A financial lease is a lease arrangement where a lessor purchases a product (which must be a movable asset) selected by the lessee from a third party as part of a lease agreement between the lessor and lessee. For the term of the lease, the lessor owns the product, and the lessee has the rights specified in the lease agreement. In Cambodia, the market for financial leases is undeveloped but growing. Financial lease business may be conducted by banks - subject to approval from the National Bank of Cambodia (the “NBC”) and non-banks – subject to obtaining a license to do so from the NBC.
As the owner of the product during the life of the lease, the lessor obtains several key benefits. First, the lessor does not need to have any security over the product created, but is free to obtain additional security including guarantees. The product will also be excluded from the lessee’s assets in insolvency proceedings. The lessor may possess and sell the products upon default of the lessor under the lease agreement without going to court (with some minor limitations).
Entering into a financial lease may result in lower transaction costs when compared to a traditional bank loan. A traditional bank loan often involves an extensive examination of the borrower’s assets, liabilities, income, and other due diligence. Given the fact that ownership of the product remains with the lessor, this process may be more expeditious in the case of a financial lease.
The Law on Financial Leases (2009) offers parties the flexibility to structure the terms of their lease agreements to meet their needs. Parties to a lease agreement may incorporate a wide variety of terms and conditions into the agreement regarding, among other things, the use of the product, maintenance requirements, payment options, advance payments and security deposits (and interest thereon), and ownership transferal upon expiration of the lease term.
Given the potential benefits of financial leases over other methods of asset financing, we expect to see the market in Cambodia for financial leases continue to grow. In Cambodia, financial leases have been used to finance motorcycle and car purchases, but a financial lease can be used to finance the purchase of any movable property, including equipment for all kinds of businesses.