The New Banking and Financial Institutions (Financial Leasing) Regulations, 2022

The Banking and Financial Institutions (Financial Leasing) Regulations, G.N. No. 151 of 2011 (the 2011 Regulations) were essentially enacted to cater for financial leasing operations in Tanzania. The 2011 Regulations were revoked by the Banking and Financial Institutions (Financial Leasing) Regulations, G.N. No. 575 of 2022 as published on 23 September 2022 (the 2022 Regulations).

In this month’s legal update, we analyse the 2022 Regulations and highlight the key changes introduced following the revocation of the 2011 Regulations.

Application

The 2022 Regulations apply to all financial leasing operations undertaken by banks and financial institutions or their subsidiaries as well as financial leasing companies in Tanzania. However, the 2022 Regulations do not apply to micro leasing operations which are instead governed by the Microfinance (Non-Deposit Taking Microfinance Service Providers) Regulations, G.N. No. 679 of 2019 (the NDT Regulations).

Key definitions

The following key terms have been defined in the 2022 Regulations:

“Financial leasing” means a lease or leasing agreement entered into pursuant to a transaction in which:

1. the lessee specifies the property and selects the supplier;
2. the lessor acquires the selected property through lease or purchase as instructed in writing by the lessee without assuming any direct responsibility of maintenance and after-service;
3. the lease payments are calculated so as to take into account the amortisation of the whole or a substantial part of the cost of the property; and
4. matters concerning the disposal of the leased property after the expiry of the lease, including an option given to the lessee to purchase the leased property, are agreed upon between the parties

“Financial leasing operations” means operations which involve provision of financial leasing

“Financial leasing company” means a non-deposit taking entity which is licensed by the Bank of Tanzania (BoT) to carry out financial leasing operations

“Financial lease agreement” means an agreement for financing by the lessor in the form of an asset to be used for business purposes by a lessee

“Lessee” means a natural or legal person, who under a financial lease agreement made in terms of the 2022 Regulations, obtains from another person known as lessor, the right to possession and use of an asset in return for rental payments over an agreed period of time and includes its successors and assignees

“Lessor” means a person legally registered or licensed by the BoT and who under a financial lease agreement made in terms of the 2022 Regulations, conveys to another person known as the lessee, for an agreed period of time, the right to possession and use of an asset in return for rental payments and includes its successors and assignees

“Micro leasing operations” means financial leasing operations:

1. where the average value of the asset in the portfolio is up to TZS 10 million (approx. USD 4,500); and
2. where the leasing term is short-term not exceeding twenty-four months

“Non-performing asset” means an asset in respect of which the scheduled lease rental has remained overdue or delinquent for 90 days and above.

Changes under the 2022 Regulations

Application process

In the process of applying to establish a representative office, subsidiary, branch or agency either within or outside Tanzania, the 2022 Regulations provide a requirement to furnish the following supporting documents:

1. projected balance sheet and income statement for the next three years;
2. consolidated projected balance sheet and income statement for the next three years;
3. proposed organisational structure;
4. detailed budget and programme for the establishment;
5. names and particulars, including curriculum vitae for persons proposed to take up senior positions; and
6. any other information the BoT may require.

Prior to the 2022 Regulations, a financial leasing company was only required to notify the BoT and seek approval before opening and closing its representative office, subsidiary, branch or agency. This requirement still applies and is currently supplemented by the supporting documents listed above.

Application fees

The 2022 Regulations have brought a significant change on the application fees for financial leasing operations. Prior to the 2022 Regulations, the application fee was TZS 3,000,000 (approx. USD 1,300), however, as it stands, the application fee is TZS 5,000,000 (approx. USD 2,200) which is almost twice the previous application fee under the 2011 Regulations.

Minimum capital requirements

Pursuant to the 2022 Regulations, a financial leasing company must commence operations and at all times maintain at least a core capital of TZS 1 billion (approx. USD 500,000) or a higher amount as prescribed by the BoT. Where capital is remitted in foreign currency it must be reflected in Tanzanian Shillings in the books of the financial leasing company using the exchange rate prevailing on the date of remittance. The 2022 Regulations have maintained this requirement as it was under the 2011 Regulations.

Furthermore, the condition of a financial leasing company to deposit its paid up capital and other funds either in Tanzanian Shillings or in foreign currency has been maintained under the 2022 Regulations. Such deposit shall be made in a Tanzanian registered bank or financial institution in Treasury Bills or other Government Securities of not more than 364 days.

