Microleasing: An Alternative Way of Financing Productive Assets

This briefing note examines the process of micro-leasing, focusing on the constraints that it faces in developing countries, and the strategies by which it can overcome these constraints. The note identifies the following constraints:

• Absence of a conducive legal and regulatory environment;
• Weak economic conditions;
• Institutional factors, such as limited technical skills and insufficient linkages;
• Limited client knowledge of leasing.

It then outlines the experiences of the following two African leasing schemes and the lessons they learned:

FINCA, Tanzania:

• It learnt that complications are specific to leasing products; these included tax considerations, ownership of the financed asset and compliance with legal and regulatory requirements;
• Dealing with suppliers was also demanding.

GIE Hari Goumo in Timbuktu, Mali:

• This scheme failed for various reasons:
  • The foreign equipment could not function in African conditions and was also too expensive;
  • Lessees failed to pay the final instalment;
  • There was no system to monitor the proper use of rented equipment.

The note then lists the risks the microfinance institutions (MFIs) engaged in micro-leasing may face:

• Liquidity risk;
• Credit/business risk;
• Equipment obsolescence, maintenance, and deterioration risk;
• Second hand market risk.

It concludes with strategies to manage operating risks in micro-leasing in the areas of:

• Business assessment;
• Processes and systems;
• Agency arrangements;
• Asset insurance;
• Upfront payments;
• Linkages, collateral, sectoral knowledge and financial resources.