Description
Any single asset which has an acquisition cost of $5,000 or more and a useful life of more than one year, whether purchased outright, acquired through a capital lease or through donation. It also includes certain constructed or fabricated items and certain component parts (See UW Shared Financial System Accounts and Definitions.) It does not include real property (land), software or library holdings.
Subsidizing Capital Equipment: Leasing
“The key benefit of leasing is the access it provides to those that do not have a significant asset base already by enabling small enterprises to leverage off an initial cash deposit, with the inherent value of the asset being purchased acting as collateral.” -Leasing in Development Guidelines for Emerging Economies IFC Report Programs that subsidize physical capital generally work through leasing agreements. There is a growing amount of literature on this subject and on the appropriateness of leasing versus credit schemes. Many of the development examples in the literature are for rural markets. Leasing is a valuable tool for MSMEs to use physical capital without collateral or credit history. This allows smaller businesses more access to finance leading to the acquisition of capital equipment. Leasing can also provide an alternative to credit in countries with weak business environments. These agreements can help to allocate risks to the party most suitable to bear the risk.
Types of leasing agreements:
• Finance Lease: In this type of agreement, the lessor purchases the capital and leases it to the lessee for a monthly fee. For the duration of the arrangement the lessor owns the capital, thus providing a useful alternative to collateral if the lessee defaults. At the end of the arrangement, the lessee has the option of purchasing the capital. Usually the terms of the lease are for the entire economically productive life of the asset. Financial leases are useful for clients that do not have collateral to back up a loan. Operational Lease: These agreements do not have an implication of final ownership. The terms of the lease are for substantially less than the economically productive life of the asset. The lessee would return the capital before the economic viability of the equipment was obsolete. These leases are often used for capital with a high depreciation value. Hire Purchase Lease: This type of agreement is similar to the finance lease. The client puts down a substantial down payment on the capital and throughout the term of the lease the lessee owns a growing percentage of the capital until eventually she owns the equipment in its entirety. This serves the dual purpose of gaining access to productive capital and building equity. Hire purchase leases are often used for smaller purchases (i.e. a sewing machine).
•
•
Drawbacks to leasing:
There are a number or disadvantages leasing has as compared to lending. Possible problems include: • Local banking regulations could pose problems in financial leasing. • There are more opportunities for legal disputes because the leasing institution owns the equipment.
The USAID Knowledge Services Center is operated by Bridgeborn, Inc. and Library Associates, and funded by M/CIO/KM and M/HR/TE under contract AID-OAA-C-08-00004. The contents of this document are the sole responsibility of the Knowledge Services Center and do not necessarily reflect the views of USAID or the United States Government.
• • •
The leasing institution may face increased liabilities due to their ownership of the equipment. Financial leasing tends to have higher operating costs There is often a lack of knowledge about leasing operations among the lessees.
Because of the drawbacks listed above, before initiating a project to promote leasing of capital equipment to MSMEs, there needs to be a strong legal and regulatory framework in place. Without this environment as a backdrop, a leasing project is not a viable development program. Many studies cite the necessity of the following institutions: • Clear rights and responsibilities of all parties to a lease • No contradictions within the existing legislation • Clear, swift and easy repossession mechanisms • There exists only the necessary level of leasing industry supervision and licensing • An appropriate taxation framework surrounding the lease, including income and value-added taxes • An appropriate accounting framework
Development Impacts:
According to the World Bank study, Leasing: An Underutilized Tool in Rural Finance, the substantial development impacts of leasing are: • Access to finance and increase in capital investment • Increase in capital base and capital market development • Competition in the financial market
Sources:
Studies and toolkits
