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Agenda
‡ Leasing defined
‡ Overview of the leasing industry worldwide
‡ Why has leasing grown so fast
‡ Impact of leasing
± Economic development
‡ Micro, Small and Medium Sized Enterprises (MSMEs)
± Financial sector development
± IFC¶s experience
‡ Role of the Regulator / Enabling environment
‡ Trends in Leasing Industry
‡ Conclusions 2
Leasing defined

Two kinds of leases:

± Operating lease or hire-purchase
± Financial lease

We will discuss only financial leasing. The

difference between the two being that operating
lease is not a means of financing equipment
purchase ± only short-term use of equipment:
e.g., car rentals. Maintenance and obsolences
risk lie with the leasing company as against the
lessee in financial leasing.
_
Financial Leasing

‡ A contractual arrangement that allows one party (the

lessee) to use an asset owned by the leasing
company (the lessor) in exchange for specific periodic
payments. This requires:
± Separation of legal ownership from economic use
± Credit analysis focuses on lessor¶s cash generation
capacity to finance lease payments rather than relying on
credit history
± Security is the asset itself
‡ As such, this product is particularly suitable for new
Micro, Small or Medium Sized Enterprises
(MSMEs) without a long credit history of
financial statements. '
Overview of the Leasing Industry

‡ Historically, leasing dates back to thousands of

years ± where the industry has developed from
being a manufacturer¶s selling technique to a stand-
alone specialized financial service industry.
‡ First leasing firms started in the US in ± ¶s; then in
Europe and Japan in the 6 ¶s; and since the 7 ¶s,
leasing has been spreading to many developing
nations
‡ In 2
, over US$'76 billion of new vehicles, plant,
machinery and equipment were financed
through leasing.
±
Overview (Cont¶d)

‡ Africa region accounted for US$_.8 bn less than
 of

total volume

‡ The top four countries in leasing volume are U.S., Japan,

Germany, and the U.K.

‡ South Africa remains the largest leasing market in the

Africa region with a volume of US$2.79 bn

‡ Substantial scope for future growth ± globally, annual

leasing volumes as a percentage of GDP average about

.± (U.S. 2._).

6
Leasing Industry
in the Developing Countries

‡ Since the late 7 ¶s, many developing nations have

been developing their leasing industries.

‡ The most spectacular increases being in Asia, led by

Korea

± In
99', South Korea¶s leasing market was ±th largest in

the World ± an industry which was started in
97± with
IFC¶s investment in Korea¶s first leasing firm.

‡ Growth of leasing in Africa, Asia and S. America

exploded in the early 9 ¶s but stagnated over the last
± years.
7
Why has Leasing Grown so Fast

‡ Leasing has filled the gap for financing the un-

met demand for a key sector in any Economy ±
MSME

‡ MSME are mostly shunned out from the formal

banking sector due to high transactions costs,
and as well as other considerations.

8
Why has Leasing Grown so Fast
Beneficial to both lessee and lessor:
 
‡ Fewer requirements about balance sheets.
‡ Leasing may be the only source of financing
‡ No outside security/collateral needed
‡ Low documentation cost
‡ Leasing can finance a higher  of equipment than
bank loans
‡ Governments allow lessees to deduct full lease
payments from their income before tax.
9
Why has Leasing Grown so Fast
Beneficial to both lessee and lessor:
  
‡ Ownership of asset
‡ Transaction costs lower
‡ Lighter regulations, because they are not deposit taking
institutions.
‡ Tax incentives, although they are eroding.
‡ Better control on utilization of funds.

Why has Leasing Grown so Fast
Beneficial to both lessee and lessor:
   
‡ Fewer requirements about
balance sheets.
‡ Leasing may be the only
source of financing
‡ No outside security/collateral
needed
‡ Low documentation cost
‡ Leasing can finance a higher
 of equipment than bank
loans
‡ Governments allow lessees
to deduct full lease payments
from their income before tax.

‡ Ownership of asset
‡ Transaction costs lower
‡ Lighter regulations, because
they are not deposit taking
institutions.
‡ Tax incentives, although they
are eroding.
‡ Better control on utilization of
funds.



