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Leasing in Emerging Markets
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Leasing in Emerging Markets
Lessons of Experience Series
Copyright 1996
The World Bank and International Finance Corporation
1818 H Street, N. W.
Washington, D. C. 20433, U.S.A.
All rights reserved
Manufactured in the United States of America
First printing July 1996
The International Finance Corporation (IFC), an affiliate of the World Bank, promotes the economic development
of its member countries through investment in the private sector. It is the world's largest multilateral organization
providing financial assistance directly in the form of loan and equity to private enterprises in developing
countries.
The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should
not be attributed in any manner to the IFC or the World Bank or to members of their Board of Executive Directors
or the countries they represent. The World Bank does not guarantee the accuracy of the data included in thispublication and accepts no responsibility whatsoever for any consequence of their use. Some sources cited in this
paper may be informal documents that are not readily available.
The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent
to Director, Corporate Planning Department, IFC, at the address shown in the copyright notice above. The IFC
encourages dissemination of its work and will normally give permission promptly and, when the reproduction is
for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted
through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923,
U.S.A.
The complete backlist of publications from the World Bank, including those of the IFC, is shown in the annual
Index of Publications , which contains an alphabetical title list (with full ordering information) and indexes of
subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution
Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from
Publications, The World Bank, 66 Avenue d'Iena, 75116 Paris, France.
Laurence W. Carter is a senior policy analyst in the Corporate Planning Department of IFC. Teresa Barger is a
manager in IFC's Office of the Vice President for Operations, and Irving Kuczynski is Director of Financial
Sector Issues in the same office.
Leasing in Emerging Markets
Leasing in Emerging Markets 1
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This serial publication has been cataloged by the Library of Congress as follows:
Library of Congress CataloginginPublication DataCarter, Laurence W., 1960
IFC's experience in promoting leasing in developing countries,
19771995 / Laurence W. Carter
p. cm.(IFC lessons of experience series; 2)
ISBN 0821336754
1. International Finance Corporation. 2. Lease and rental services
Developing countries 3. Industrial promotionDeveloping countries.
I. Title. II. Series.
HG3881.5.I56C367 1996
338.4dc20 9628074
CIP
Statistics sourced to the World Leasing Yearbook, 19881994 , are based substantially on information
compiled by London Financial Group , London , U.K. This data may not be reproduced without the priorpermission of London Financial Group and IFC .break
Many small and new firms in developing countries use leasing to finance their investments. Because the leasing
company retains legal ownership of the leased asset, it enables a firm to qualify for use of leased equipment based
on its generated cash flow rather than its credit history, assets, or capital base. Twenty years ago, new or small
firms without adequate collateral or a credit history would have faced severe difficulties in obtaining financing.
Today, the growth of the leasing industry has made much needed equipment available to a broad range of
enterprises.
Since its first investment in a Korean leasing company in 1977, IFC has vigorously promoted leasing in
developing countries through a combination of advising governments and investing in leasing companies. Leasing
today finances over US$40 billion worth of new vehicles and equipment each year in developing countries.
Leasing in Emerging Markets describes IFC's experience in the leasing industry.break
Preface
The role of capital markets in economic development is becoming increasingly evident. It is now widely
recognized that there is a direct correlation between economic growth and development of the financial sector. A
wellfunctioning financial intermediation system helps to facilitate a virtuous circle of productivity increases,
economic growth, and domestic savings.
IFC has been involved with the capital markets sector for over 25 years, reflecting its focus on assisting
developing countries in building their physical and financial infrastructure. It has helped supplement domestic
resources by mobilizing external savings flows to emerging markets, and focused on developing domesticfinancial institutions and capital markets. This approach to "deepening" and "broadening" domestic markets has
been critical to IFC's strategy of promoting the growth of local savings.
IFC has pursued its capital markets objectives by:
providing technical assistance to help create or change laws and establish regulatory agencies;
creating new institutions . IFC has worked with foreign and local sponsors to create new institutions, often the
Leasing in Emerging Markets
Preface 2
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first of their kind in a country;
supporting existing financial institutions . IFC has helped domestic financial institutions expand their access to
local and foreign financing sources (through provision of credit and agency lines, commercial paper programs,
bond guarantees, etc.) and to strengthen their balance sheets (e.g., through swaps, the second tier capital and
securitization of assets); and
encouraging financial institutions to reach underserved business segments especially smalland
mediumsized enterprises (SMEs). IFC has used credit lines and promoted SMEfocused institutions to improve
the access of new, smalland mediumsized firms to financing.
Since 1971, IFC has invested and made available through financial intermediaries some $3.5 billion in the
financial and capital markets sector, covering more than 560 separate transactions to clients in over 50 countries.
In addition, it has provided technical assistance through nearly 800 projects in over 90 countries. The scale of
IFC's capital markets operations has increased dramatically since the beginning of the 1990s, during which time
capital markets have come to the forefront of the development agenda worldwide. During 19911995, investments
in the financial sector accounted on average for 22% of the Corporation's aggregate investment commitments, and
for nearly 35% of its total number of transactions.
