Equipment Leasing and Lending: A Guide for Microfinance

This paper explores whether MFIs should approach equipment finance through lending or leasing, and how each of these should best Equipment leasing and lending: a guide for microfinance done. Equipment finance (providing loans or leases for equipment) has been a growing area of microfinance, as it has been recognised that the acquisition of equipment is often a key channel through which microentreprenuers expand their businesses and raise their incomes. This article aims to fill a current gap in research, on how best to approach equipment lending to microenterprises

The article examines:

• The advantages and disadvantages of leasing and lending as alternative means to finance equipment purchases by microenterprises;
• Best practices in equipment leasing and lending;
• The legal, regulatory and tax environments in which the choice between leasing and lending is made.

Drawing on research in Latin America, the paper finds:

• When choosing between financial leasing or lending, MFIs face a trade-off between having a stronger legal position for reclaiming equipment for the former, or having possible tax and regulatory advantages offered by lending;
• Clients choosing whether to finance equipment through a lease or a loan would consider the interest rates charged and any difference is taxes they are required to pay.

The article makes an extensive set of best practice recommendations for MFI equipment loan and lease programmes, and offers a number of policy recommendations in the regulatory, tax and legal areas.