managing risk.pdf

80 Chapter 6 - Microleasing: Overcoming Equipment-Financing Barriersseasonal payments. Leasing does not affect the solvency of the firm, because it is not reflected in the liabilitiesof the balance sheet.The client also benefits in operational ways. In many leasing programs, the microbusiness operator can choosethe supplier and the equipment without intervention or limitations placed on the choice by the MFI. Leasingalso offers easy-to-understand lending terms and does not require a large amount of documentation. Finally, awide range of equipment can be provided by an MFI through a leasing arrangement, as the experience of theSavings and Agricultural Credit Cooperative Society in Madagascar illustrates (see box 6.1).Box 6.1 CECAM’s Expanded Menu of Leased Equipment for Rural ProducersBegun in 1993 in the highlands of Madagascar, the Savings and Agricultural Credit Cooperave Society (Caissesd’Epargne et de Crédit Agricole Mutuels, or CECAM) provides a menu of financial services to its members,who are rural producers. One product is a credit to acquire assets such as plows, harrows, carts, weedingmachines, seeders, grinders, husking machines, dairy cows, draught oxen, and tractors. Other productsinclude tools used by carpenters, blacksmiths, mechanics, masons, tailors, and weavers. The lease price isset on the basis of the inial value of the equipment, plus interest and costs related to the transacon. Theownership of the equipment shis from CECAM to the member aer the final payment is received. Unlikemost leasing arrangements, CECAM offers both individual and group-based leases of equipment.Source: Adapted by authors from Fraslin (2003).Advantages of Microleasing for the MFIIn microleasing, the MFI maintains the ownership of the asset until the final payment is received. As a result,the MFI can offer financing with a smaller or no initial payment, fewer external guarantees, and longer terms(compared to a long-term loan provided for the same purpose). In general, individual leasing arrangements arepreferred, because a lease in the name of a community group or cooperative can lead to difficulties in the eventof seizure, according to experiences in other countries. In some countries, equipment leasing is exempted fromthe interest rate ceilings imposed on lending.Another key advantage of financial leasing is the MFI’s strong legal position for repossession of theasset if the client fails to make the required payment. Because it is the owner, the MFI can repossessthe equipment. The client is more likely to allow the MFI staff to come onto the property if thisright is established in the lease agreement. For this reason, the National Ecumenical Association forDevelopment (Asociación Ecuménica de Desarrollo, or ANED) and Caja Los Andes (both in Bolivia)prefer leasing to long-term loans to finance new equipment. 2 In addition, a court judgment is notnecessary for the recovery of the machinery, because the MFI is free to recover and sell the equipment in asecondary market (for used equipment) in the event of default. Therefore, leasing companies prefer morestandardized goods (such as taxis, sewing machines, or tractors), which can easily be resold locally. Morespecialized equipment presents a problem if seized, because there may be far fewer potential buyers.2. However, if the machinery is installed, this advantage could be largely lost. The increased physical costs may make recovery nolonger practical.