Economic Contribution of MSMEs
in Select African Countries
MSMEs  SME as 
Country of Total formal
Enterprise employment
Algeria 99 6
Egypt 99 ±±
Mali 99 '±-±±
Morocco 9_ ± -±±
Mozambique 9 '±-±±
Nigeria 96 ± -±±
`
  


`

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Importance of Leasing
for MSMEs

‡ Leasing may be the only source of financing

as access to capital markets or bank loans is
difficult given the small size of these
companies and/or their unproven track
record.

‡ Government support of leasing industry is

thus an indirect support of MSMEs. Also,
increases competition in financial services.

_
IFC¶s Experience
in the Leasing Sector
‡ IFC has 2± years experience with
79 leasing projects in ±6
countries

‡ From
977-2 2, IFC approved
. 2 billion financing for leasing

companies

‡ Key success factors for IFC¶s leasing companies/transactions

have been: strong sponsors, access to competitive local currency
financing, stable and good legal and regulatory frameworks, and
last but not least, good structuring of the financial transactions on
IFC¶s part.

‡ Most of IFC¶s leasing projects have had strong positive impacts

on private sector development particularly in the MSME sector,
where they have pioneered financing for a previously under-
served market segment. In most cases, IFC invested in the first
leasing firms in a country.

'
IFC¶s Roles in Promoting Leasing Companies

    

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IFC¶s Experience in Leasing (Cont¶d)

‡ Impact on Broadening the Financial Sector Development:

Leasing companies have helped develop capital markets
by increasing financing options for segments of the market
which previously relied on informal financing, supplier
credit, and internal cash generation ± Filled the gap left by
banks

‡ Impact on Capital Markets: As leasing firms grow, their

needs for diversified funding sources becomes eminent ±
leading to the use of securitization, issuances of bonds and
other capital instruments.

‡ Increased Competition: The entry of leasing firms in

financing the MSME has encouraged competition in many
markets, whereby some of the banks started to go down-
market in order to serve the smaller clients.

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Challenges Facing
the Leasing Industry
‡ Funding ± Leasing companies are not deposit-taking
institutions and access to long-term funding is a critical
success factor
‡ Eroding tax benefits ± the tax benefits of leasing are gradually
eroding, opening the industry to strong competition from the
banking sector.
‡ Regulatory environment changes ± While the leasing industry
typically has less stringent regulation, changes in law impact
operations substantially.
‡ Lack of deep pocketed shareholders in the absence of capital
markets.
‡ Too much concentration in a sector
‡ Lack of a robust secondary market for certain equipments.
‡ Risk management not managed.
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Enabling Environment:
Legal and Regulatory Aspects
‡ Strengthening Leasing Laws
± Lessor¶s ownership over the assets funded must be
clearly stipulated with simple, effective and timely
procedures for repossession if lessee defaults
± Lessee and possession rights ± to ensure
uninterrupted use for the length of the lease
± Central Registry of charges
‡ Supervision and Regulation
± Restrict leasing to Licensed operators
± Prudential Requirements ± less strict than
for deposit-taking institutions

8
Enabling Environment:
Tax and Accounting

‡ Lessor ± Lessors can typically take the benefit of

depreciation expense as a shield against taxes. This
advantage has been eroding in the recent past.
‡ Lessee ± Lessees can offset their full lease payments
against income before tax
‡ Sales Tax ± Post contract sale of assets is typically
exempt from sales tax
‡ Accounting ± Accounting for Leases is done
under IAS
7 internationally
‡ Cross Border Issues

9
Trends in Leasing Industry

‡
  ‡  

± Smarter ± Specialization
± Diverse ± Diversification
± Seek more Alternatives ± Consolidation
± Service Conscience ± Globalization
± Understand Asset ± Branding, Relationship,
Management Image Building
± Trending to Technology
‡   ‡   
± Assume/Manage more ± Distinction Between
Risk Lease and Loans
± Solution Packages ± Expanded Public Official
± Leases with Other Understanding
Financing Packages ± Global Harmonization of
± Venture Leasing Accounting
2
Conclusions

‡ Leasing is an important source of funding for

MSMEs, which are key drivers of economic
development in developing countries.
‡ There is substantial scope for future growth in the
industry, particularly in developing countries.
‡ However, the industry faces financial and
regulatory challenges which must be addressed to
promote its growth.
‡ IFC¶s experience has shown that leasing
is instrumental in assisting the
development of the financial sector,
and of the economy as a whole. 2