel Transfer Instrument;
Debenture Instrument; and
Landed property or third party guarantees
supported by tangible security. (Though
this approach should be regarded as exception to the general rule).

-Ownership of equipment by a
bank/Lessor
In a finance lease, property in
the goods remains with the lessor during the tenure of the
lease. It is imperative therefore for
Tanzania banks - through the Tanzania
Bankers Association - to seek for dispensation from the Bank of Tanzania
on this aspect. The recent review of
the banking Act could have a positive
impact on this aspect but we must wait
until the final Act Supplement is published so that we can ascertain the
accuracy of this proposition.

The most important

aspect
though is the tax relief usually
associated with finance lease.
Unfortunately, the current legal set up
does not provide for this important
incentive. The Tanzania Leasing Project
(TANZALEP), which is conducting study
under the auspices of the IFC/ World
Bank on possibility of introducing finance lease in Tanzania, has identified
taxation as the major stumbling block.

TANZALEP
has proposed
targeted
amendment
to the Income
Tax
Act,
Stamp Duty
Act and the VAT Act. The gist
of the proposals is to eliminate
discrimination of leases to normal bank loans in relation to
provision for bad loans and
more important to provide for
fiscal incentives to leases.
Again, there must be in place a
proper legal framework to cater for finance leases in terms
of defining the rights and the
duties of the parties to the
transaction, registration and
enforcement of those rights
especially in the event of default. The on going debate is
whether Tanzania needs a
stand alone finance lease law
or, the current laws should be
modified to accommodate finance lease contracts. Nonetheless, this debate does not
affect the underlying requirement for a proper legal framework.
I nherent Risks and Recovery
Process:
Like any product, there are inherent risks in the business for
which
recovery
process
through legal measures cannot
be avoided. On this score,
banks will have to assess the
magnitude of the risks involved
as compared to the return on
investment. In the event of
default by the Lessee under
leasing, a bank is capable of
taking possession of the equipment by exercising its rights,
which are derived essentially
from the Lease agreement.
On the other hand, recovery
measures under finance leasing are susceptible to the following risks:

(Continued on page 13)

Page 12

Volume 1, Issue 2

Accounting for Leasing in Tanzania

By Joass O. Lyatuu, Financial Analyst, Tanzania Leasing Project
What is a Lease?

Hire Purchase

Legally, a lease is a contract of bailment, where the owner of an asset

(the Bailor) leaves his goods in the possession of another person (the
Bailee) for a specific purpose. The essence of the relationship between a lessor and the lessee includes the legal ownership of the
leased asset remaining with the Lessor throughout the period of the
lease, the Lessee being entitled to use of the asset for a specified
period or periods (if the lease is renewable) and the Lessee paying
the Lessor for the use of the asset- such a payment is usually called
rent.

Major types of Leases

Certain jurisdictions treat hire purchase as a form of

lease. However, most do not. The essence of a hire
purchase agreement is that it is a contract for bailment where the hirer has an option, usually for a
nominal price, to purchase the asset at the end of
the period of hire. There can be misunderstanding
about the terms financial lease and hire purchase
because the terms are used differently in different
countries. In India and England for example, a finance lease does not have an option to purchase the
asset at the end of the lease term, therefore a lease
with an option to purchase is a hire purchase. In
other countries, lease transactions with a purchase
option are referred to as finance leases and the term
hire-purchase is less used.

Leases are broadly of two types, finance leases and operating leases

Credit Sale

Finance lease Typical finance lease is three party arrangement (see

diagram below) and in most cases provide an option to lessee to purchase the equipment after expiry of lease term.

Contracts of this kind pass legal ownership of an

asset immediately, with the supplier or finance house
providing finance facilities. Unlike, conditional sale
contracts, there is no retention of ownership.