Within this framework, the development of the leasing industry has been extremely important. The Corporation
has promoted the development of the industry through a combination of measures, including advice to
governments on leasing regulations, undertaking of feasibility studies, identification of sponsors and technical
partners, and investments in new leasing companies. Between 1977 and 1995 IFC's Board approved 120
transactions involving 63 leasing companies in 36 countries, many of these being the first leasing companies set
up in the country concerned. The impact has been substantial: in virtually every country, the industry has grown
rapidly. Large numbers of smalland mediumsized companies have been able to secure better access to
financing. For instance, in 1994, 16 leasing companies in which IFC had invested wrote over 10,000 new leases
worth over US$2 billion.break
This paper, covering IFC's promotion of the leasing industry in developing countries, is part of the Corporation'sstrategy to further extend its development impact by disseminating the lessons of its experience in key sectors and
activities to external audiences. The paper is one of a series of reports dealing with capital markets issues, all to be
released as part of IFC's Lessons of Experience series. The work on these reports was carried out by a team of IFC
staff under the coordination of Dileep Wagle and Teresa Barger. This paper was prepared by Laurence Carter,
Teresa Barger, and Irving Kuczynski, with research support from Lory CambaOpem and Tracy Rahn. Consistent
with the fundamental basis of the series, the paper draws upon a full range of operational experience from across
the Corporation. Data from the World Leasing Yearbook was provided by David Porter, Chairman of the London
Financial Group. Data on IFC transactions reflect IFC's operational position as of endJune 1995.break
JANNIK LINDBAEK
EXECUTIVE VICE PRESIDENT
INTERNATIONAL FINANCE CORPORATION
JULY 1996
Leasing in Emerging Markets
Preface 3
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Contents
Executive Summary link
Financing Opportunities for Small Firms link
What Exactly Is Leasing? link
A Large, Growing Industry link
Why Has Leasing Grown so Fast? link
The Lessee link
Leasing Companies link
Governments link
IFC's Experience link
Lesson's from IFC's Experience link
What Is IFC's Role? linkWhat Is the Development Impact? link
What Makes Successful Leasing Companies? link
1
Development of Leasing Worldwide
link
Background link
Developing Markets Driving Leasing Industry Growth link
Regional Trends link
Leasing: Important to SMEs link
Why Has Leasing Grown so Fast? link
The Lessee link
The Lessor link
Governments link
Leasing and Financial Sector Development link
What Leasing Needs: A Conducive Macroeconomic Environment link
What Leasing Needs: A Conducive Regulatory Environment link
Legal linkSupervision and Regulation link
Tax and Accounting link
2
IFC's Leasing Experience
link
Accelerating Approvals link
IFC's Commitments link
Leasing in Emerging Markets
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Wide Geographic Coverage link
Mobilization link
Leasing WorksEven in Risky Countries with Poor Access to
International Capital
link
Low Volume Masks Significance link
DebtEquity Ratios link
Foreign Sponsors and Technical Partners link
IFC's Portfolio link
Regional Split link
Performance Indicators link
Financial Performance of IFC's Portfolio link
Equity link
Loans link
Lessons from IFC's Experience link
More Impressive Than the Numbers Suggest . . . link
. . . But Returns Are Lower Than the Numbers Suggest link
3
IFC's Role in Promoting Leasing
link
Financing Smalland MediumSized Enterprises link
IFC's Proactive Approach to Leasing link
Are Regulatory Barriers Preventing the Development of Leasing? linkCan IFC Catalyze the Industry by Sponsoring a Leasing
Company?
link
Will the Leasing Company Be Able to Mobilize MediumTerm
Local Debt?
link
Can the Leasing Company Use Foreign Currency Loans? link
How Best to Foster Sustainable, Competitive Leasing
Companies?
link
Are the Leasing Company's Assets and Liabilities Matched? link
Can the Product Line of Existing Leasing Companies BeWidened?
link
Can IFC Help to Promote Greater Private and Local Ownership? link
4
Evaluation of IFC's Leasing Experience
link
Leasing Companies Do Lend to New, Smalland MediumSized
Enterprises
link
Leasing in Emerging Markets
Contents 5
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Leasing Has Grown Rapidly in Most Countries link
Competition and Private Investment are Increasing link
Leasing Helps Mobilize Savings and Develop the Financial
Sector
link
Checklist for Successful Leasing Companies link
Conclusion link
Future IFC Work to Promote Leasing link
Appendix Tables link
Box A1: Worked Example Using IAS Accounting Standards link
Table A1: Leasing Volume and Market Share, 19881994 link
Table A2: IFC's Leasing Project Approvals, 1977June 1995 link
Table A3: Summary of IFC's Leasing Project Approvals link
Table A4: IFC's Leasing Project Commitments, 1977June 1995 link
Table A5: Summary of IFC's Leasing Commitments link
Table A6: IFC's Leasing Project Droppages and Cancellations link
Table A7: Leasing Market Share, Private Investment, and Broad
Money, 19881993
link
Bibliography link
Text Boxes
Box 1.1: Leasing Definitions link
Box 1.2: Leasing Development in Korea and Thailand linkBox 1.3: Leasing Levels the Playing Field for Investment
Incentives
link
Box 1.4: Competitive Advantage for a Lessor: Processing,
Relationships and Marketing
link
Box 2.1: Examples of Technical Partners in IFC Leasing
Investments
link
Box 2.2: Mobilizing Local Finance for a Leasing Company in
Cte d'Ivoire
link
Box 2.3: High Costs: Introducing Leasing to Senegal link
Box 3.1: Developing a Favorable Regulatory Environment for
Leasing
link
Box 3.2: Identifying Constraints to Leasing in West Africa link
Box 3.3: Assessing the Market link
Box 3.4: Uneven Progress: The Right Conditions Make a
Difference
link
Leasing in Emerging Markets
Contents 6
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Box 3.5: Accessing Local Finance and Marketing Channels:
Romania
link
Box 3.6: A Local Currency Issue That Failed: Botswana link
Box 3.7: Providing Dollar Financing to a Chilean Leasing
Company
link
