Leasing to Support Small Businesses and Microenterprises
This paper explores the potential of leasing as an additional financing technique to expand the supply of medium-term financing for capital equipment and new technology to MSBs. It identifies the following advantages of lease financing:
- Ownership is retained by the lesser-financier of the product;
- Lease payments are tailored to match the cash flow generation of the lessee-borrowers business;
- Security deposit requirement is smaller than the margin required in bank financing.
The paper includes a review of relevant practical experiences using leasing as a financial intermediation mechanism for MSB development projects in Pakistan and Bangladesh, and for the sale and diffusion of alternative energy systems in Indonesia, Sri Lanka, the Philippines and Kenya. The principle lessons of these experiences are:
- Leasing is suitable as a means of finance for MSBs;
- A clear regulatory and legal framework is indispensable to encourage leasing operations;
- Flexible repayment terms in lease contracts ensure minimal defaults and losses;
- Subsidies should be carefully applied.
Finally, the paper suggests that opportunities should be maximized to expand the use of leasing as an intermediation technology to promote MSB development.