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