MODULE 1:

UNDERSTANDING AGRICULTURAL MECHANIZATION LEASING*

INCREASING AGRICULTURAL PRODUCTIVITY THROUGH INNOVATION

AGRICULTURAL MECHANISATION LEASING PROJECT
MODULE CONTENT*

►1. AMLP Background and Objectives

►2. What is Leasing?
►3. Types of Leasing Products
►4. How Leasing Works in General
►5. The AMLP Leasing Ecosystem
►6. The AMLP Sustainable Business model
►7. Benefits of HP Leasing Compared to Conventional Financing
►8. Overview of the AMLP Process

4/7/22 No 2
1. AMLP – BACKGROUND AND OBJECTIVES

►Ethiopia’s agricultural sector accounts for 66% of total employment, but only 33.9% of GDP
►The agro-ecological conditions for agriculture, especially arable farming, can be described as good to
very good but are hampered through low levels of mechanization
§ Only around 1% of agricultural plots are plowed with a tractor
§ In recent years, the uptake of agricultural machinery has accelerated
►Mechanization was identified as area with high potential of creating impact at scale
►Challenges on different levels keep mechanization in Ethiopia from unfolding potential:
§ Financial institutions (FIs) lack foreign currency for machinery import
§ FIs with little access to and knowledge of mechanization technology
§ Lack of capacities within FIs in designing and implementing leasing as a financial product
§ Limited technical skills and financial know-how among farmers and service providers
§ Limited availability of adapted financial products for agricultural clients

4/7/22 No 3
1. AMLP – BACKGROUND AND OBJECTIVES

►The purpose of the Agricultural Mechanization Leasing Project is to:

§ Strengthen the financial sector & establish the financial product of leasing in the market
§ Expedite the import of long-lasting and adequate agricultural machines and implements
§ Support DBE by building internal capacities required to offer leasing for agricultural machines
and implements in a sustainable manner
§ Contribute to improving the sustainable access to finance via leasing for agricultural SMEs for
the financing of agricultural machines and equipment
►Target groups
§ Agricultural SMEs and agricultural services providers (constituted as private enterprises,
cooperative associations and youth groups) that provide farmers, incl. smallholders with
machinery services along the production cycle
§ Must be able to prove the economic and technical viability of their project
►KfW cooperates with DBE & MoA for transparent and efficient high-quality processes

4/7/22 No 4
2. WHAT IS LEASING?

►Leasing: financing in-kind (usage of equipment) for periodic payments

►Generally defined by:
§ practice and customs
§ Leasing laws
§ Other laws (civil code, commercial code, tax laws, investment laws
§ International bodies (International Accounting Standards Board)- IFRS 16-Leases
►In Ethiopia,
►Capital goods finance includes: Hire Purchase and Financial Lease
§ Lessor (DBE and other regional leasing companies) licensed and regulated by NBE
►Excludes Operating lease, under the purview of Ministry of Industry
►For the AMLP, our focus is Hire Purchase

4/7/22 No 5
2. WHAT IS LEASING?

►What is leasing?
§ “A contract is, or contains, a lease if the contract conveys the right to control the
use of an identified asset for a period of time in exchange for consideration*.”
IFRS 16, IFRS Foundation
*consideration – noun. a payment for a service, https://dictionary.cambridge.org
o Key point: The customer has control over the asset for a period of time and can
decide how to use it

§ “A lease is an implied or written agreement specifying the conditions under which

a lessor accepts to let out a property to be used by a lessee. The agreement
promises the lessee use of the property for an agreed length of time while the
owner is assured consistent payment over the agreed period.” Corporate Finance
Institute,
https://corporatefinanceinstitute.com/resources/knowledge/other/lease/