Leasing: An Underutilized Tool in Rural Finance World Bank http://lnweb18.worldbank.org/ESSD/ardext.nsf/11ByDocName/LeasingAnUnderutilizedToolinRuralFinance/$FILE/LeasingDP7_Final.pdf Leasing: A Potential Solution for SME Expansion and Rural Financial Sector Deepening USAID http://www.microlinks.org/file_download.php/mN+23+Leasing++A+Potential+Solution+Russia.pdf?URL_I D=1040&filename=11515964821mN_23_Leasing__A_Potential_Solution_Russia.pdf&filetype=applicatio n%2Fpdf&filesize=208569&name=mN+23+Leasing++A+Potential+Solution+Russia.pdf&location=user-S/ Leasing: A New Option for Microfinance Institutions USAID http://pdf.usaid.gov/pdf_docs/PNACQ698.pdf Leasing in Development Guidelines for Emerging Economies IFC – World Bank Group http://rru.worldbank.org/Documents/Toolkits/Leasing/Leasing_in_Development_Full.pdf Equipment Leasing and Lending: A Guide for Microfinance Asian Development Bank http://www.adb.org/Documents/Periodicals/Microfinance/finance-200452.pdf
Country Experiences
Approaches to SME Lending in Eastern Europe and Eurasia USAID http://pdf.usaid.gov/pdf_docs/PNADE050.pdf Buffalo, Bakeries, and Tractors: Cases in Rural Leasing From Pakistan, Uganda, and Mexico World Bank http://www.ruralfinance.org/servlet/BinaryDownloaderServlet/38812_Document.pdf?filename=115139290 5359_Buffalo_Bakeries_and_Tractors_Cases_in_R-1552321165.pdf&refID=38812 Recommendations to ABAD for Facilitation of Leasing Services - Financial Institutions and Leasing Companies: What is the potential to increase access to leasing services in Azerbaijan? USAID http://pdf.usaid.gov/pdf_docs/PNADE726.pdf Coping with the “Unexpected”—The Experience of ACBA Leasing in Armenia USAID http://www.microlinks.org/file_download.php/BASIS+microNOTE_Experience+of+ACBA+Leasing+in+Arm enia.pdf?URL_ID=15496&filename=11691584681BASIS_microNOTE_Experience_of_ACBA_Leasing_in _Armenia.pdf&filetype=application%2Fpdf&filesize=69871&name=BASIS+microNOTE_Experience+of+A CBA+Leasing+in+Armenia.pdf&location=user-S/
doc_589952199.pdf
Any single asset which has an acquisition cost of $5,000 or more and a useful life of more than one year, whether purchased outright, acquired through a capital lease or through donation. It also includes certain constructed or fabricated items and certain component parts (See UW Shared Financial System Accounts and Definitions.) It does not include real property (land), software or library holdings.
Subsidizing Capital Equipment: Leasing
“The key benefit of leasing is the access it provides to those that do not have a significant asset base already by enabling small enterprises to leverage off an initial cash deposit, with the inherent value of the asset being purchased acting as collateral.” -Leasing in Development Guidelines for Emerging Economies IFC Report Programs that subsidize physical capital generally work through leasing agreements. There is a growing amount of literature on this subject and on the appropriateness of leasing versus credit schemes. Many of the development examples in the literature are for rural markets. Leasing is a valuable tool for MSMEs to use physical capital without collateral or credit history. This allows smaller businesses more access to finance leading to the acquisition of capital equipment. Leasing can also provide an alternative to credit in countries with weak business environments. These agreements can help to allocate risks to the party most suitable to bear the risk.
Types of leasing agreements:
• Finance Lease: In this type of agreement, the lessor purchases the capital and leases it to the lessee for a monthly fee. For the duration of the arrangement the lessor owns the capital, thus providing a useful alternative to collateral if the lessee defaults. At the end of the arrangement, the lessee has the option of purchasing the capital. Usually the terms of the lease are for the entire economically productive life of the asset. Financial leases are useful for clients that do not have collateral to back up a loan. Operational Lease: These agreements do not have an implication of final ownership. The terms of the lease are for substantially less than the economically productive life of the asset. The lessee would return the capital before the economic viability of the equipment was obsolete. These leases are often used for capital with a high depreciation value. Hire Purchase Lease: This type of agreement is similar to the finance lease. The client puts down a substantial down payment on the capital and throughout the term of the lease the lessee owns a growing percentage of the capital until eventually she owns the equipment in its entirety. This serves the dual purpose of gaining access to productive capital and building equity. Hire purchase leases are often used for smaller purchases (i.e. a sewing machine).
