Innovation / rural finance products and process

Paper

Leasing: An Underutilized Tool in Rural Finance

Agriculture and Rural Development Discussion Paper No. 7

This paper examines the potential of leasing as a tool in rural finance. It is based on a survey of providers drawn from Africa, South Asia, Central Asia, and Latin America, across a spectrum of different types of organizations including two banks, a NGO, a cooperative, a state-owned company, and five private leasing companies. The study suggests that small and medium enterprises in rural areas benefit from access to leasing. Two main conditions enabling development of leasing markets are clear legal basis and minimal regulation. Elements of a good legal framework include: a) accepted accounting standards; b) a tax code not biased against leasing; c) a high degree of clarity in defining lease contracts, leased assets and the rights and responsibilities of all parties to a lease contract; and, d) well-defined methods of conflict resolution and asset repossession under strictly-defined circumstances. An enabling regulatory environment would: a) not warrant prudential regulation of leasing companies, and b) permit institutions subject to prudential regulation, such as banks, to provide leasing services as leases are no riskier than loans.

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