4/7/22 No 6
2. WHAT IS LEASING? -ETHIOPIAN CONTEXT

►"Leasing” means a financing in kind for production and service purpose by which a lessor provides lessee with
the use of specified capital goods on financial or operating lease or hire purchase agreement basis, without
requirement of collateral, for a specified period of time and collects in turn a certain amount of installment in
periodical payments over the specified period;
►“Financial lease” means a type of leasing by which a lessor provides a lessee against payment of mutually agreed
installments over a specified period with the use of specified capital goods which is:
§ either already acquired by the lessor; or
§ purchased by the lessor from a third party, known as the supplier, chosen and specified by the lessee;
and under which the lessor shall retain full ownership right on the capital goods during the period of the lease
agreement, and, subject to agreement between the two parties, the lessee may have an option to purchase the
capital good outright after the termination of the lease period at an agreed price;
2. WHAT IS LEASING - ETHIOPIAN CONTEXT?

►“Hire-purchase” means a type of leasing by which a lessor provides a lessee with the use of a
specified capital goods, against payment of mutually agreed installments over a specified period
under which, with each lease payment, an equal percentage of the ownership is transferred to
the lessee and, upon effecting of the last payment, the ownership of the capital goods shall
automatically be transferred to the lessee;
►“Operating lease” means a type of leasing for a period of time not exceeding two years, by which
a lessor provides a lessee against payment of mutual agreed rent with the use of specified
capital goods that the lessor has at hand;
2. WHAT IS LEASING - ETHIOPIAN CONTEXT

►Proclamation No. 103/1998: Capital Goods Leasing Business Proclamation

§ Defines financial, operating and hire-purchase leases
§ Hire-purchase lease:
o The agreement must settle how ownership and claims will be settled in case of early termination
o The obligation to insure and maintain the asset lies with the lessee
►In case of default on a payment, lessor must give lessee 30 days to pay. If still in default, lessor may rescind the lease,
repossess the asset and claim related damages. Lessor may recover accrued unpaid rent together with interest and damages,
whether the default is remedied or not.
►Neither lessor, nor lessee lose their rights in case of bankruptcy of the other party
►Lessor has the unilateral right to assign his lessor’s rights to a third party, without infringement of lessee’s rights
►Unless agreed otherwise, lease contract shall not terminate with death of lessee
►Any charge or encumbrance created on the asset by the lessee shall be void
►In case of operating or financial lease, depreciation allowance is for the benefit of lessor. In case of hire-purchase – of lessee.
►The lessor is exempted from customs duties on a certain list of capital goods for agricultural, manufacturing, construction
machines and equipment for transportation and storage services, health, education, hotel and tourism services

4/7/22 No 9
3. TYPES OF LEASING PRODUCTS-INTERNATIONAL CONTEXT

►Operating lease: does not transfer substantially all the risks and rewards incidental
to ownership of the underlying asset
o lessee uses asset for a period of time
o pays rents
o returns asset to lessor at the end of lease tenor
o no option to purchase asset
►Finance lease: does transfer substantially all the risks and rewards incidental to
ownership of an underlying asset
o lessee leases asset for a period of time
o pays lease instalments
o has option to purchase asset at the end of lease term at
predefined price close to fair value

4/7/22 No 10
3. TYPES OF LEASING PRODUCTS-INTERNATIONAL CONTEXT

4/7/22 No 11
3. TYPES OF LEASING PRODUCTS-ETHIOPIAN CONTEXT

►Hire-purchase lease (our focus):

o similar to finance lease
o lessee leases asset for a period of time
o pays lease instalments
o lessor transfers a proportional share of ownership over lease asset with each
lease payment
o from accounting point of view, similar to investment loan:
- lessee charges depreciation on asset
- interest component of lease payments is considered expense
►Finance lease
►Operating lease

4/7/22 No 12
3. TYPES OF LEASING PRODUCTS

►International context, financial lease:

Rights Obligations
Lessee Use the asset Pay lease instalments
Opt to acquire the asset at the end of lease Pay for asset’s insurance and maintenance
Lessor Own the asset Transfer ownership to lessee once all
Collect payments instalments are paid