•
•
Drawbacks to leasing:
There are a number or disadvantages leasing has as compared to lending. Possible problems include: • Local banking regulations could pose problems in financial leasing. • There are more opportunities for legal disputes because the leasing institution owns the equipment.
The USAID Knowledge Services Center is operated by Bridgeborn, Inc. and Library Associates, and funded by M/CIO/KM and M/HR/TE under contract AID-OAA-C-08-00004. The contents of this document are the sole responsibility of the Knowledge Services Center and do not necessarily reflect the views of USAID or the United States Government.
• • •
The leasing institution may face increased liabilities due to their ownership of the equipment. Financial leasing tends to have higher operating costs There is often a lack of knowledge about leasing operations among the lessees.
Because of the drawbacks listed above, before initiating a project to promote leasing of capital equipment to MSMEs, there needs to be a strong legal and regulatory framework in place. Without this environment as a backdrop, a leasing project is not a viable development program. Many studies cite the necessity of the following institutions: • Clear rights and responsibilities of all parties to a lease • No contradictions within the existing legislation • Clear, swift and easy repossession mechanisms • There exists only the necessary level of leasing industry supervision and licensing • An appropriate taxation framework surrounding the lease, including income and value-added taxes • An appropriate accounting framework
Development Impacts:
According to the World Bank study, Leasing: An Underutilized Tool in Rural Finance, the substantial development impacts of leasing are: • Access to finance and increase in capital investment • Increase in capital base and capital market development • Competition in the financial market
Sources:
Studies and toolkits
Leasing: An Underutilized Tool in Rural Finance World Bank http://lnweb18.worldbank.org/ESSD/ardext.nsf/11ByDocName/LeasingAnUnderutilizedToolinRuralFinance/$FILE/LeasingDP7_Final.pdf Leasing: A Potential Solution for SME Expansion and Rural Financial Sector Deepening USAID http://www.microlinks.org/file_download.php/mN+23+Leasing++A+Potential+Solution+Russia.pdf?URL_I D=1040&filename=11515964821mN_23_Leasing__A_Potential_Solution_Russia.pdf&filetype=applicatio n%2Fpdf&filesize=208569&name=mN+23+Leasing++A+Potential+Solution+Russia.pdf&location=user-S/ Leasing: A New Option for Microfinance Institutions USAID http://pdf.usaid.gov/pdf_docs/PNACQ698.pdf Leasing in Development Guidelines for Emerging Economies IFC – World Bank Group http://rru.worldbank.org/Documents/Toolkits/Leasing/Leasing_in_Development_Full.pdf Equipment Leasing and Lending: A Guide for Microfinance Asian Development Bank http://www.adb.org/Documents/Periodicals/Microfinance/finance-200452.pdf
Country Experiences
Approaches to SME Lending in Eastern Europe and Eurasia USAID http://pdf.usaid.gov/pdf_docs/PNADE050.pdf Buffalo, Bakeries, and Tractors: Cases in Rural Leasing From Pakistan, Uganda, and Mexico World Bank http://www.ruralfinance.org/servlet/BinaryDownloaderServlet/38812_Document.pdf?filename=115139290 5359_Buffalo_Bakeries_and_Tractors_Cases_in_R-1552321165.pdf&refID=38812 Recommendations to ABAD for Facilitation of Leasing Services - Financial Institutions and Leasing Companies: What is the potential to increase access to leasing services in Azerbaijan? USAID http://pdf.usaid.gov/pdf_docs/PNADE726.pdf Coping with the “Unexpected”—The Experience of ACBA Leasing in Armenia USAID http://www.microlinks.org/file_download.php/BASIS+microNOTE_Experience+of+ACBA+Leasing+in+Arm enia.pdf?URL_ID=15496&filename=11691584681BASIS_microNOTE_Experience_of_ACBA_Leasing_in _Armenia.pdf&filetype=application%2Fpdf&filesize=69871&name=BASIS+microNOTE_Experience+of+A CBA+Leasing+in+Armenia.pdf&location=user-S/
doc_589952199.pdf