Leasing as Credit Alternative - World Bank

Leasing as Credit Alternative - World Bank

Financing Agricultural Investments: Leasing as Credit Alternative Expert Meeting on Managing Risk in Financing Agriculture Johannesburg, 1-3 April, 2009 Renate Kloeppinger-Todd The World Bank The World Bank What is Leasing? Contract between two parties: the party that owns an asset ( lessor) lets the other party (lessee) use the asset for a predetermined time in exchange of periodic payments Separates use of asset from ownership of asset. Finance Lease (The Credit Alternative) Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

Amortizes asset price - includes purchase option for a token amount at end of lease period Lessee responsible for maintenance and all risks usually associated with ownership without actually owning the asset Non-cancellable 2 Advantages: The Client Perspective Asset serves as collateral, less additional collateral required Lesser credit history may suffice May require less down payment May have better prices Potential tax-benefits Expert Meeting on Managing

Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 3 Advantages: The Leasing Company Perspective Lower transaction costs Stronger security: ownership rights versus weaker collateral rights Less incentives to default, less costs of repossession Usually more flexible pricing Lease rates not usually regulated (loan rates often are) Less costs of regulatory compliance Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

Leasing companies often exempt from prudential regulations. 4 Advantages in Rural / Agricultural Finance Collateral Absence of assets that can be collateralized. Transaction Cost Poorly functioning asset-registries Regulation Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg Rural lending often subject to interest ceilings 5

Economy Wide Benefits Increase in capital investment, and thereby productivity Particularly for the Missing Middle Capital market development Leasing companies borrowing from insurance companies, pension funds Increased competition in the financial market Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg Competition for banks on products and prices. 6

Firm Case 1: John Deere, Mexico Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg Fully-owned subsidiary of John Deere US$ 74million lease portfolio in 2004 85% in farm equipment Rural leases: examples US$107,000 Harvester US$ 21,000 Seeding Machine US4 11,000 Cultivating Implements 7 Firm Case 2:

DFCU Leasing, Uganda Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg Profitable, publicly listed company, bank subsidiary. US$ 25.7 million lease portfolio in 2004 20% portfolio in rural areas; 10% portfolio and 16% leases in Agriculture Rural Leases- Examples US$ 70,000 Cotton-ginning equipment US$34,000 bakery equipment US$ 6,000 milling equipment

8 Firm Case 3: Uzselkhoz mash Leasing, Uzbekistan State-owned company US$76.6 million lease portfolio, end-2005 100% rural leases Primary client group: farm enterprises Average lease size: US$13,700 Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 9 Firm Case 4: Network Leasing, Pakistan Expert Meeting on Managing

Risk in Financing Agriculture, 1-3 April 2009, Johannesburg Profitable, publicly listed private company. US$ 11.6 million lease portfolio in 2004 21% portfolio & 43% leases in rural areas Rural Leases- Examples US$ 420 Buffaloes US$ 2793 clinic lab-equipment US$ 402 school furniture 10 Five Lessons specific to rural leasing Leasing is a means to acquire

productive assets Rural enterprises of different sizes benefit, but providers may not be able to serve all markets Non-farm enterprises account for a significant portion of rural leases Rural leasing can be profitable but may require initial donor/government support A rural-only leasing company may Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg not be viable 11 World Bank Group: History of supporting leasing development A Core Component of IFCs Financial Markets Strategy

Increase access to financing to Micro, Small & Medium Businesses Broaden the range of financial services available in Emerging Markets An Historic Focus Area for the IFC Over the past 30 years, IFC has financed 200 leasing projects in 50 countries for $1.4 billion IFC has set-up or improved leasing legislation and regulations in 60 countries IFC has operated 30 Leasing technical assistance projects across the globe with $17 million of its own funding leveraged with Donor funding. Also part of IDA-IFC MSME Project in SSA Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 12

IFCs Leasing Market Support: Investment and advisory strategy Help local banks create leasing operations Bringing technical partners and acting as honest broker in JV Combining debt or risk sharing with advisory services Invest in start-up and existing leasing companies Equity and quasi equity, debt, structured finance Foster SME Financing through advisory services and performance-based grants Facilitate development of enabling

environment Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg Support for drafting leasing laws, amendments to commercial regulations 13 IFC Leasing Market Support: Regional Activities in Africa Advisory Services IFC Africa Leasing Facility (Ghana, Tanzania, Rwanda, Madagascar, Senegal, Cameroon, DRC, Mali, Ethiopia) In Rwanda: CEDP Leasing Development Program WB/IFC partnership to increase agribusiness finance (coffee bikes project)

Investments: Ethiopia Access Leasing Company the first leasing company in Ethiopia Other projects in pipeline for 2009 (DRC, Madagascar, West Africa) Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg 14 Contacts and Resources IFC Africa Advisory Facility: Private Enterprise Parternership for Africa http://www.ifc.org/ifcext/africa.nsf/Content/PEPAfrica IFC Headquarters: Ary Naim

Principal Financial Specialist, Global Financial Markets Department [email protected] 1.202.458.1471 Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg Rural leasing papers Discussion Paper 1 Discussion Paper 2 15

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