Leasing to support small businesses and microenterprises

Abstract

In most developing countries, capital markets are relatively undeveloped and banks are often unable or unwilling to undertake term lending. And banks prefer to lend to larger, established business with well-developed balance sheets and credit histories. Operations in microenterprises and small businesses are cash-flow-oriented but rarely have organized historical financial records or the assets needed for collateral for conventional bank financing. The author explores the potential of leasing as an option to expand small businesses'access to medium-term financing for capital equipment and new technology. In a lease-financing contract, the lessor-financier retains ownership of the asset, lease payments can be tailored to fit the cash-flow generation patterns of the lessee-borrower's business, and the security deposit is smaller than the equity stake required in conventional bank financing. Different types of small businesses require different financial services. It would be worthwhile to encourage development of a range of institutions using special methods to service particular market niches. Most small businesses that generate extra income for a household or employ nonfamily members need simple access to financing to augment their working capital needs. Microfinance appropriate to their needs will feature short cycles of repayment and borrowing. Other small businesses require medium-term financing to acquire the tools and equipment needed to support production growth and expansion. For these businesses, leasing is an attractive new financing option. The author examines and compares the Bank's experience: 1) Lease financing was used to promote the development of small businesses in Pakistan, as part of a microenterprise development loan project. 2) For a Bank-supported alternative-energy project in Indonesia, a variant of lease financing -- the hire-purchase contract -- is being used in marketing and distribution by private distributorsof photovoltaic solar home systems. 3) Lease financing was used by Grameen Trust in Bangladesh to finance the purchase of small tools and equipment and in other countries to promote the growth of alternative energy systems.