Box 3.8: Typical Operating Guidelines for a Leasing Company link
Box 3.9: Competition and Growth in Thailand's Leasing Industry link
Box 4.1: KDLC and the Development of Korea's Leasing
Industry
link
Box 4.2: Riding the Roller Coaster: Leasing in Peru, 19811993 link
Box 4.3: Legal Difficulties link
Box 4.4: Financial Liberalization Encourages Investors in
Pakistan
link
Box 4.5: Financing Options: With and without a Leasing Industry link
Box 4.6: Leasing to Merchant Banking: Developing the
Philippine Capital Markets
link
Text Figures
Figure 1.1: Leasing in Developing Countries, 19881994 link
Figure 2.1: IFC's Leasing Equity Approvals, FY77FY95 link
Figure 2.2: IFC's Leasing Commitments by Region, 1977June
1995
link
Figure 2.3: A Leasing Company's Balance Sheet link
Figure 2.4: More Projects in Riskier Countries link
Figure 2.5: Sharp Growth: IFC's Leasing Portfolio, 19921995 link
Figure 3.1: Financing SMEs through Building Local Financial
Institutions
link
Figure 3.2: IFC's Specific Roles in Promoting Leasing Companies link
Figure 4.1: Size Distribution of Korean Leasing Company's
Leases, 1993
link
Text Tables
Table 1.1: Top 50 Leasing Markets, 19881994 link
Table 1.2: Private Investment Financed by Leasing, 19881994 link
Table 1.3: Finance Raised by Korean Firms, 19911993 link
Table 2.1: IFC Approvals, 1977June 1995: The Big Picture link
Table 2.2: IFC Commitments, 1977June 1995 link
Table 2.3: Regional Distribution of IFC Commitments,
1977June 1995
link
Leasing in Emerging Markets
Contents 7
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Table 2.4: Mobilization Rates link
Table 2.5: Equity Shares in Leasing Companies at Time of IFC's
Entry
link
Table 2.6: Average DebtEquity Ratios, 19911995 link
Table 2.7: IFC's Leasing Portfolio, June 1995 link
Table 2.8: Regional Distribution, 19921995 link
Table 2.9: Good Overall Performance link
Table 3.1: Pioneering the Leasing Industry link
Table 4.1: Falling Spreads Ascribed to Increased Competition link
Table 4.2: Market Share of Leasing Industry Versus Private
Investment, 19881993
link
Table 4.3: Market Share of Leasing Industry Versus Monetary
Depth, 19881993
link
Appendix Tables and Text Boxes
Box A1: Worked Example Using IAS Accounting Standards link
Table A1: Leasing Volume and Market Share, 19881994 link
Table A2: IFC's Leasing Project Approvals, 1977June 1995 link
Table A3: Summary of IFC's Leasing Project Approvals link
Table A4: IFC's Leasing Project Commitments, 1977June 1995 link
Table A5: Summary of IFC's Leasing Commitments link
Table A6: IFC's Leasing Project Droppages and Cancellations link
Table A7: Leasing Market Share, Private Investment, and Broad
Money, 19881993
link
Glossary
CAMENA Central Asia, Middle East and North Africa
DFI Development finance institutions
FY Fiscal year
GDP Gross domestic product
IFC International Finance Corporation
IRR Internal rate of return
LAC Latin America and the Caribbean
LDC Less developed country
OECD Organization for Economic Cooperation and
Development
SME Smalland mediumsized enterprises
Leasing in Emerging Markets
Contents 8
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TCD Transferable certificates of deposit
US$m US$ millions
US$bn US$ billions
1
Executive Summary
Financing Opportunities for Small Firms
Consider three entrepreneurs seeking financing:
1) The owner of a small , threeyearold road maintenance company in Ghana has secured his first big break: a
contract from the Ministry of Public Works to maintain roads in a region of the country for three years. He needs
to double his truck fleet from two to four. His bank manager, although sympathetic, points out that the owner has
only two years of accounts and has already mortgaged his house to secure a loan to buy one of the earlier trucks.
The owner approaches a leasing company, which concludes that the firm will be able to make the lease payments
without difficulty. After a 20% down payment from the contractor, the trucks are supplied within two weeks, on athreeyear lease.
2) A Romanian chemist wants to set up a private medical testing laboratory to conduct tests for several local
hospitals. She has identified the equipment required, which needs to be imported from Germany. She has 25 years
of experience, lots of contacts within the local medical community and an option to rent lab space. But she has
limited personal savings, no fixed assets to collateralize, and no corporate sponsor. She approaches several banks,
which suggest that they might consider a loan after two to three years of successful operation, but that they could
not help now. After looking at her business plan, the manager of a leasing company concludes that she will be
able to service the lease payments. The leasing company imports the equipment (handling all of the paperwork)
and supplies it to the chemist under a twoyear lease.
3) Following a year of growing orders, a small textile manufacturer in Bangladesh wants to borrow US$500,000to double the capacity of his factory. He needs US$300,000 worth of new machinery and US$200,000 in extra
working capital. His bank manager tells him that the bank is suffering from constrained liquidity and can only
make loans for under six months. The manufacturer borrows US$200,000 of shortterm working capital from the
bank and arranges a fouryear lease for the machinery with the local leasing firm.
Without leasing companies, investments like these would not happen. Twenty years ago (more recently in most
developing countries), these entrepreneurs would not have found a leasing company. Demand from new, small
and mediumsized enterprises such as these has turned leasing in developing countries into a US$40 billionplus
industryfrom nothingwithin just 20 years.
IFC has played a central role in this change, through a combination of advising governments about leasingregulations, undertaking feasibility studies, identifying sponsors and technical partners, drafting business plans
and operating policies, and investing in new leasing companies. IFC has invested in leasing companies in over
half of the developing countries which have a leasing industry today (and often, IFC investment has been the
country's first leasing company).break
Leasing in Emerging Markets
1 Executive Summary 9
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What Exactly Is Leasing?
