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UNITED NATIONS CAPITAL DEVELOPMENT FUND Microfinance |
Issue 2 / March - April 2004 |
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News | Leasing for Small and Micro Enterprises An ILO guide for designing and managing leasing schemes in developing countries
By Hyewon Jung Leasing for Small and Micro Enterprises is one of a series of manuals published by the Social Finance Programme of ILO to assist microfinance providers in designing new financial products through training and direct technical assistance. Leasing is a contractual agreement between two parties, which allows one party (the lessee) to use the equipment (asset) of the other party (the lessor) who legally owns it. In exchange for the borrowed asset, which serves as security, the lessee makes specified periodic payments to the lessor. To determine the ability of the lessee to make the payments, the legal owner relies on knowledge about the prospective of business cash flows. This analysis, authors say, eliminates the requirement for borrowers to have a credit history or a well-developed balance sheets in leasing. What types of assets can
be leased? Any items needed to increase production of small and micro enterprises
can be leased (ex. refrigerators, lathe machine, farming equipments, ovens,
sewing machines, satellites, airplanes, cars etc.) The idea is that if you lease
an item for production purposes, income goes up and the lease is paid; if you
lease an item for consumption purposes, like a TV, income goes down and there
is a higher probability of default. Lessors also prefer equipment with a secondary
resale market; this facilitates repossession and sale of the item in case the
lessee defaults.
The book suggests that the lack of initiatives to offer leasing in developing countries has limited the provision of working capital loans in short loan cycles. However, to small and micro enterprises, leasing has a distinct advantage over credit. Medium-term investment finance allows small and micro enterprises in the production and service sector to increase their productivity. However, most often these small enterprises do not have access to adequate financial services to meet their needs because they are too big for microfinance institutions but too informal for commercial banks. For entrepreneurs with limited means to provide the collateral necessary to access financial services, leasing is a solution that fits their needs. Leasing can thus enable small and micro enterprises to increase the total availability of capital from external sources, therefore freeing its own sources of capital available for other productive use. By allowing a larger number of small and micro enterprise owners to have access to financial services, leasing can facilitate the promotion of the small and micro business sector and local economic development, provided that the appropriate legal and regulatory framework are in place. In an environment where a legal supervisory mechanism is nonexistent, the cost of leases increases due to greater legal hazards associated with lease transactions, inhibiting further development and promotion of leasing products. The existence and degree of efficiency of laws and regulations overseeing leasing transactions are thus important considerations in the implementation of leasing schemes. In many countries, legal regulations on leasing normally cover the following issues (p. 77):
As the microfinance sector in many countries begin to realize that there is a clear demand for leasing among the clients, many institutions have started to consider the introduction of a leasing scheme as their new financial product. Leasing for Small and Micro Enterprises draws on lessons learned from micro-leasing schemes all over the world to familiarize practitioners with the complexities of designing a leasing product. Organized into eight chapters, the handbook introduces the basic principles of a leasing operation, methods of designing and marketing a lease product to fit the needs and preferences of potential clients, and the regulatory, monitoring and fiscal aspects of leasing. The book offers case studies, a glossary and illustrative anecdotes from existing leasing operations that are useful in deepening the understanding of readers on how the principles can be applied. Leasing for Small and Micro Enterprise: A guide for designing and managing leasing schemes in developing countries is a publication of the International Labour Organization. This book can be obtained through major booksellers or ILO local offices in many countries, or direct from ILO Publications, International Labour Office, CH-1211 Geneva 22, Switzerland. The full document can be downloaded at: http://www.ilo.org/public/english/employment/finance/download/leasing.pdf
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