►International context, operating lease:

Rights Obligations
Lessee Use the asset Pay rents
Return asset to lessor at the end of lease contract
Lessor Own the asset Pay for asset’s insurance and maintenance
Collect rents

4/7/22 No 13
3. TYPES OF LEASING PRODUCTS

►Ethiopian context, hire-purchase lease:

Rights Obligations
Lessee Use the asset Pay lease instalments
Get pro-rata share of ownership in asset Pay for asset’s insurance and maintenance
Get automatically full ownership over
the asset once all instalments are paid
Lessor Own the asset (pro-rated basis) Transfer proportional share of ownership in
Collect payments asset with each instalment paid
Transfer full ownership of asset to lessee
automatically, once all payments are made

4/7/22 No 14
4. HOW LEASING WORKS IN GENERAL

4/7/22 No 15
4. HOW LEASING WORKS IN GENERAL

4/7/22 No 16
4. HOW LEASING WORKS IN GENERAL

4/7/22 No 17
4. HOW LEASING WORKS UNDER AMLP

►Steps to get an asset on lease under the AMLP:

§ Potential lessee visits an approved supplier from the list
o Gets advice on characteristics of machinery
o Together with supplier, selects the asset which best matches business’s needs
o Gets a pro-forma invoice
§ Potential lessee gets another 2 independent quotes for the same asset
§ Potential lessee visits DBE
o Attends mandatory DBE training
o Submits lease application and documents
§ DBE takes a decision to approve the lease application
§ Lessee, DBE and supplier sign a tri-partite agreement
o DBE, supplier: specification of the asset, details of the delivery
o DBE, lessee: conditions of the lease contract, conditions of delivery
§ Supplier orders asset at producer
4/7/22 No 18
4. HOW LEASING WORKS UNDER AMLP

►Steps to get an asset on lease under the AMLP (continued):

§ Asset gets delivered to Ethiopia
§ Lease contract signed
§ Registration of lease contract in public registries and Credit Registry Office (NBE)
§ Registration of asset, if necessary
§ Asset delivered to lessee’s premises
o Installation, if necessary
o Personnel trained
o Acceptance protocol signed, “start” of lease
§ Monitoring of lease contract
o Regular technical servicing and maintenance at specialized garages
o DBE insures asset in its favour and claims expenses on lessee
§ Final payment, end of lease contract. Un-registration of lease contract, if necessary

4/7/22 No 19
5. THE AMLP LEASING ECOSYSTEM*

►A potential lessee under the AMLP would be an AMS provider:

§ An investor
§ A youth group
§ Co-operative or association
§ Larger farmer, serving smaller farmers through mechanization services
►AMS providers give their services to Farmers that:
§ Do not have the resources to buy expensive agricultural machines and implements
o for instance because they work on a small land plot
§ Need access to modern tractors, harvesters or implements
►Such a cooperation between farmers and AMS providers allows:
§ Efficient use of resources
§ Wider penetration of modern agro-mechanization as compared to the case when
the lessee would be a stand-alone farmer.

4/7/22 No 20
5. THE AMLP LEASING ECOSYSTEM*

KfW DBE MoA

(Funder) (Lessor) (Advisor)

AMS
Provider
(Lessee)
AMS Beneficiaries
Supplier (farmers, youth
groups, cooperative
unions)

4/7/22 No 21
5. THE AMLP LEASING ECOSYSTEM - THE BENEFICIARIES

►Smallholder farmers:
§ largest share of agriculture-related businesses
§ usually uneducated
§ subsistence farming:
o typically low productivity due incorrect or outdated methodology
o low level of mechanization
§ typically small piece of land, unirrigated
§ limited use of high-quality seeds, pesticides and fertilizers
§ usually yields are below regional averages

4/7/22 No 22
5. THE AMLP LEASING ECOSYSTEM – THE BENEFICIARIES

►Larger farmers:
§ better productivity
§ larger piece of land, own or rented
§ own or lease some agricultural machines
§ may let excess capacity to smallholder farmers