Financial leasing is a contractual arrangement that allows one party (the lessee ) to use an asset owned by the
leasing company (the lessor) in exchange for specified periodic payments. Critical to this arrangement, legal
ownership (retained by the leasing company) is separated from economic use of the asset (held by the lessee). The
leasing company focuses on the lessee's ability to generate cash flow to service the lease payments, rather than
relying on its credit history, assets or capital base. This arrangement particularly suits new, small or
mediumsized enterprises (SMEs) without a long history of financial statements. Security for the transaction is
provided by the asset itself.
A Large, Growing Industry
Leasing can be traced back thousands of years, although it has evolved considerably during the last 40 years. The
industry evolved from being a manufacturer's selling technique into a specialized financial service with the
formation of the first independent leasing company in 1952 in the United States. The industry extended to Europe
and Japan in the 1960s and has been spreading through developing countries since the mid1970s. By 1994
leasing had been established in over 80 countries, including over 50 developing economies.
In 1994 over US$350 billion of new vehicles, machinery and equipment was financed through leasing, accountingfor about an eighth of the world's private investment. In OECD countries up to a third of private investment is
financed through leasing.
Developing countries are driving most of the leasing industry's growth today: between 1988 and 1994, new leases
written increased from US$15 billion to US$44 billion. The most spectacular increase has been in South Korea.
Started in 1975 and supported by IFC investments in the first leasing company, the South Korean leasing market
was the fifth largest in the world by 1994.
Furthermore, market penetration (leasing as a share of private investment) more than doubled in both middle and
lowincome countries between 1988 and 1994. By 1994 leasing accounted for an average of 11% of the financing
of capital equipment in middleincome countries, up from just 4% in 1988.
Why Has Leasing Grown so Fast?
Leasing has addressed an unmet demand from new, small and mediumsized firms and attracted borrowers
away from traditional bank loans. It offers advantages to all parties:
The Lessee
Although leasing is a highspread business it offers potential advantages to the lessee:
Simpler security arrangements and the less strict requirements for historical balance sheets mean that SMEs can
access lease finance more easily than bank loans.
Availability . In developing countries leasing may be the only form of medium to longterm finance available
for purchasing equipment.
Convenience . Leasing can be arranged more quickly and simply than conventional loan financing because
outside security often does not need to be established.
Lower transaction costs . Despite the relatively high spreads of leasing, the costs of assigning collateral,
documentation, and slower processing times for bank borrowing can be significant, particularly for smaller
Leasing in Emerging Markets
What Exactly Is Leasing? 10
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borrowers.
Little cash required. Leasing can finance a higher percentage of the capital cost of equipment than bank
borrowing, often with little downpayment.
Flexibility . Leasing contracts can be structured to meet the cash flow needs of the lessee.
Tax incentives . In many countries lessees can offset their full lease payments against income before tax,
compared to just the interest on bank loans. Furthermore, lessors may pass on tax benefits associated with their
depreciation to lessees via reduced financing costs. Governments grant tax incentives to leasing because they
recognize that it enables new and small firms to access financing for investment.break
Leasing Companies
Leasing companies also benefit SMEs:
Ownership of the assetgives the lessor strong security. In countries where weak collateral laws hinder bank
lending, leasing offers the advantage of (often) not requiring collateral beyond the security of leased asset itself,and of simpler repossession procedures, because ownership of the asset already lies with the lessor.
Dedicated use of funds . Because the lessor purchases the equipment directly from the supplier there is no
opportunity for the lessee to use the funds for other purposes.
Relatively simple documentation keeps transaction costs down, allowing leasing companies to achieve high
leasing volumes efficiently.
Lighter regulation . Because leasing companies are not usually deposit takers they tend to be less tightly
regulated than banks.
Governments
Many governments have promoted leasing as a way of encouraging investment. But leasing offers other benefits:
it broadens competition in financial services and introduces businesses and financiers to innovations such as
cashflowbased credit analysis.
IFC's Experience
In addition to over 50 technical assistance projects to advise governments on how to promote leasing, between
1977 and June 1995, IFC's Board approved US$523 million via 120 transactions to 63 leasing companies in 36
countries. IFC invested equity in most of these companies at an average of just under US$500,000 per approval.
Over 75% of IFC's leasing financing was approved during the last five years, reflecting:
Industry growth . The industry is quickly spreading to more countries.
Needs of transition economies and lowincome economies . Leasing has proven an appropriate financing source
for the emerging private sector in transition economies and in lowincome regions, such as SubSaharan Africa.
Financial sector stabilization and liberalization . Following severe macroeconomic and financial sector
instability during the 1980s debt crisis, many countries have implemented stabilization and liberalization
programs that have allowed leasing industries to flourish.
Leasing in Emerging Markets
Leasing Companies 11
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IFC focus . As the importance of leasing to SMEs has become more evident with experience, IFC has stepped up
its promotion efforts.
The leasing companies in which IFC has invested have, on average, proven relatively profitable and efficient.
Returns on equity have averaged over 20 percent. Combined with relatively low provisioning rates (compared to
bank lending), this suggests that leasing is less vulnerable to default than lending. Since IFC made its first loan to
a leasing company in 1977 there have not been any defaults to IFCand none of the loans have shown arrears to
date.
Lessons from IFC's Experience
Within this positive picture, several lessons have emerged from IFC's experience:
Technical partners should have a substantial equity stake (20% 40% ). Although foreign technical partners have
played an important role in the majority of the leasing companies that IFC has sponsored, they have not always
proven effective, for various reasons, including unfamiliarity with the market, cultural differences, and lack of
interest. Technical partners with a substantial investment are more likely to contribute effectively.
