Rural leasing initiatives
A 2006 World Bank case study of three profitable providers of leasing in rural areas showed that in all three cases the rural portfolios were as profitable as their urban portfolios. Arrendadora John Deere, the largest provider of farm machinery leases in Mexico, had nearly US$63 million in farm equipment leases. DFCU Leasing, the largest provider of leases in Uganda, had a US$5 million lease portfolio in rural areas. Network Leasing Corporation Limited, a leading micro-leasing provider in Pakistan, had a lease portfolio of more than US$2.4 million in rural areas. Low lease losses, strong client demand for asset financing, and a favorable legal and policy environment made rural leasing a profitable business for these companies. For clients, access to finance at a reasonable cost, low or no collateral requirements, quick processing, and easy access to the provider appear to be significant benefits. Drawing on the experiences of the providers studied, the World Bank study identified the following lessons on managing financial leasing in rural areas.
• Rural leasing is a means to acquire productive assets. All rural leases provided by the three leasing companies are financial leases and were used to finance the acquisition of assets (in contrast to renting of assets).
• Rural enterprises of different sizes benefit from leasing, but a provider may not be able to equally serve all enterprises. Providers are limited because of differences in the skills and capacities required to effectively serve enterprises of varying sizes.
• Nonfarm enterprises account for a significant proportion of rural leases.
• Rural leasing can be profitable, but jump-starting rural leasing will require government and donor support. All three firms studied benefited from access to government or donor funds, particularly in expanding their rural operations.
• A rural-only leasing company may not be viable. Because leasing is a specialized financial activity, economies of scale, cost, and risk factors may require that, in most economies, leasing companies have larger urban operations.
The challenge: Supporting increased availability of leasing in rural areas
Leasing is a viable tool to finance rural assets. The nature and capacity of existing financial institutions, the level of potential demand for investment finance in rural areas, and the level of development of the leasing industry should determine the mechanisms for supporting increased access to leasing for rural enterprises. Policy-level support will be required in countries that do not have a clear legal and regulatory framework for leasing. Such support must be sectorwide and not restricted to rural leasing.
A good legal framework for leasing includes (1) clear definitions
of a lease contract, leased assets, and responsibilities and rights of the parties to a lease contract; (2) clarity in allocating responsibility for liability for third-party losses arising out of the operation of leased assets; (3) stipulation of the priority of a lessor’s claim over a leased asset; and (4) a framework for easy and fast repossession of leased assets. The use of internationally accepted accounting standards and an unbiased tax code enhance the development of the leasing sector. The existence of a well-functioning asset registry, the availability of insurance and maintenance services for equipment at a reasonable cost, and the existence of a good market for used assets are also necessary for the development of the financial leasing industry. Targeted institutional support may also be needed to help
develop the rural leasing sector. As shown in Boxes 1 and 2 and Figure 1, financial leasing is a relatively complex transaction. To successfully undertake financial leasing operations, organizations need not only well-trained staff, but also high-quality lease origination processes, accounting and internal control systems, and overall portfolio risk management. Types of institutional- level support that can help include (1) subsidies for startup costs of leasing operations to help offset the higher transaction cost and risk of operating in rural areas; (2) funding to establish links between commercial providers and community-based or nonprofit organizations to increase scale; (3) technical support to leasing companies; and (4) provision of equity, loans, or guarantees to expand rural outreach. A wide range of organizations—leasing companies, banks, financial cooperatives, microfinance organizations, and equipment- selling companies—could benefit from such support. Institutional- level support can include capital support when access to long- term funds is a critical constraint. Capital support combined with technical assistance can help leasing firms develop access to sustainable sources of capital. n
For further reading: IFC (International Finance Corpo- ration), Leasing in Development: Guidelines for Emerging Economies (Washington, DC, 2009), available at www.IFC. org; A. Nair and R. Kloeppinger-Todd, “Buffalo, Baker- ies, and Tractors: Cases in Rural Leasing from Pakistan, Uganda, and Mexico” (Washington, DC: World Bank, 2006), available at
www.worldbank.org/rural; A. Nair, R. Kloeppinger-Todd, and A. Mulder, “Leasing: An Underuti- lized Tool in Rural Finance,” World Bank Agricultural and Rural Development Discussion Paper No. 7 (Washington, DC: World Bank, 2004), available at
www.worldbank.org/ rural; G. D. Westley, Equipment Leasing and Lending: A Guide for Micro-Finance, Best Practice Series (Washington, DC: Inter-American Development Bank, Sustainable Develop- ment Department, 2003).
Ajai Nair (
anair@worldbank.org) is program coordinator of the Agriculture Finance Support Facility in the Agriculture and Rural Development Department of the World Bank. Azeb Fissha, consultant, provided research and editorial support.
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