►Agriculture mechanization service providers:

§ own some machines but have capital constraints to grow capacity
§ need access to finance to access more machines
§ provide mechanization services to small farmers in the nearby regions
§ might be farmers themselves, too

4/7/22 No 23
5. THE AMLP LEASING ECOSYSTEM – THE AMS PROVIDER
►Lessees:
§ AMS providers are intermediate partners in the AMLP model
§ They provide access to machines and implements to farmers, who otherwise will not
have access to such services
§ They have passed Lessee Eligibility Criteria (LEC) test
§ Focus on agriculture mechanization service (AMS) providers
§ Investors, medium and larger farmers
§ All kinds of legal forms acceptable, incl. cooperatives, youth groups, federations,
unions
§ Should quality under the DBE definition of SME
►Leased assets (Packages preferred):
§ Tractors, Combine harvesters and Implements – ploughs, seeders, seed drills, planters,
sprayers, balers, harrows, fertilizer spreaders, etc.
§ Machinery Profile (Cooperation Agreement)
§ Buyer’s Guide (GIZ)

4/7/22 No 24
5. THE AMLP LEASING ECOSYSTEM – THE AMS PROVIDER
Typical needs of lessees under the AMLP
Lessee Typical needs How HP lease satisfies those needs
Larger farmers Agricultural HP lease provides the needed asset faster, cheaper and with
machines or minimum requirements
implements - Makes asset affordable:
Agriculture Tractor/ Combine - Lessee gets 100% financing (less local costs)
mechanization harvester/ - No need for extra collateral
service providers Implements - VAT not payable
(Please refer to - Import duties not payable for certain types of agricultural
annexure 1 of the assets
Cooperation - Import-related formalities are covered by supplier and/or
Agreement) lessor
- Repayment plan is in line with lessee’s business or cash flow
cycle
- Lessee gets a working capital loan from DBE, too

4/7/22 No 25
5. THE AMLP LEASING ECOSYSTEM - OTHER ACTORS

►DBE – The Lessor

o DBE acts as lessor and receives funding in forex from KfW for the AMLP
o Funds are used to finance total import costs of machinery and implements in EUR
or equivalent
►Suppliers
o Responsible to provide lessees with appropriate machinery and implements of
optimal quality and technology
o Equipment should be fit for the Ethiopian market
o After sales, repairs and maintenance, spare parts, training
§ Pass the Supplier Minimum Eligibility Criteria (SMEC)
§ Pass the Supplier Due Diligence (SDD)
§ Official representatives of reputable original agricultural mechanization equipment
manufacturers
§ Good financial and organizational standing
4/7/22 No 26
5. THE AMLP LEASING ECOSYSTEM - OTHER ACTORS

►Ministry of Agriculture (MoA)-Agricultural Mechanization Directorate

o Advisory role to DBE and the AMLP stakeholders (AMS providers, AMS
beneficiaries and suppliers) on mechanization and other technical matters
o Responsible for mechanization awareness creation.
►KfW – FX Funding
o Total equipment cost (CIF) at import
o Access to foreign currency

4/7/22 No 27
6. AMLP SUSTAINABLE BUSINESS MODEL*

4/7/22 No 28
7. BENEFITS OF HP LEASING COMPARED TO CONVENTIONAL FINANCING *

►VAT Exemption
►Agricultural equipment are imported duty free, subject to regulations
►Import risk borne by the lessor/importer/local supplier
►No collateral requirements
►Lower costs
►Lower down payment requirements
►Tax incentives compared to a loan

4/7/22 No 29
7. BENEFITS OF HP LEASING COMPARED TO CONVENTIONAL FINANCING *

Feature Investment loan Hire-purchase lease in Ethiopia

Affordability Advance payment: higher Down payment: lower
Price More expensive Cheaper
Tenor Longer Shorter
Collateral Often additional collateral required The asset itself
VAT VAT is payable Exempt
Import duties Agricultural machinery exempt Agricultural machinery exempt
Asset ownership Borrower Split, proportional
Procurement Borrower Lessor

