This content is from: Local Insights

Leasing

The leasing market in Bosnia and Herzegovina (BiH) has experienced a high growth rate over the past few years despite the absence of adequate legislation. Leasing agreements have been regulated by the Law on Obligations and Law on Ownership of the BiH constituent entity (the Federation of Bosnia and Herzegovina ("FBiH") or the Republika Srpska (RS)) where the leased property was located. Since these laws were not fully adapted to the demands of the leasing market, the legal rights of the parties to leases remained unclear.

A new Law on Leasing was enacted in RS on August 16 2007 and will come into force on November 16 2007. The Law covers both real property and non-real property leases. It covers aspects related to the foundation, business activities and termination of leasing companies, the registration of property rights over leased properties, and reporting, audit and supervision of a leasing company's business activities.

The Law establishes a legal framework for two types of leasing – financial leases and operating leases – which should in practice reduce the use of loans secured by pledges, which have been used frequently in RS and FBiH. This is seen as particularly advantageous for small businesses that do not have sufficient initial capital to purchase machinery and fixed assets, or real estate that is eligible to be mortgaged.

The Banking Agency of RS is authorized to issue licences to companies that are registered to carry out leasing activities and to supervise their business activities through monitoring financial reports and direct check-ups. In addition to granting and revoking licenses, the Agency is empowered to set interest rates and leasing fees.

Although the new Law should contribute to the development of the leasing market, opponents have criticized certain key aspects. The Association of Leasing Companies of BiH and other opponents of the Law have strongly criticized the requirement that leasing companies wishing to operate in RS must have initial share capital of not less than KM 250,000 (approximately $140,000), which is a large increase on the previous initial share capital required. Their principal argument is that leasing companies in BiH are not financial institutions and the required capital is too high for a non-financial institution.

Leasing companies registered in FBiH must have a branch office registered in RS in order to operate their business, and are subject to the licensing procedure before the Agency. Leasing companies registered in FBiH are also subject to tax on profits from business performed in RS, as well as to accounting and other requirements set out by the Law. Critics of the Law see these as a further burden on these companies and a setback for the overall trend towards integration of the RS and FBiH markets.

Despite these limitations, the Law will be an important step forward in regulation of the leasing market in BiH once it becomes fully operational.

Sead Miljkovic, Almir Smajli and Dina Durakovic

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