Careful portfolio management pays . Many of the problems that arose in IFCsponsored leasing companiesresulted from overly concentrated portfolios by client or sector.
Leasing companies are vulnerable to adverse macroeconomic changes . A worsening of the macroeconomic
climate usually affects smalland mediumsized firms quickly. Such firms often form a high percentage of
leasing customers. Furthermore, if credit is tightened, leasing companies may suffer from financing constraints or
term mismatches.break
Leasing companies benefit from foreign exchange convertibility and reduced tariffs on imported machinery and
equipment. Leasing companies in developing countries often require foreign exchange to purchase imported
equipment, but prefer to denominate their leases in local currency (because of their SME client base). Without
foreign exchange convertibility leasing companies write mostly foreign currency leases to match their loans tofinance imported equipment, which restricts their market to exporters.
Standalone leasing firms compete more vigorously for markets and focus on their portfolios . For this reason
IFC usually prefers to finance standalone companies, although such firms can be at a disadvantage when
competing with leasing subsidiaries of commercial banks, which can tap lowcost depositors' funding from their
parents.
Difficulties in mobilizing domestic financing are often one of the most serious constraints to expansion. This is
one of the key roles that local partners can bring to a new leasing company, as well as knowledge of local
markets.
What Is IFC's Role?
In the long run, IFC's most important and effective approach to financing SMEs is indirect, through promoting
domestic financial institutions that target small and new firms. IFC uses three main mechanisms:
Sponsoring leasing companies ;
Making loans to banks for onlending to SMEs ; and
Leasing in Emerging Markets
Lessons from IFC's Experience 12
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Promoting venture capital funds which provide SMEs with equity and managerial advice.
Building these institutions enables a sustainable flow of local financing to reach SMEs, as they all primarily
mobilize domestic financing (appropriate for SMEs, which are not usually prepared to take foreign exchange
risk). Working through such institutions IFC can ultimately reach more SMEs at lower costs than via its
complementary direct financing programs.
Because of its developmental importance, IFC often takes the initiative to promote leasing. Broadly, IFC seeks to
extend the leasing industry to more countries and to promote vigorous, competitive leasing industries in countries
where it already exists. More specifically, IFC advises governments, initiates concepts, undertakes feasibility
studies, sounds out potential technical partners, helps draft business plans and operating policies, mobilizes
funding, invests directly, and sits on the boards of leasing companies.
Mobilizing domestic financing is a particularly important part of IFC's role. Some mobilizating follows almost
automatically after a new leasing company is established because leasing companies typically leverage
themselves. Thus, while a dollar of IFC equity is matched on average by three other dollars of sponsor equity, the
company will leverage its equity by raising 56 times as much debt, enabling it to write over US$20 of leases.
Over the mediumterm, mobilization is higher still because most leasing companies grow rapidly. For example, asample of 11 leasing companies which IFC helped start between 1977 and 1988 had an initial capitalization of
US$61 million (that is, about US$5 million apiece). By 1994 the capitalization of those 11 companies totalled
US$3.3 billion.
What Is the Development Impact?
A rippleeffect of related development impacts from leasing can be identified, with each subsequent impact being
more widespread and powerful than the previous:
More SMEs access financing . In 1994, 16 of IFC's leasing companies wrote over 10,000 new leases worth over
US$2 billion. Lease sizes varied enormously between countries and companies, ranging from one company that
wrote over 2,700 leases worth an average of US$18,000 each to another that wrote a similar number of leasesaveraging US$580,000 each.
The industry grows rapidly as lessors gain experience, and potential borrowers come to understand leasing. For
example, when IFC helped establish Malawi's first leasing company in 1986, it expected the volume of new
leasing business to rise to US$3.6 million after five years. In fact, its new business in 1991 was over double this
level and two new competitors entered the market.break
Increased competition stimulates new product development(leasing to new sectors, crossborder leases, and so
on ) and sometimes reduced spreads . In Bostwana, for example, the new leasing company captured 25% of the
market within its first year. Leasing spreads fell from over 10% in the late 1980s to under 5% in 1994.
Private investment in capital equipment has increasedin many countries which have developed leasing
industries. Although sample sizes are small (18 countries) and direction of causality cannot be proven, there does
seem to be a correlation between the market share of leasing and private investment as a share of GDP.
Leasing companies help develop capital markets . On the assetside, they introduce small and medium businesses
that previously relied on informal financing, supplier credit, and internal cash generation to formal financial
markets. They also increase financing options for larger companies. On the liability side, leasing companies'
efforts to mobilize debt and equity help deepen and broaden domestic capital markets. Leasing companies
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mobilize debtby:
(1) borrowing from banks and finance houses or, where available, pension funds and insurance companies .
Demand from leasing companies broadens the term lending options for all of these institutions.
(2) issuing bonds or other marketable instruments . This broadens the choice and liquidity of instruments on
domestic capital markets. In their search for financing, several of the leasing companies which IFC has supported
have innovated in their domestic bond markets. In Korea, KDLC's W20 billion nonguaranteed corporate bond,
issued in May 1986, was the first domestic securities issue by a Korean leasing company.
(3) finally, securitizing their lease receivables. IFC is working on securitizing lease receivables for some of its
leasing companies.
On the equity side, several IFCsponsored leasing companies have floated their shares. IFC has invested both in
leasing companies that had already listed (for instance, in Sri Lanka and several in India) and has supported others
in which it had stakes to issue shares publicly (Korea, Portugal, Pakistan, and Zimbabwe).
What Makes Successful Leasing Companies?
IFC's experience suggests that six factors enable leasing companies to flourish:
Management. A high standard of cashflowbased credit analysis and supervision of clients, complemented by
followup and equipment insurance procedures are critical.