4/7/22 No 30
7. BENEFITS OF HP LEASING COMPARED TO CONVENTIONAL FINANCING *

►Advantages of leasing in comparison to other forms of financing:

Advantage Reason
More affordable Leasing is considered less risky as lessor keeps
- Lower own participation (down payment) (part of) ownership over the asset until repayment.
required Thus asset is considered easier to repossess.
- Lower interest rate
No need for extra collateral besides the lease asset Asset serves as guarantee
Lessee does not need to pay VAT on the asset Hire-purchase lease is VAT exempt in Ethiopia

4/7/22 No 31
8. RELATIONSHIP BETWEEN AGRICULTURE CYCLES & MECHANIZATION NEEDS

►Agricultural mechanization has its own peculiarities coming

from two major sources:
§ Type of Activity, which the farmer is engaged in
§ The specific Type of Assets (tractor and implements)
required at each stage

4/7/22 No 32
TYPE OF ACTIVITY

►Farming differs from most other business activities

§ Long production cycle
§ Unpredictable prices
§ Weather dependency

4/7/22 No 33
LONG PRODUCTION CYCLE

Identification of types of implements

examples include:
►Under the AMLP, Typical production steps o Soil preparation
can include: o Stubble cultivation - compact disc harrow
1. Identification of type of soil and crop o Ploughing - Moldboard plough
2. Identification of type of motorization o Seedbed preparation - light tine cultivator
(tractor) required (capacity and lifting
o Seeding/planting - precision row planter
power)
3. Identification of types of implements o Fertilizing - disc fertilizer spreader
4. Type of harvester e.g., combine o Protection (chemical control) - mounted
harvester. boom sprayer
o plant protection (mechanical control) –
mechanical weed control

4/7/22 No 34
UNPREDICTABLE PRICES

Farmers cannot predict the price at which they will be able to sell their produce.
The AMS provider will reflect this risk and specificity in its financial model.

What shall DBE’s underwriting consider to mitigate the risk of unpredictable prices?
►The seasonal aspect of the farmer’s business, which will directly affect the AMS
provider’s revenue stream
§ Consider granting a grace period on a case-by-case basis
§ Structuring the repayment of the rental considering the seasonality of the cash flow

4/7/22 No 35
9. OVERVIEW OF THE AMLP PROCESS

►In this segment we take an overview look at the AMLP process in three stages:
§ (1) Prior to Lease Application
§ (2) During Lease Application
§ (3) Acceptance of Equipment

4/7/22 No 36
9. AMLP PROCESS: PRIOR TO LEASE APPLICATION*

►Before even discussing about the agricultural mechanization leasing process, it is

important to note that the lessee has some work to do.
►The lessee can receive support from DBE, MoA, BDS providers and extension
workers in doing so:
§ (a) Survey the region in which he is operating to:
o Identify the soil type
o Identify the tractor type (motorization)
o Identify the crop type/s
o Identify the implements for each stage (ploughing, soil preparation,
seeding/planting, fertilizing, plant protection, harvesting, storage etc.)
o Understand the demand for AMS: number of farmers, number and size of farms
available for mechanization, types and machines needed, times during the year
when machines are needed, number of hours needed, etc.

4/7/22 No 37
9. AMLP PROCESS: PRIOR TO LEASE APPLICATION*

§ (b) Based on information collected, build a business plan/feasibility study, together

with a financial model showing the business is profitable and sustainable.
§ (c) Visit a supplier or potential suppliers of the machines and implements needed
and discuss on their:
o availability,
o detailed costing,
o make,
o models,
o capacity,
o country of origin,
o and technology level,
►The key is to get access to the most appropriate equipment at the optimal price.

