Leasing is a powerful product to provide Small and Medium Enterprises (SMEs) with much needed term-financing to invest in productive and logistic equipment. It enables SMEs to leverage an initial cash deposit with the inherent value of the asset being purchased acting as collateral. It is particularly effective in emerging economies where SMEs provide strong growth and employment opportunities, but lack access to term financing due to a limited development of capital markets and banking sector.
Leasing is a form of access to finance, and is a contract between two parties where one party (the lessor) provides an asset for use to another party (the lessee) for specific period of time in return for specified payments. Leasing is based on the proposition that income is earned through the use of assets rather than from their ownership, focusing on the lessee’s ability to generate cash flow from business operations to service the lease payment rather than on the balance sheet or on past credit history.
IFC is chiefly involved in the development of financial leasing, which is the primary stage in leasing development in most emerging and transitional economies. With financial leasing, legal ownership remains with the lessor, whilst the lessee enjoys the right to economic usage of the asset. The asset could range from something as simple as a bicycle to trucks, or even the development of sustainable energy equipment to fight climate change.
Leasing plays a critical role in bringing in small businesses into the formal financial system. Once informal businesses have access to lease financing, they begin building a history of financial transactions. When the appropriate credit information-sharing infrastructure is in place, banks and other financial institutions can access these records, better manage risks and start providing widespread financial services to these small businesses. With this new opportunity, small businesses also find additional incentives to join the formal sector.
A dynamic leasing sector can greatly benefit the economy of a country as it creates access to finance that, in turn, can create employment opportunities and opportunities for domestic investment. Also, by developing additional financial tools such as leasing or mortgages, countries are able to deepen the activities of their financial sector by introducing new products and/or industry players.