Competent partners . In many markets where leasing is being introduced, it is important to have an active,
committed and competent foreign technical partner. The technical partner, which should have enough equity to
ensure active participation, should: establish and monitor standards and procedures; train local staff; advise on
lease pricing, marketing and administration; and perhaps second the first general manger.
Funding . The single biggest obstacle to the growth of IFC's investee leasing companies is access to term local
currency funds. Access to term deposits from insurance companies or pension funds or to a local bond markethelps overcome this problem.
Assetliability matching (ALM). Leasing companies must match fixedrate leases with fixedrate term funding,
or if only floating rates are available (locally or internationally), it needs a regulatory framework that allows
periodic adjustments of lease rates.
Attractiveness to lenders . Given their high debtequity ratios, leasing companies must remain attractive to
lenders. Security sharing agreements that establish equal rights to a pool of collateral for senior lenders are often
used in IFC agreements. Also, IFC gives guarantees or direct loans, particularly to new companies that have not
yet established credit histories that allow them to borrow locally.
Regulatory framework. Leasing companies need a regulatory, legal and fiscal environment that at least provides
equal treatment compared withcontinue
other sources of capital investment financing. Clear, simple and effective legal procedures are important to
reclaim assets if the terms of the lease agreement are breached.break
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1Development of Leasing Worldwide
Leasing is big business. In 1994 over US$350 billion of new vehicles, machinery and equipment was financed
through leasing, accounting for about an eighth of the world's private investment. In OECD countries up to a third
of private investment is financed through leases.
Leasing has expanded rapidly over the past 20 years in developing countries. IFC has helped promote this trend
through a combination of technical assistance to governments on leasing regulations, identifying sponsors and
technical partners, and investing in new leasing companies. IFC has invested in leasing companies in over half of
the developing countries with a leasing industry todayoften assisting the country's first leasing company to get
started. IFC has promoted leasing vigorously because of its high developmental impact. It is an especially suitable
financing vehicle for new, smalland mediumsized enterprises (SMEs).
Background
Financial leasing is a contractual arrangement between two parties, which allows one party to use an asset owned
by the other in exchange for specified periodic payments. The lessee usescontinue
Box 1.1: Leasing Definitions
Financial leases are an alternative to bank loan financing of equipmentpurchases. The lessor buys the equipment chosen by the lessee, which is
then used by the lessee for a significant period of its useful life. Financial
leases are often called fullpayout leases because the lease payments
during the lease term usually amortize the lessor's total purchase
costsresidual value is typically between 0% and 5% of the original
acquisition priceplus covering interest costs and providing some profit.
The lessee bears the risk of obsolescence and the cost of maintaining andinsuring the asset. Typically the lessee has the right to buy the asset at the
end of the lease contract for a nominal fee. The companies IFC has
sponsored generally provide financial leases.
Operating leases are not a means of financing equipment purchase.Instead, the lessee contracts for shortterm use of equipment the leasing
company has on hand: car rentals are a typical example. The capital cost
is typically recovered from multiple, serial rentals and the final sale of the
asset. Maintenance and obsolescence risk lies with the leasing company.
Hirepurchase is a hybrid instrument that provides an alternative to
bank financing for purchasing an asset. It is usually sold to retail(individual) customers for financing motorcycles, sewing machines,
refrigerators and other small ticket items. The lessee renders a high down
payment (often around 30% of the cost) and with each lease payment a
higher percent of the title is transferred to the lessee. Thus the lessee
builds equity and transfer is automatic once all the payments are made.
This arrangement is less secure for the lessor juridically because the
lessee is a part owner of the asset; on the other hand, the lessees tend to
have a large enough stake in the equipment that they do not want to risk
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losing it through payment default. Some companies in which IFC invests
provide both hirepurchase and financial leasing.
Table 1.1: Top 50 Leasing Markets,
198819941988 1990 1992 1994
Leasing volume (US$bn )
High income countries
[1]
259 310 292 313
Middle income
countries
12 17 27 39
Low income countries 3 5 5 5
Total [2 ] 274 332 323 357
Market share (% ) [3
]
High income countries 15 15 15 15
Middle income
countries
4 5 9 11
Low income countries 3 4 4 7
Average 9 10 11 13
Source : World Leasing Yearbooks , 19881994.
Note : [1] World Bank classification.
[2] This 1994 survey is based on a sample of 24 high,20 middle, and 6 lowincome countries, as classified
by the World LeasingYearbook.
[3] Unweighted averages. Leasing as % of private
investment.
the asset and pays a rental to the lessor, who owns it. The legal owner relies on the ability of the user to generate
sufficient cash flow to make lease payments, rather than relying on its credit history, assets or capital base.
Security for the transaction is provided by the asset itself. Leasing enables borrowers without welldeveloped
balance sheets or credit histories (especially new or small firms) to use capital equipment in cases where they
would not be able to access traditional bank lending. Box 1.1 describes different leasing arrangements.
Leasing can be traced back thousands of years, although it has evolved considerably during the last 40 years. Inthe nineteenth century, leasing was used by the Bell Telephone Company, and shortterm leases were available
for cotton looms, electricity and gas meters, and some manufacturing equipment. Equipment manufacturers
realized the value of leasing as a marketing tool, and the growth of the aircraft and car industries further
stimulated the development of leasing (partly because repossession of moveable property in the event of default is
relatively easy). The industry evolved from being a manufacturer's selling technique into a specialized financial
service with the formation of the first independent leasing company in 1952 in the United States. The industry
extended to Europe and Japan in the 1960s and has been spreading through developing countries since the
mid1970s. By 1994 leasing had been established in over 80 countries, including over 50 developing economies.