The classes of assets that may be leased are almost without limit. The
duration of a lease can vary from a few minutes (the hire of a projector for power point presentation to the Board meeting) to many years
(the lease of an aircraft by international airlines)

Accounting for leasing transactions

Supplier

I nformation, Demonstration, AfterSales Services

Lessee

Technology Choice

Accounting for leasing is governed by the

International Accounting Standard, No 17
(Revised 2003) and adopted in 2005
Objective of IAS 17

Sale of Object

Rental Payment

Cash payment of object

Lessor

Rental Object

Operating lease: An operating lease is any lease often with a shorter

contractual term than a finance lease (always significantly shorter than
the working life of the asset). The most common type of operating
lease transactions is contract hire, where the lessor undertakes some of
the responsibility for management and maintenance (insurance, repairs,
license) of the vehicles, whereas in other forms of leasing is solely the
responsibility of the lessee. The lessor also takes a residual value risk
of the asset in the transaction.

What is not a lease

Conditional Sale
A conditional sale agreement is an agreement for sale under which title
remains in the seller until the purchase price has been paid in full or the
buyer has complied with any other conditions prescribed by the agreement for the transfer of title to him. Apart from the reservation of title
provisions, a conditional sale agreement has all the normal incidents of
a contract of sale.

The objective of IAS 17 is to prescribe to parties,

lessees and lessors, the appropriate accounting
policies and disclosures to apply in relation to finance and operating leases.
Scope
IAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and similar
regenerative resources and licensing agreements
for films, videos, plays, manuscripts, patents, copyrights and similar items (IAS 17.2) However, IAS 17
does not apply as the basis of measurement for the
following leased assets
Property held by lessees that is accounted for as
investment property for which the lessee uses the
fair value model set out in IAS 40
Investment property provided by lesssors under operating leases (IAS 40)
Biological assets held by lessees under finance and
operating leases (IAS 41)

Applicability of IAS 17
Whether a lease is a finance lease or not depends on
the substance of the transaction rather than the
form. Examples of situations which would normally
(Continued on page 14)

Volume 1, Issue 2
Page 13

TBA Newsletter

(Continued from page 11)

Where the equipment has been fixed to

or installed in land and building, the
normal risks
associated with removing the assets from
the premises where it has been fixed/
installed may not be avoided.

in terms of strategies that will facilitate enactment of enabling legislation within the shortest period. We
also need to train our staff and clients. This is no humble task. A call
is thus made for a common strategy
directed towards achieving those
goals.
(Continued from page 9)

Hiding of movable chattels such as motor

vehicles or vessels. For instance, there
are cases where assets such as long
haul vehicles are hidden in a foreign
country.
Deliberate cannibalisation of assets.
Third party claim where a repossessed
vehicle has assets of a third party under
a separate transportation agreement.
Need for Training:
In view of the socio-political orientation
that the majority of Tanzanians have
undergone during the past 30 years, the
need for clear understanding of what a
finance lease is all about is paramount.
For instance, it is quite common for
businesses to consider accumulation of
assets as a sign of prosperity. In this
regard, a need for mindset shift is necessary. In addition, the inherent advantages of a finance lease are hardly
known even to some of the seasoned
bankers let alone the potential clients.
There is a need for banks and the Government as the major stakeholder to
consider this aspect.
Roadmap Tow ards a Full- fledged
Finance Leasing:
As intimated at the beginning, finance
leasing presents an opportunity to Tanzania businesses including SME as it
creates an avenue for capital investment. As for the banks, the advantages
are almost straightforward. In sum, this
is yet another opportunity for our banks
to broaden their income streams and to
diversify their asset portfolio as opposed
to the current situation where leasing
is structured on term-loan basis.
The Tanzania Bankers Association (TBA)
should support IFC initiatives and which
are aimed at creating an enabling environment for finance lease to happen in
our market. It is my view that TBA will
fulfil this role not by duplicating work
already done by other institutions.
Rather, it should join hands with, say
the IFC by identifying common grounds

