The question is do traders dealing in high value assets for domestic, commercial or industrial use know about the hire purchase system and how its adoption and compliance with its associated regulatory framework would impact positively on their respective businesses? I do not think so. So then what is hire purchase system? Which legal framework is it premised on? Does it have any remarkable history of success in Uganda and else in the world?
In responding to the above questions, let me start by explaining what hire purchase business is. Hire purchase is an arrangement which enables a buyer to acquire and own goods without paying the whole price at ago.
The buyer takes possession of the goods with the first payment and takes ownership with the final payment i.e. until the final installment is paid; the goods are owned by the seller (owner) though they are in the possession of the hirer (buyer or customer). Sometimes it is also termed as an installment purchase.
Globally, this form of business has its roots of growth in the 19th century when companies started offering purchase of their products on Hire Purchase system to allow customers with a cash constraint to make an expensive purchase they otherwise would have to suppress altogether, delay or forgo.
In Uganda, during the 1960s and 70s Hire Purchase system was popular under Car & General Agencies Ltd and promoted businesses of the time so much so that ordinary citizens and most importantly civil servants; were able acquire assets of their interest relatively much easier unlike now.
However, not until 2009, Uganda did not have a distinct piece of legislation governing Hire Purchase system transactions (relied on: contract Act, Cap75, Sale of Goods Act cap 82 and Judicature Act).
Nevertheless the parliament of Uganda enacted the Hire Purchase Act in June 2009, the first of its kind and in 2012 the minister responsible for trade made Hire purchase regulations. The Act and associated regulations provide for regulation of the Hire Purchase system transactions, licensing of entities to carry out hire purchase business and also hire purchase agreements. This is a clear manifestation that the industry is well regulated and as such; business proprietors need to confidently embrace it so that they can improve the rate of stock turnover hence transform ‘dead stock’ into relatively fast moving stock to the advantage of the business proprietors.
So then what value does Hire purchase system generate in terms of benefits to business proprietors and consumers? The benefits it should be noted, are enormous but notable ones under each category include:
a)Business proprietors:
- It assists management of cash flow rather than losing large amount of capital through paying for the expensive item at ago!
- The proprietors attempting to acquire assets particularly expensive capital equipment for value addition, setting up of cottage industries, will find it easier to realise their dreams under Hire Purchase systems.
- Increased volume of sales: hire purchase system attracts more customers as the payment is to be made in tailor-made instalments leading to increased volume of sales hence increased profits to the seller.
- Lesser Risk: From the point of view of the proprietor this system is greatly beneficial as he or she knows that if the buyer fails to pay one instalment, he or she can get the asset back
- Proprietors can purchase machinery and other equipment on instalment basis and in turn sell to the buyer charging full price.
- It provides Tax shield or protection for Business proprietors since the interest payable to the owner or seller the item, is an allowable deduction for tax purposes.
- b) Consumers:
- It spreads the cost of expensive items over an extended time period
- Often one can choose a fixed term and deposit that fits one’s budget before a contract is signed; hence you can get a facility that fits you and your circumstances as a consumer.
- The rate of interest and monthly instalments are fixed throughout the duration of the agreement this allows one to plan cash flows accordingly.
- It enables consumers amass property on credit
- It is the most common source of medium term finance that is convenient, affordable and fast for consumers to invest in capital assets
- Even if the consumer has not been able to pay for the item in full, he or she are still able to use it.
- Hire purchase also helps to sustain economic growth by making it possible for consumers to hedge against the downward adjustment of their consumption during a fall of their income.
- It encourages savings: It encourages thrift among the consumers who are forced to save some portion of their income for the payment of the instalments
Conclusion:
- Hire Purchase system has potential to accelerate the pace of growth and development of businesses and investments in particular and the economy in general.
- First, the increase in spending because a great proportion of the population is enabled by the instalment purchase (Hire purchase) has the multiplier effect on income in addition to encouraging savings and aggregate investment in productive sectors of the economy.
- Increased income raises the level of expenditure further, thus setting in motion a virtuous cycle of growth in consumption, savings, investment, income hence trade and general economic development.
This therefore calls for all business proprietors dealing in high value goods e.g cars, trucks, TV screens, Music systems, refrigerators etc. to seek for licensing (Section 18 of the Act provides for the licensing of the hire purchase business in Uganda) to be able to take advantage of the hire purchase system with a view of rendering trade more affordable, convenient, flexible and above all inclusive.
By Fred Ahimbisibwe
Development Consultant
MICROFINANCE TRAINING AND ADVIOSORY SERVICES (MATS) LTD