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Developing Markets Driving Leasing Industry Growth
Leasing is now a mature industry in most highincome economies. The United States is a clear leader both in
terms of volume (with US$140 billion of leases written in 1994) and market penetration (with 30% of plant and
equipment purchases). In many developing economies, however, leasing has been growing very rapidly. Between
1988 and 1994 new leases written in developing countries increased from US$15 billion to US$44 billion. By
1994, middle and lowincome countries accounted for five out of the largest twenty leasing markets. The most
spectacular increase has been in South Korea. Started in 1975 and supported by IFC investments in the first
leasing company, the South Korean leasing market was the fifth largest in the world by 1994.
Furthermore, market penetration (leasing as a share of private investment) more than doubled in both middle and
lowincome countries between 1988 and 1994 (see Table 1.1 and Figure 1.1). By 1994 leasing accounted for an
average of 11% of the financing of capital equipment in middle income countries, up from just 4% in 1988.
There are some important caveats to these data which, while they do not affect the broad conclusions, do mean
that crosscountry comparisons should be treated carefully. Euromoney's World Leasing Yearbookpubsoft
Figure 1.1:Leasing in Developing Countries, 19881994
lishes figures on the 50 largest leasing markets, of which about half are in developing economies (see Appendix
Table A1). Definitional differences mean that the numbers are not strictly comparable between countries.
Furthermore the small number of low income countries in the top 50 markets means that the large jump in
market share between 1992 and 1994 should be treated as indicative of the trend rather than representative of all
low income countries.1
On average, leasing was financing 11% of private investment in middleincome countries by 1994, yet wide
variation remains between countries. Thus, leasing's share of private capital investment in South Korea exceeds
20%, while it is below 2% in Thailand (Box 1.2 explains why).
Regional Trends
America still accounts for 40% of worldwide leasing, yet the regional distribution of leasing has changed
markedly during the past five years. In 1993 Asia overtook Europe for the first time, and in 1994 accounted for
28% of the world market compared to Europe's 25 percent. Latin America's share increased by more than five
times from 0.8% in 1989 to 4.2% in 1994. Africa's share of the global total increased marginally from 1% to
1.3%, but the figures should be treated with caution as South Africa and Morocco have been the only two African
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countries in the top 50 leasing markets every year since 1989.
Although variations in data quality between countries mean that the figures should be considered indicative rather
than precise, regional trends in the market penetration of leasing broadly reflect the pattern set by volumes (see
Table 1.2). While leasing has matured in the United States and Europe, leasing's market share grew from an
average of 3.5% in 1988 to 13.4% of capital investment in 1994 in the Latin American countries in the top 50
markets (Brazil, Mexico, Colombia, Venezuela, Chile, Peru and Ecuador). The increase in Asia was almost as
dramatic, from 4.4% to 7.8 percent.break
Table 1.2: Private Investment Financed by Leasing ,
19881994
Regionalaverage
1988(% )
1990(% )
1992(% )
1994(% )
North America 21.3 20.6 21.5 22.1
Asia 4.4 4.9 5.9 8.2
Europe 11.7 12.1 13.5 13.4
Latin America 3.5 5.4 8.8 13.4
All regions 9.0 9.6 10.9 12.5
Source : World Leasing Yearbook. IFC.
Note : Unweighted averages. Market share for Africa
and Australia/NZ not shown because of small sample
sizes; these markets, however, are included in the "All
Regions" average. World Leasing Yearbook, 1995.
Box 1.2: Leasing Development in Korea and Thailand
Why does leasing account for a much higher share of private capital
investment in Korea than Thailand? The answer is mainly in the
countries' different regulatory and fiscal environments.
In 1973 the Korean government, drawing on IFC advice, enacted a
leasing industry promotion law, which defined the regulatory framework
for leasing. In 1976 the government issued leasing regulations, which
stipulated the type of assets that licensed leasing companies may lease,
specified that lessees could deduct lease payments before tax, and that
lessors could deduct interest charges and accelerated depreciation before
tax. In addition, leasing companies were exempted from customsrestrictions on importing equipment, and allowed more expeditious
treatment in the handling of foreign trade transactions. Later in the decade
restrictions on spreads and local borrowing were removed.
As the demand for capital equipment rose with Korea's rapid economic
growth, leasing companies were better placed than banks to meet it. As
part of its tight monetary policy, the government imposed restrictions on
bank lendingwhich meant that bank lending to SMEs was particularly
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constrained. Being less tightly regulated than banks, leasing companies
were able to respond to the increased lending opportunities.
Thailand's first leasing company started in 1978, with IFC participation.
However the industry grew slowly until the early 1990s. Until 1991
reforms, the tax treatment of leasing was harsher than the two
alternatives: bank borrowing or hirepurchase. This is well illustrated bythe change after the law was amended. In 1993 leasing volume tripled to
US$560 million, from US$180 million in 1992.
Leasing:Important to SMEs
Leasing is even more important to new, and small and mediumsized firms than these large, growing volumes
and market shares suggest. Surveys of how companies finance themselves typically focus on how firms draw on
three main sources of capital: internal cash, bank loans and capital markets. Yet in many developing countries
capital markets are relatively undeveloped, and banks (understandably) often prefer to lend to larger firms that can
offer stronger security. Banks are also often reluctant to undertake term lending. New or small firms withoutstrong collateral (or which are located in countries without effective laws for repossessing security) typically do
not have access to much bank lending; leasing or supplier credits may be their only external financing options.
In South Korea for example, leasing (which is provided by both banks and nonbank financial institutions)
accounts for nearly a fifth of total finance raised by the business sector (see Table 1.3). It is the single most
important source of external finance for small firms.
Why Has Leasing Grown so Fast?