At the same time the Project notes

concerns amongst the financial services
sector regarding the judicial system and
dispute resolution in Tanzania. Therefore, while working on a legal framework, TANZALEP also provides capacity building to stakeholders in the legal
sector, and works with other institutions
in legal sector reform.
The Project is likewise working with the
Bank of Tanzania to address issues of
light regulation of non deposit taking
leasing companies as well as the appropriate framework for the same, should
this be deemed necessary. Regulation
would be in
the areas of
minimum capital requirements, entry
and exit requirements for
leasing companies, and corporate governance. At the
same time, the
Project will be advising on appropriate
prudential regulation.
Financial Leasing Taxation Framework
The application of Value Added Tax on
financial leasing has been particularly
troublesome for practitioners in the
leasing market. The essence of TANZALEP s proposals for Value Added Tax
is to provide certainty regarding application of VAT on financial leasing, as
this has been uncertain leading into
undesirable results for leasing practitioners. It is advised that financial leasing
is essentially a financial service, and
VAT should therefore be applied accordingly. The Project has made a number
of recommendations regarding VAT and
financial leasing.
TANZALEP has also made recommendations with regard to capital allowances
and accelerated depreciation for leasing
that are different from the existing
framework under the Income Tax Act,
2004.

With regard to specific tax incentives for

leasing, TANZALEP has not advocated
for tax incentives as such. However,
stakeholders including Government have
been made aware of the economic benefits of leasing, with a view that Government may consider incentives for this
sector, if appropriate, so as to stimulate
investment, economic growth and to
widen the tax base.
C. Financial Leasing Business Development
In addition to appropriate legal environment, leasing development requires business/product development services for both
established and prospective leasing companies, availability of funding for leasing operations, awareness on the part of the public and enterprises, asset management and
monitoring skills, and availability of secondary markets for leased equipment, among
other things.
TANZALEP is addressing some of these
needs, so that the country s financial leasing portfolio can be increased, and so that
existing banks as well as new leasing companies whether captives (leasing companies owned by equipment suppliers), independent leasing companies, or commercial
banks enter the leasing market.
TANZALEP s business/product development component addresses the following
areas:
funding mechanisms for leasing
companies,
leasing company structures,
structuring of lease deals,
legal documentation,
lease marketing
lease taxation
lease accounting; and
Asset monitoring and management,
including developing secondary markets (This component is to be confirmed)
The local team in association with IFCs
international experts is able to provide this
range of services, either at banking industry level or at individual commercial or development bank level.
For more information, please contact:
International Finance Corporation - Tanzania
Leasing Project (TANZALEP)
World Bank Country Office
50 Mirambo Street, 4th Floor
P.O. Box 2054
Dar es salaam
E-Mail: MNdonde@ifc.org
Tel: 216 3289 (direct). Tel: 211457- 7
Ext 3289

TBA Newsletter

Page 14

(Continued from page 12)

classification criteria
IAS 17 above.

in

lead to a lease being classified as a

finance lease are:
the lessors transfers ownership of
the asset to the lessee by the end
of the lease term;
the lessee has the option to purchase the asset at a price which
is expected to be sufficiently
lower than the fair value at the
date the option becomes; exercisable such that, at the inception of
the lease it is reasonably certain
that the option will be exercised;
the lease term is for the major part
of the economic life of the asset
even if title is not transferred;
At the inception of the lease the
present value of the minimum
lease payments is greater than or
equal to substantially all of the
fair value of the leased asset; and

In an
operating
lease, the
lessor
registers
the
equipment
as a
balance
sheet
asset.

The leased assets are of a specialized nature such that only the
lessee can use them without major modifications being made.
Other situations that might also
lead to classification as a finance
lease are (IAS 17.11)
if the lessee is entitled to cancel the
lease, the lessor s losses associated with the cancellation are
borne by the lessee;
gains or losses from fluctuations in
the fair value of the residual fall
to lessee (for example, by means
of a rebate of lease payments);
and
the lessee has the ability to continue to lease for a secondary
period at a rent that is substantially lower than market rent.
In classifying a lease of land and
buildings, land and buildings elements would normally be separated. The minimum lease payments (MLP) are allocated between the land and buildings elements in proportion to their fair
values. The land element is normally classified as an operating
lease unless title passes to the
lessee at the end of the lease
term, while building element is
classified either as an operating
or finance lease depending on the

