Leasing Offers Options for Small Businesses across Africa


A lease enabled business owner Osmal Turay to expand his tailor shop in Sierra Leone. © WBG

Osman Turay has big dreams for his modest tailor shop on the outskirts of Freetown, Sierra Leone: visions of a boutique with a workshop in the back and space to sell his designs up front. He feels confident because he has a good relationship with his bank, longtime IFC client Ecobank. “They encourage the little business people to grow,” Turay says. “They encourage you to do more.”

Turay speaks from experience. Several years ago, after he gathered enough savings working at a clothing manufacturer, he opened his tailor shop. Business was brisk—in fact, his one sewing machine couldn’t keep up with demand. So Ecobank connected Turay with its microleasing program to finance a new machine. As part of his one-year lease, he makes monthly payments; if he has difficulty making a payment, he can arrange for an alternative payment date.

Arrangements like this one can play a critical role helping small and medium enterprises (SMEs) access finance across Africa, and Turay’s business is one of many that benefit. The Africa Leasing Facility II program supports institutions like Ecobank to promote leasing across the continent and partners with governments, financial institutions, insurance providers, equipment suppliers, and small business owners to create a viable leasing industry.

Since IFC launched the Africa Leasing Facility program in 2008, it has provided advice to governments that have supported policies leading to the enactment of 24 leasing laws; trained 20,000 SMEs; and mobilized $57 million of investment capital. The second phase of the program, launched in 2013, focuses almost exclusively on Fragile and Conflict-Affected States like Sierra Leone—where the need for financing is the largest and where leasing can have the greatest impact.

 

A Look at Leasing

In the majority of African countries, high interest rates and prohibitive collateral requirements prevent most micro, small, and medium enterprises from acquiring expensive machinery, equipment, or vehicles. Traditional banking services and commercial credit are often only available to the top end of the market.

That’s where leasing can offer solutions. Leasing is a medium-term financial instrument for the purchase of machinery, equipment, vehicles, or properties. Fundamentally, it is asset-based financing with the asset providing the security for the financing. Leasing institutions (lessors), whether banks, leasing companies, insurance companies, equipment producers or suppliers, or non-bank financial institutions, purchase the equipment that has usually been selected by the lessee, and then allow the lessee use of that equipment for a specified period of time. For the duration of the lease, the lessee makes periodic payments to the lessor, and at the end of the lease, the lessee has the option to purchase that equipment at a nominal fee.

This arrangement provides benefits across the economy. For consumers, equipment or vehicle leasing can greatly increase the growth possibilities for a small business. For financial institutions and leasing companies, new and revised laws and regulations allow for more safeguards when lending, and increase the volume of lease transactions. And for governments, strong financial infrastructure and increased access to finance create employment and foster economic growth.

Such growth is already being charted. In 2008, when IFC established the Africa Leasing Facility, the leasing market in Sub-Saharan Africa was estimated at $300 million. By 2015, it had more than doubled to $800 million (excluding Nigeria and South Africa).

In Sierra Leone alone, five years into the second phase of the Africa Leasing Facility, we expect that 200 SMEs will have access to financing, with $2.5 million in loans disbursed and $5 million in financing facilitated.

 

Creating Relationships that Last

The second phase of the Africa Leasing Facility is primarily supported by the Swiss Secretariat for Economic Affairs (SECO). Other donor partners include the Conflict-Affected States in Africa program funded by Ireland, the Netherlands, and Norway; the UK Government; and the Swedish International Development Cooperation Agency. The program is active in the West Africa Economic and Monetary Union, Burundi, Chad, Djibouti, Democratic Republic of the Congo, Ethiopia, Guinea, Liberia, Seychelles, Sierra Leone, and South Sudan. With additional funding the program may expand to other countries in Sub-Saharan Africa.

Just as the Africa Leasing Facility builds upon IFC’s 35 years of global experience in leasing advisory and investment activities, it also builds on the long history between IFC and Ecobank, the leading pan-African full service banking group, which has activities in 36 African countries. Ecobank has been an IFC client since 1993.

That’s the sort of solid relationship that Osman Turay, in his tailor shop, hopes to develop with his own clients. With each completed job, finished with the assistance of newly leased sewing machines, he’s stitching together his own financial future.

Stay connected: #6DecadesOfExperience

Published in December 2016

 

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