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Leasing: An Underutilized Tool in Rural Finance

Topic :

This discussion paper, written for the Agricultural and Rural Development sector of the World Bank, examines the potential of leasing as a tool in rural finance. The authors make a strong case in favour of expanding World Bank support to develop access to leasing in rural areas. The paper’s audience is, in the narrowest sense, policy-makers at the World Bank, but more generally could be of use to organisations working in developing countries.

The authors use evidence drawn from Africa, South Asia, Central Asia, and Latin America, across a spectrum of different financial organizations including a bank, an NGO, a cooperative, private leasing companies and a state-owned company. Their study suggests that both small and medium enterprises in rural areas benefit from access to leasing. The authors assert that the two main conditions enabling development of leasing are a clear legal basis and minimal regulation. Elements of a good legal framework would include:

  • accepted accounting standards
  • a tax code not biased against leasing
  • a high degree of clarity in defining lease contracts, leased assets and the rights and responsibilities of all parties to a lease contract
  • well-defined methods of conflict resolution and asset repossession under strictly-defined circumstances

For an enabling regulatory environment, the authors isolate two main areas of importance:

  1. they suggest that leasing does not warrant prudential regulation and
  2. that institutions subject to prudential regulation, such as banks, ought to be allowed to provide leasing services, as they are no riskier than cash loans

The paper makes four recommendations for World Bank involvement in enhancing access to leasing in rural areas of developing countries. First, it should increase the availability of information on the demand and supply of leasing in rural areas. Second, it should incorporate technical and financial assistance for leasing into rural finance projects. Third, it should consider establishing leasing development facilities to provide technical assistance for policy reforms and leasing providers. Fourth, it should build relationships with other agencies that have more experience in supporting leasing development.

This study is both comprehensive and convincing, with its strong emphasis on practical case studies in a wide variety of different developing nations. Of the several appendices, perhaps most interesting is Appendix 4, which gives profiles of rural lessors, showing the variety of different types of lessors and giving a thumbnail of their successes and limitations.

  • Resource type
  • Author Nair, A.; Kloeppinger-Todd, R.; Mulder, A.
  • Organisation
  • Year of Publication2004
  • Region
  • LanguageEnglish
  • Number of pages47 pp.
  • EditionARD Discussion Paper

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