Paper

Microleasing: An Alternative Way of Financing Productive Assets

How can micro-leasing become feasible and sustainable in developing countries?

This briefing note examines the process of micro-leasing, focusing on the constraints that it faces in developing countries, and the strategies by which it can overcome these constraints. The note identifies the following constraints:

  • Absence of a conducive legal and regulatory environment;
  • Weak economic conditions;
  • Institutional factors, such as limited technical skills and insufficient linkages;
  • Limited client knowledge of leasing.

It then outlines the experiences of the following two African leasing schemes and the lessons they learned:

FINCA, Tanzania:

  • It learnt that complications are specific to leasing products; these included tax considerations, ownership of the financed asset and compliance with legal and regulatory requirements;
  • Dealing with suppliers was also demanding.

GIE Hari Goumo in Timbuktu, Mali:

  • This scheme failed for various reasons:
    • The foreign equipment could not function in African conditions and was also too expensive;
    • Lessees failed to pay the final instalment;
    • There was no system to monitor the proper use of rented equipment.

The note then lists the risks the microfinance institutions (MFIs) engaged in micro-leasing may face:

  • Liquidity risk;
  • Credit/business risk;
  • Equipment obsolescence, maintenance, and deterioration risk;
  • Second hand market risk.

It concludes with strategies to manage operating risks in micro-leasing in the areas of:

  • Business assessment;
  • Processes and systems;
  • Agency arrangements;
  • Asset insurance;
  • Upfront payments;
  • Linkages, collateral, sectoral knowledge and financial resources.

About this Publication

By Sempangi, H., Messan, H.
Published