ACCOUNTING FOR
LEASES
There are two ways for
lessors and lessees to
account for leases in their
financial
statements-as
an operating lease or as
a finance lease. The basic
differences in accounting
procedures are:
In an operating lease, the
lessor
registers
the
equipment as a balance
sheet asset. The lessor
owns the equipment and
rents it out. The accounting procedure resembles that of o a rental
agreement. Lease payments received are recorded as rent revenue
on the lessor s
profit and loss account,
and the lessor records
the depreciation of the
asset in accordance with
the accounting principles/
regulations of depreciation
In a financial lease, the
lessee
becomes
the
ow ner of the equipment, and registers it as
an asset on his/ her balance sheet. For accounting purposes, the lessor s
considers the asset as
sold to the lessee, and
the lessor s balance sheet
records the lessee as a
debtor. The accounting
procedure is similar to
that of a loan.

Accounting of Finance
Leases
i) By Lessees
The following principles
should be applied in the
financial statements of
the lessees:
At commencement of the
lease term, finance leases
should be recorded as an

asset and a liability at the

lower of the fair value of
the asset and the present
value of the minimum
lease
payments
(discounted at the interest rate implicit in the
lease, if practicable, or
else at the enterprise s
incremental
borrowing
rate); [IAS 17.20].
Finance lease payments
should be apportioned
between
the
finance
charge and the reduction
of the outstanding liability
(the finance charge to be
allocated so as to produce a constant periodic
rate of interest on the
remaining balance of the
liability): [IAS 17.25].
The depreciation policy for
assets held under finance
leases should be consistent with that for owned
assets. If there is no reasonable certainty that the
lessee will obtain ownership at the end of the
lease the asset should
be depreciated over the
shorter of the lease term
or the life of the asset.

ii) By Lessors
The following principles
should be applied in the
financial statements of
lessors:
At commencement of the
lease term, the lessor
should record a finance
lease in the balance
sheet as a receivable, at
an amount equal to the
net investment in the
lease (IAS 17.36)
the lessor should recognize
finance income based on
a pattern reflecting a
constant periodic rate of
return on the lessor s net
investment outstanding in
respect of the finance
lease.

Page 15

TBA Newsletter

Pictorial News

Hon. Abdisalaam Khatib (MP), Deputy Minister for Finance

Mr. Mayank Malik, TBA Chairman and CEO of Citibank (T)

Justice Dr. Steven J. Bwana, Judge Incharge Commercial

Division of the High Court of Tanzania.

Mrs. Lelde Schmitz, Senior Resident Representative, IMF.

Coverage of the TBA Public

Lecture, held on 20th April 2006 at
the Kilimanjaro Kempinski Hotel,
Dar es Salaam whereby Justice
Dr. S. J. Bwana presented a paper
on The Role of Court s in Supporting Financial Sector Reforms in Tanzania .
The event was graced by the Deputy Minister for Finance, Hon.
Abdisalaam I. Khatib. A total of
110 participants from Government, the Financial Sector, Representatives from IMF and World
Bank and the Business Community
attended.

A cross-section of Participants at the TBA Public Lecture

Page 16

Volume 1, Issue 2

Need a laugh... there we go...

I have enough fish to feed my family

Having tough

An investment banker was on the pier of a small coastal village when

a small boat with just one fisherman docked. His boat was full of
beautiful yellow tuna. The banker complimented the fisherman on his
catch, asking how long it took to catch. The fisherman replied "only a
short time." The banker asked why not stay out and catch more. The
fisherman replied,
"I've enough fish to feed my family."

borrowers...easy!