4/7/22 No 38
9. AMLP PROCESS: PRIOR TO LEASE APPLICATION*

►After agreeing on the proposed technical specifications and price, the lessee asks
for a detailed quote/pro-forma invoice, which also includes:
§ Technical specifications,
§ Warranty conditions,
§ FOB and CIF costs,
§ Local costs,
§ Locally built infrastructure,
§ Training costs,
§ Terms of payment, including down-payment to start the procurement process,
§ Expected delivery time, etc.

4/7/22 No 39
9. AMLP PROCESS: DURING LEASE APPLICATION*

►Now the lessee is equipped to start the lease application process under the AMLP.
§ He visits the closest DBE Branch and writes an application letter and submits all
the required supporting documents, including:
o (1) All KYC documents
o (2) Detailed quote/ pro-forma invoice with technical specifications
o (3) Business plan or feasibility report.

4/7/22 No 40
9. AMLP PROCESS: DURING LEASE APPLICATION*

►The AMLP procedures manual provides full details of how the application is
screened, appraised and approve/rejected.
►One of the important tests in this process is to make sure the lessee satisfies the
AMLP Lessee Eligibility Criteria (LEC). Please refer to the LEC to refresh
►Once the application is approved by the Lease Approval Team (LAT), then DBE makes
an offer containing the terms and conditions, of which the main ones are
summarized as followed:
§ (1) 20% down-payment, to cover working capital costs for procuring the capital
goods.
§ (2) Duration of the lease of normally around five years.
o A tractor may have useful economic life of between 8- 12 years,
o Implements may have economic useful life of between 5- 12 years.
o In some cases, the duration of the lease may exceed 5 years, at the discretion of
DBE.

4/7/22 No 41
9. AMLP PROCESS: DURING LEASE APPLICATION*

§ (3) Service charge under the AMLP is meant to be affordable for the lessee and is
currently set between 11.0% to 11.5% p.a.
§ (4) Lease rental payments will amortize the capital amount during the tenor of the
lease and calculated to suit lessee’s seasonal cash flow cycle, including grace
periods and other structure, as the cases warrant.
§ (5) The lessee will be responsible to maintain, repair and insure the capital goods.
§ (6) DBE will carry out periodic site visits at the business location to assess the level
of business operations as well as inspection of the capital goods.
o This supervision will be carried out by qualified and experienced staff of DBE.

4/7/22 No 42
9. AMLP PROCESS: DURING LEASE APPLICATION *

►DBE Branch Manager has the duty to explain the end-to-end process to the lessee,
upfront, to avoid raising their level of expectations and which may create
disappointment. For example, the lessee needs to:
§ (a) know the screening, appraisal and approval turnaround times.
§ (b) be aware of the requirements for the legal documentation and contracting
process.
§ (c) understand the normal terms and conditions of the process and operation.
§ (d) authorize utilization of the 20% down-payment, for example to pay the local
costs for the procurement of the capital goods and not for working capital.
§ (e) have available or be able to access working capital, when required.
§ (f) understand the procurement process and timelines.
§ (g) sign the “Tripartite Contract for purchase and lease of capital goods” together
with the lessor and the supplier;
§ (h) be aware of modes of delivery, installation, if necessary, testing and
commissioning, training and acceptance process and timelines.
4/7/22 No 43
9. AMLP PROCESS: ACCEPTANCE*

►As from the date of acceptance, the lease contract becomes irrevocable and non-
cancelable, except with the agreement of both parties or by an operation of law.
►It is the lessee’s duty to ensure periodic lease rental payments as per the
amortization schedule attached to the lease agreement.
►The disbursement process is not directly concerned by the lessee but is connected
to the acceptance of the capital goods by the lessee.
►Disbursement is both an accounting procedure and a process making any final
payment to the supplier, recording the contract amount in the lease administration
system to make the contract live as from that date.

4/7/22 No 44
►Open Discussions

4/7/22 No 45