Financial lease is a common practice in Kazakhstan and is in high demand as it is a more favourable option for asset acquisition than making a straightforward purchase. Main advantages:
- financial lease allows a company to retain a significant volume of its financial resources, and it is more cost-effective long-term;
- at the end of the agreed-upon period, a company can acquire ownership or return the asset and consider buying another one - new or up-to-date;
- payments are not based on the interest rate and the leasing process is considerably simpler than taking a loan.
Basically, financial lease can be defined as long-term rent of buildings, constructions, machinery, equipment, inventory, vehicles, land, and any other non-consumable items with an option to acquire ownership at residual value stipulated by the contract.
In this legal contract, the leasing company is called the lessor, and the user of the asset is called the lessee. The subject of leasing may not be securities or natural resources.
The Kazakhstan Law "On Financial Leasing" (hereinafter – the Law) states that any leasing contract should meet at least one of the following:
- ownership acquisition is specified in the leasing contract;
- the lease term is more than 75% of the leased asset's useful life
- current (discounted) value of lease payments for the whole term exceeds 90 percent of the value of the asset.
In addition, the Law also provides for international leasing when one of the parties is a non-resident of Kazakhstan.
There are 5 types of financial lease in Kazakhstan. The terms below may have different connotations in other jurisdictions, but these are what the Law has, translated verbatim. The following types of lease are available:
1) reverse lease - a seller sells the asset to a company on the condition that the asset is leased back to the seller;
1-1) secondary lease - the leased asset, remaining in the ownership of the lessor in the event of leasing contract termination or cancellation, is leased to another lessee;
2) bank lease - a bank acts as lessor;
3) full lease - lessor bears the expenses for the asset maintenance;
3-1) sublease - lessee transfers the asset to third parties for temporary use for a fee and for a period according to terms of the subleasing agreement the property previously received from the lessor under the leasing agreement and constituting the leasing object
4) net lease - lessee bears the expenses for the asset maintenance;
5) Islamic lease - this type of leasing fully complies with the principles of Islamic finance.
There is a difference between reverse lease and sublease. Under reverse lease, an entity sells its property to a leasing company and at the same time enters into an agreement with that company under which it receives the same property on lease. Under a sublease contract, the lessee, with the lessor's permission, can become a sublessor, transferring the leased asset to other lessees.
In order to carry out a finance lease, a company must select a financial model and comply with all legal requirements. For example, banks have the right to carry out leasing activities only if they have an appropriate licence from an authorised body. Other legal entities carry out leasing activities without a licence only after submitting a notification on the commencement of activities to the Financial Monitoring Committee. The notification is submitted at the time of commencement of leasing activities and upon termination thereof. There is no need to send a notification with each new leasing contract, and the steps to take are as follows:
Step 1: The lessee chooses an asset.
Step 2: The lessor acquires ownership of the asset.
Step 3: The parties sign a finance lease contract, specifying the terms, payments, and other conditions.
Step 4: The lessee uses the asset and makes the payments within the agreed-upon time period.
Step 5: Ultimately, the lessor is reimbursed for the asset value plus interest.
Step 6: At the end of the financial lease, the lessee has the option to acquire the asset ownership.
Kazakhstan's leasing market is growing every year, and leasing itself is an indispensable tool for business development, enhancing the country's investment potential. At the moment, the legislation fully regulates the lease procedure and minimises risks for all parties involved as the state is interested in facilitating business and developing the level of leasing activities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.