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Buffalo, Bakeries, and Tractors: Cases in Rural Leasing From Pakistan, Uganda, and Mexico
Topic : Leasing
This discussion paper builds on a previous on previous work from the same series that assessed the relevance and potential of rural finance leasing as a financing tool. The previous paper suggested that the enhanced use of leasing in rural areas could be supported, because this practice would overcome some of the existing constraints in providing rural credit for investment financing. This current paper reinforces the case for supporting the development of leasing services in rural areas by presenting the case studies of three leasing companies. Examples of areas of support at the institutional level are provided and results that project managers can expect are also discussed.
The three firms analysed in the case-studies are:
- Network Leasing Corporation Limited (NLCL)
- Development Finance Company Uganda (DFCU)
- Arrendadora John Deere (AJD)
Finance leases are said to be close substitutes for loans as asset financing tools. In finance leases, the lease amortises most of the asset cost, usually cannot be cancelled during the lease-term, and maintenance and insurance costs rest with the lessee. Nearly all risks associated with owning an asset are transferred to the lessee without actually transferring the title. At the end of the lease period, the lessee has the option to purchase the asset for a token price.
The most significant benefit to the clients of the case-study firms that was noted is access to the formal financial system. The case studies suggest, however, that lease financing only partially overcomes the typical constraints to credit financing. Two of the three case-firms take additional collateral (unlike traditional leasing where the asset itself is usually considered security). The security deposit or down-payment required by all three companies is also higher than typically demanded in developing countries. Five lessons specific to rural leasing are drawn from the case studies:
- In rural areas leasing is a means to acquire productive assets
- Rural enterprises of different sizes benefit from leasing, but a provider may not be able to serve enterprises of all sizes
- Non-farm enterprises account for a significant proportion of rural leases
- Rural leasing can be profitable, but jump-starting rural leasing may require government and donor support
- A rural leasing company may not be viable