The banker then asked what did the fisherman do with the rest of his
time, he replied, "I will sleep late, fish a little, play with my children,
take a siesta with my wife, stroll into the village each evening, sip
wine with my friends, play my guitar, I have a full and busy life."
The banker was not impressed. "I have a Harvard MBA and could help
you. You should spend more time fishing and with the proceeds buy a
bigger boat and from those increased proceeds you could buy several
boats and soon have a fleet. Instead of selling your fish to a middleman, you could control production, processing and distribution by
building your own
cannery. You could leave this small coastal village and move to the
city then to New York where you could run your expanding enterprise."
The fisherman asked, "How long will this take?"
The banker said, "Ten to 20 years."

Jones applied to a finance

agency for a job, but he
had no experience. He
was so intense that the
manager gave him a tough
account with the promise
that if he collected it,
he'd get the job.
Two hours later, Jones
came back with the entire
amount. "Amazing!" the
manager said. "How did
you do it?"
"Easy," Jones replied. "I
told him if he didn't pay
up, I'd tell all his other
creditors he paid us."

Doctor s advice:

if your job can t

give you time to
relax... Quit!!!

"But what then?"

"Next you would announce an IPO and sell your

stock to the public, making millions and millions. Then you could retire to a small coastal
village where you could sleep
late, fish a little, play with your
Smart Lawyer VS smart
kids, take a siesta with your wife,
Judge
stroll to the village in the evenings, sip wine and play your
A lawyer defending a man accused of burglary
guitar with your friends," said
tried this creative defense: "My client merely
the banker smiling.
inserted his arm into the window and removed

Identification
A young woman went
into a bank to withdraw
some money. "Can you
identify yourself?" asked
the cashier. The woman
looked into a small mirror and said "Yes, it s me
alright!"

Pr a ct icing
t h y Ar t
In a long line of people
waiting for a bank teller,
one guy suddenly started
massaging the back of the
person in front of him.

a few trifling articles. His arm is not himself,

and I fail to see how you can punish the whole
individual for an offence committed by his
limb."

Surprised, the man in front

turned and snarled, "Just
what the heck do you think
you are doing?"

"Well put," the judge replied. "Using your

logic, I sentence the defendant's arm to one
year's imprisonment. He can accompany it or
not, as he chooses."

"Well", said the guy, "you

see, I am a chiropractor and
I could see that you were
tense, so I had to massage
your back. Sometimes I just
cannot help practicing my
art!"

You got a joke

please
shar e with us
Send it to:
info@t anzaniab
ankers.org

If y ou owe the bank $100,

that's your problem. If you
owe the bank $100 million,
that's the bank's
problem

"That is the most silly thing I

have ever heard, the guy
replied. I work for the Income Tax Department. Do
you see me making life hell
for the guy in front of me?"

Tanzania Bankers Association

Sukari House,
4th Floor, crn- Sokoine/Ohio
P.O.Box 70925,
Dar es Salaam.
Phone:255-22-2120551/ 2127764
Fax: 255-22-2124492
E-mail: info@tanzaniabankers.org

We are on the Web: www.tanzaniabankers.org

Current TBA Members:

Akiba Commercial Bank Ltd.

African Banking Corporation Tanzania Ltd.
Azania Bancorp Ltd.
Bank of Baroda Tanzania Ltd.
Barclays Bank Tanzania Ltd
CF Union Bank Ltd
Citibank Tanzania Ltd
CRDB Bank Ltd
Dar es Salaam Community Bank Ltd
Diamond Trust Bank Tanzania Ltd
Eurafrican Bank Tanzania Ltd
Exim Bank Tanzania Ltd
FBME Bank Ltd
Habib African Bank Tanzania Ltd

International Commercial Bank Tanzania Ltd

Kenya Commercial Bank Tanzania Ltd
Kilimanjaro Co-operative Bank Ltd
National Bank of Commerce Ltd
National Microfinance Bank Ltd
Twiga Bancorp Ltd
Peoples Bank of Zanzibar Ltd
Savings and Finance Commercial Bank Ltd
Stanbic Bank Tanzania Ltd
Standard Chartered Bank Tanzania Ltd
Tanzania Investment Bank Ltd
Tanzania Postal Bank Ltd.
United Bank of Africa Ltd.

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