Board membership

Similar to the 2011 Regulations, the 2022 Regulations require the board of directors of a financial leasing company to have a membership of not less than five, two of whom must have experience in financial leasing operations or financial intermediation and, the majority of whom must be non-executive. The chairperson of the financial leasing company must also be a non-executive member of the board of directors.

Senior management and the board

Pursuant to the 2011 Regulations, the vetting or screening of senior management staff for any financial leasing company was done by the BoT. However, under the 2022 Regulations, this requirement is expunged hence senior staff no longer require vetting by the BoT.

With regards to the board of directors, the 2022 Regulations set out their responsibilities to include strengthening the safety and soundness of such companies through approving and overseeing strategic objectives and corporate values.

Reporting standards

Akin to the 2011 Regulations, the 2022 Regulations mandate financial leasing companies to submit their annual audited financial statements in the format and frequency prescribed by the BoT. However, the 2022 Regulations introduce a mandatory requirement that the annual audited financial statements be in accordance with the International Financial Reporting Standards (IFRS), and it must be submitted to BoT not later than three months after the close of the financial year.

Furthermore, the 2022 Regulations require all banks, financial institutions as well as financial leasing companies to observe the IFRS requirements on provisioning for non-performing assets. In an instance where the IFRS differ from the BoT standard requirements, the 2022 Regulations stipulate compulsory requirements on provisioning for non-performing assets to be adhered to. Please note that the 2022 Regulations have preserved this requirement as it was under the 2011 Regulations.

Additionally, a progress report on the recovery targets and a list of court cases emanating from financial leasing transactions as well as the progress on their recovery are to be submitted to the BOT on a semi-annual basis as it was under the 2011 Regulations.

License revocation

Distinct from the 2011 Regulations, the 2022 Regulations provide circumstances under which a license of a financial leasing company may be revoked by the BoT. The grounds for revocation are provided under regulation 53 of the 2022 Regulations and these include the following:

1. where the BoT has approved a plan for a financial leasing company to terminate its operations in Tanzania and the company has complied with such plan;
2. where, in the judgement of the BoT, a financial leasing company engages in unsafe or unsound practices;
3. where a licence has been obtained through submission of false information;
4. where there has been a merger, amalgamation, or sale of substantially all of the assets of the financial leasing company;
5. where another financial leasing company that holds a significant interest in the financial leasing company has had its license revoked;
6. where a financial leasing company has not commenced operations within twelve months after receipt of a licence; and
7. where the activities undertaken by the financial leasing company differ substantially from those presented in the application for the licence and, in the opinion of the BoT, such difference is not justified, nor approval of such changes have been granted by the BoT.

The 2022 Regulations further mandate the BoT to revoke a license held by a financial leasing company upon determination of insolvency or expected insolvency. Such revocation by the BoT must be communicated in writing and grounds for such revocation will be provided. Any revocation of a licence is effective from the date on which it is communicated by the BoT.

Incidents of default

The 2011 Regulations provided a requirement for every bank, financial institution or financial leasing company to submit a list of defaulters to the BoT on a quarterly basis. This list would include names of those who have failed to liquidate their obligations towards the bank, financial institution or financial leasing company. This requirement was expunged with the coming into operation of the 2022 Regulations.

Upgrade of non-performing assets

Unlike the 2011 Regulations, the 2022 Regulations set a requirement for non-performing assets to be upgraded only if timely payment of interest and rescheduled principal amount has been made in accordance with the new repayment schedule for four consecutive instalments.

Micro leasing operations

As explained above, the application of the 2022 Regulations is limited to financial leasing operations and do not apply to micro leasing operations. The main difference between financial leasing operations and micro leasing operations is the average value of the asset in the portfolio and the leasing term. Furthermore, in relation to minimum capital requirements, pursuant to the NDT Regulations, microfinance service providers must commence business and at all times maintain a minimum capital of TZS 20 million (approx. USD 9,000) or higher. The BoT may require a higher minimum capital, where, among other things, the micro leasing operator has significant exposure to risk.

Conclusion

While the differences between the 2011 Regulations and the 2022 Regulations are not substantial, it is clear that the BoT is closely monitoring such arrangements to ensure compliance with the relevant laws. One of the main concerns is whether a financial leasing operator falls within the definition of “Financial leasing” as provided under the 2022 Regulations. If this is not clear on the face of it, assurance must be sought from the BoT.