Enhancing the Leasing Enabling Environment - Economic Growth ...

EXECUTIVE SUMMARY
At the heart of economic development activity is the need for businesses to access financing,
particularly long-term financing of equipment (three to five years). The availability of
equipment financing within a developing economy can translate into additional economic
activity through increased employment, productivity, product quality, and exports. This
creates a multiplier effect through the additional demand of products and services such as
accounting, advertising, transportation, mechanical repairs/parts and service, and consumer
goods. Increasing access to equipment financing is a catalyst for economic growth.
By replacing outdated equipment, emerging economies can increase production, product
quality, exports, and employment. Access to financing for equipment, however, continues to
be a significant hurdle for small- and medium-sized enterprises (SMEs) and the agricultural
sector in many countries. Traditional banking in emerging economies often has structural
limitations due to insufficient liquidity, poor or nonexistent secured transactions laws and
collateral registries, inadequate judicial processes, and limited or absent creditors’ rights.
Developing leasing can mitigate many of these constraints. Leasing companies are not
secured parties; they are owners of equipment that have more control over their equipment
than banks do over their collateral. Furthermore, because up-front costs for leasing are lower
than traditional bank lending, leasing is a viable alternative to lending in many economies
where unreasonable collateral requirements are prohibitive.
Leasing is a method of financing that provides for the use of an asset (e.g., equipment) rather
than advancing money (in the form of a loan) to a business to purchase the asset. Leasing is
based on the premise that profits are earned through the use of equipment, not ownership. It
focuses on the lessee’s ability to generate cash flow from the use of equipment and its
business operations to service the lease payment, not the balance sheet or collateral, as with
loans. This can be advantageous for new businesses or SMEs that do not have enough cash
savings for large down payments or sufficient other assets that could be pledged as collateral
for a loan. Leasing does not require additional collateral because the equipment is owned by
the lessor (the leasing company).
Lending and leasing are similar in that both involve decisions regarding the creditworthiness
of the borrower (i.e., the lessee) and an analysis of the risks. Leasing, however, has additional
factors: The lender must be knowledgeable about both agricultural credit analysis and the
equipment (its value, the dealers, parts providers, repairs, maintenance schedules,
manufacturers’ warranties, and how to calculate expected depreciation). This is why a leasing
company might choose to specialize and build expertise in one equipment or industry.
There is a significant amount of confusion in lease terminology. For example, ―finance lease‖
and ―operating lease‖ are commonly referred to as types of leases, though they are
accounting terms that define how companies account for a lease transaction in their financial
reporting. Care must be taken when defining leasing under a lease law or tax code because
accounting, commercial law, and tax codes have different objectives and each should be
clearly defined. The confusion over these terms in developing countries and their improper
use has seriously constrained the growth of leasing and the positive economic impact leasing
could be having in developing countries.