Challenges of Tapping Opportunities in An Emerging Market

Mohammed Hussein & Zubir Harun Tashkent International Leasing Forum Tashkent, 28th April 2011

Outline

1. Challenges of entering a new emerging market

2. Growth opportunities for the leasing business

3. Creating a foundation for sustainable high-

performance

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1.Entering a new emerging market

•Market study – is there a market potential•The regulatory framework – how it is

implemented & shortcomings, if any•Legal framework – especially recognition

of creditor rights and recovery process•Human resource & work culture•Sources of funding to finance growth

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The Market Study

The market study should cover the following to form a basis to assess whether or not there is a demand for the leasing business

•Determining the potentially leasable assets• Identifying the sectors• Identifying the sectors you are likely to focus•Understanding the competitive environment

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The Regulatory Framework

•The licensing requirement•Limitations, if any, on the license•The issuing authorities - How many

different departments are involved in the process

•Restrictions on borrowings & repatriation 4

The Tax Requirements Understanding the tax treatment on:

•Ownership of the leased assets – property tax, capital allowances/depreciation

•Lease rentals paid by the lessees•Lease rentals received by the lessors•Deductible expenditures for lessees &

lessors 5

•Uzbek Leasing International A.O. was incorporated pursuant to the decree of the Cabinet of Ministers of Republic of Uzbekistan dated January 5, 1995 No:6

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Charter Memorandum of Association

1. To carry on Leasing Business etc.

2. To finance sales of equipment etc.

3. To carry on business of Financiers.

4. To advance or lend moneys on Security.

5. To carry on business of Advisers.

6. To engage in the business of Consultants

7. To accept payment in shares or debentures.

8. To guarantee.

9. To borrow, mortgage. Issue debentures etc.

10.Etc.

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The Human Resource

•Availability of local resources for the various skills required

•Competency & skills gap•Local employment & Union rules for the

various grades of staff•The work culture

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Realizing the importance of the transfer of technology of leasing and Hire-Purchase Operations, the company had taken steps both with the training programmed and also an educational platform, so as to create awareness to the general public to better understanding of the leasing products and their better acceptance

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Due Diligence

It is critically important that you:

•Validate your findings with on-the-ground due diligence

•Do not just rely on consultants•Validate also how realistic are your

timelines for implementation and what can upset your timelines

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2. Growth opportunities for the Leasing Business

If we consider banking as the first tier financing, • we have to acknowledge that leasing • Is the second tier financing, and therefore serving a • secondary market. In a developing country, this secondary-tier market is served by many

components:

• Unlicensed finance companies• Hire purchase companies• Licensed Money lending companies

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1997 positive economy to enable the company: -

• Sustained and superior returns on investments –

• Development of the Republic of Uzbekistan in line with government policy whereby emphasis will be streamlined on the followings: -

• Long-term financing for purchase and usage of technological

equipment

• Attraction of advanced technology within the framework of

leasing in the primary industrial sector of the economy. 12

• Enhancing of export potential and development of import-substituted production

• Provide wide range of leasing services to develop small and medium entrepreneurship growth of manufactured consumers goods.

• Wide range of leasing services to companies and joint venture companies in line with Government policies in attracting foreign investment;

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• To work on the methodology of leasing operations and recommendations on the development of leasing service market in the Republic of Uzbekistan

• To fulfill the government mission and vision on the development of the Small and Medium scale industries

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Growth opportunities……. (cont’d)

The needs served by these institutions are:

•Car financing•Equipment financing•Working capital for SMEs financing•Financing of receivables – factoring•Financing of HP receivables – bill

discounting

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Growth opportunities……… cont’d

These various institutions existed in many developingcountries, but recent industry developments have seenthese various institutions being absorbed into banks aspart of the universal banking process.

In Malaysia for example, all the finance companies, leasing companies and factoring companies have beenAbsorbed into their respective mother banks as part of the

Universal banking process where banks do everything.

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Growth opportunities………. Cont’d

The question for an emerging market such as

Uzbekistan is therefore:

Should we follow the path of these otherdeveloping markets by absorbing all theseother businesses into the banks as part ofthe universal banking process?

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Growth opportunities………… cont’d My view is NO. As an emerging market, you should

encourage the development of these other financing institutions which focus on the second-tier market, to stimulate the development of the small businesses and SMEs, which will add breadth to the economy and create wider opportunities for all. Do not rush into a universal banking platform until small businesses & SMEs have reached certain level of development.

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Growth opportunities…….. Cont’d BUT, for these second-tier institutions to grow, they

must have access to funding. • Another area that has been given priority by

the Government at that point of time was the creation of credit policy which was directed towards the financing of primary sectors of the industry and for the enterprises which were involved in the primary needs of the country’s economy. Such credit policy together with other measures have given great support to producers and allowed positive tendencies in increasing the manufacture of industrial products.

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• With all the government support in priority areas and attractive legal framework, we are confident that leasing in future is most effective form of financial support to enterprises and small-medium business.

• In many developing economies, these funding requirements are provided by banks through bill discounting facilities.

Banks therefore must be encouraged to provide bill - discounting facilities, with or without recourse to the leasing companies.

• This will allow these second - tier finance companies to increase their working capital and expand their operations.

Growth opportunities…….. Cont’d

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3. Building the foundation for sustainable high performance •Being a long-term player•Achieving market and financial success to

be an industry leader – top 10?•Ensuring your success is not short -

term but sustainable over the long term i.e. becoming a Growth organization

and an industry leader 21

Elements of a Growth company• You must have a Vision – a goal that will serve as

a reference point for everything you do• Translate that Vision into milestones in

achieving that Vision i.e. what progress by when• You must know what are the enablers to achieve

that Vision • Energizing the work force – performance -

driven culture• Specific action plans for each enabler• A rigorous performance - management

framework

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Communicating the Vision

•The Vision must be communicated with all the employees, so that it is shared with all the staff, and they take ownership to support and achieve the Vision.

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Specific Milestones - the numbers

•The Vision must have specific numbers so that you can track whether the milestones are being achieved.

•Don’t just settle for ‘motherhood’ statements such as ‘being a premier….’

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Identifying the Enablers

•Capital•Competency•IT•Marketing strategy•Branding Specific Action Plans – by whom &

when - to build these enablers 25

Creating an Engaged Workforce

•Staff communication•Competency/capability building•Performance-driven culture with

performance-driven remuneration

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Performance-Management Framework

•Alignment of Key-Performance Indicators KPIs, with the Vision

•Alignment of KPIs at the various levels from the CEO downwards

•Regular and rigorous tracking of these milestones & KPISs – variance analysis

•Managing performers & non-performers 27

Conclusion

• Importance of a thorough Due Diligence process that must cover all relevant areas, and validated with on-the-ground visits• Leasing has many untapped

opportunities that represent potential for further growth and development• To ensure that success can be sustained

over a long - term, build a foundation for a Growth company that can be a market leader.

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Q & A

THANK YOU