Leasing: A New Option for Microfinance Institutions

Part of a series documenting innovative microfinance programs from the conference "Advancing Microfinance in Rural West Africa" held in Bamako, Mali in February 2000, this document presents an overview of leasing and demonstrates how it is particularly well suited to the microfinance industry.

The paper states that with leasing:

• MFIs can develop longer term financing mechanisms for clients and increase borrowing capacity;
• Microentrepreneurs can gain access to short- and medium-term capital for fixed assets;
• Entrepreneurs with scarce financial resources have the opportunity to start a business on a limited budget or increase an operation's productivity through new capital investments;
• MFIs can reduce transaction costs by accurately projecting cash flow during the lease period, with the assumption that microenterprises will meet lease payments;
• Risk is reduced because property ownership is not transferred to the enterprise until the lease term is completed.

The paper concludes that:

• MFIs are uniquely positioned to play an active role in the expansion of the leasing market for second-tier equipment, particularly because microenterprises comprise the largest segment of manufacturing, commerce, and industry in the developing world;
• Leasing provides MFIs with new opportunities to reach borrowers and expand into existing markets;
• Rapid growth of leasing in a number of developing countries indicates that leasing is addressing an important unsatisfied demand for financing;
• Leasing has the potential to develop into an effective financing technique that MFIs can use to reach those enterprises with financial needs that cannot be satisfied by traditional microfinance approaches.