Leveraging Leases for Small Businesses: A Working Analysis of Opportunities, with Special Reference to Situation in Kenya

Paper
Date Published: 
Jan 2004
Author: 
Albu, M.

How can leasing be leveraged stimulate investment in small businesses?

Small-scale enterprises in developing countries play a critical role in providing a poverty safety-net, a source of income and employment among the rural and urban poor. A key problem is access to finance for medium-term investments. The author sttates that the advantages of leasing come from several directions such as:

  • The ability to make repayments is derived from productive use of equipment;
  • Investment risk for financial institutions is reduced as the lessor retains full ownership of equipment, making the recovery easy in case of default;
  • Livelihood risks facing small-scale entrepreneurs are reduced by spreading investment costs, thus reducing cash-flow pressures.

The author discusses that leasing provides a solution to the problem of a lack of collateral faced by smaller businesses. However, he writes that several specific challenges must be addressed to make leasing attractive. These challenges include:

  • Administration and monitoring of large numbers of small-value lease contracts;
  • Bolstering the security provided to lessors by asset ownership;
  • Appraisal of market opportunities in small enterprise business sectors;
  • Assessment of commercial value and technical appropriateness of leased equipment.

Finally the author concludes:

  • The market is limited to small businesses already established in supply-chain relationships with large companies willing to play the leveraging role;
  • Leveraged leasing could help stimulate the emergence of leasing targeted at smaller businesses;
  • Leasing has potential to stimulate business investment in productive capital.
Type: 
Paper
Country: 
Kenya