The rapid growth of leasing in so many countries suggests that the product has both addressed an important unmet
demand and attracted borrowers away from traditional financial products such as bank loans. It offers advantagesto all parties:
The Lessee
Although leasing is generally a highspread business, there are many advantages for the lessee, compared to
conventional bank borrowing:
Simpler security arrangements and the less strict requirements for historical balance sheets means that new,
small and mediumsized enterprises can access lease finance more easily than bank loans.
Availability . In developing countries leasing may be the only form of medium to longterm finance available
for purchasing equipment.
Convenience . Leasing can be arranged more quickly and simply than conventional loan financing because
outside security often does not need to be established. Furthermore, many leases are provided by specialized
companies, with management focused on providing leasing related services. Speed and ease of processing are an
important source of competitive advantage to such companies.
Lower transaction costs . Despite the relatively high spreads of leasing, the costs of assigning collateral,
documentation and slower processing times for bank borrowing can be significant, particularly for smaller
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borrowers (as many of these costs are fixed and not based on the size of the loan).
Little cash required. Leasing can typically finance a higher percentage of the capital cost of a piece of equipment
than bank borrowing, often with little or no initial down payment required. This allows the company to preserve
its cash or bank facilities to meet working capital needs.
Flexibility . Leasing contracts can be structured to meet the cash flow needs of the lessee.2
Tax incentives . In many countries lessees can offset their full lease payments against income before tax,
compared to just the interest on bank loans. Furthermore, lessors may pass on tax benefits associated with their
depreciation to lessees via reduced financing costs. The tax incentives reflect the fact that governments recognize
that there are economic benefits associated with leasing, as it expands productivity by enabling new and small
firms to access financing for investment (see Box 1.3).break
Table 1.3: Finance Raised by Korean Firms ,19911993(US$ billions ) [1 ]
Financing source 1991 1992 1993
Banks [2] 15.8 10.6 10.5
Nonbanks [2] 17.5 14.9 14.6
Bonds, stocks, and
commercial paper
30.2 29.0 40.9
Borrowing from abroad 3.3 3.2 1.6
Others (trade credits, govt) 12.8 12.5 12.3
Total including leasing 79.5 70.3 76.7
New leasing contracts 9.9 12.0 14.2
Leasing as % of total 12.4% 17.1% 18.5%
Source : Bank of Korea Quarterly Economic Review ,
June 1994.
Notes : [1] Conversion to US$ based on average
conversion rate for the year as cited in Emerging Stock
Markets Factbook, IFC. 1991 = 732W/US$; 1992 =
780W/US$; 1993 = 802.6W/US$.
[2] Including leasing.
Box 1.3 : Leasing Levels the Playing Field for Investment Incentives
Some observers consider leasing to be tax driven and thus without
fundamental economic benefits. To the contrary, while it is true that the
fiscal regime plays a crucial part in development of a leasing industry, it
is inaccurate to say that tax arbitraging does not yield economic benefits.
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Most countries use tax incentives to promote capital investment, through
instruments such as accelerated depreciation, investment allowances or
investment tax credits. However the value of these benefits is not equal to
all firms. They tend to be most useful to existing firms that have taxable
profits against which to offset these allowances. New or small firms
(which may be making losses or only small profits) may not be able to
use these tax benefitsthe firms are deemed "tax exhausted." And yetsome of them might have investment opportunities that would yield
higher returns to the economy than the firms that are able to take
advantage of the tax incentives. Enter the leasing company, which buys
the equipment and (as legal owner) offsets the depreciation against its
taxable profits. It then passes on part of the benefit to the lessee, via a
lower financing costor by making the loan at all. There are variations,
but the principle is the same: giving the same incentives to invest to
taxexhausted firms as to those with tax capacity. Sometimes a leasing
company can act as a broker between a firm with a potential investment
but no tax position and a company with tax capacity but weak investment
alternatives.
The existence of a leasing industry thus may allow a mismatch in tax
positions to be arbitraged, such that capital investment is more likely to
be undertaken by the firm that expects the highest marginal return on
investment, even if it does not have a favorable tax position. The overall
volume and efficiency of capital investment is higher than in an economy
where tax positions cannot be swapped between firms. Governments
recognize these benefits and often devise their tax regimes to encourage
arbitraging and thus promote investment efficiency.
The Lessor
Leasing offers profitable opportunities to reach borrowers and expand into existing markets. Advantages include:
Ownership of the assetgives the lessor strong security. In countries where weak collateral laws hinder bank
lending, leasing offers the advantage of (often) not requiring collateral beyond the security of the leased asset
itself, and of simpler repossession procedures, because ownership of the asset already lies with the lessor. In some
countries, bank loans are commonly structured as leases because problems with the judicial system mean that
recovering collateral on bank loans is difficult.
Dedicated use of funds . Because the lessor purchases the equipment directly from the supplier (often after the
lessee has chosen it), there is no opportunity for the lessee to utilize the funds for other purposes.
Relatively simple documentation keeps transaction costs down, allowing leasing companies to achieve high
volumes efficiently (see Box 1.4).
Lighter regulation . Because leasing companies are not usually deposit takers they tend to be lesscontinue
Box 1.4: Competitive Advantage for a Lessor: Processing ,Relationships and Marketing
A midterm evaluation of an IFC investment in a Sri Lankan leasing
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company found that it was facing competition from two
governmentowned development finance institutions (DFIs) that offered
potential borrowers both leasing and loans. The DFIs had a considerable
funding advantage: they were allowed access to subsidized funds, and
their financings were not subject to the turnover taxes levied on private
leasing companies. Nevertheless, the independent leasing company was
able to compete successfully by exploiting its areas of comparativeadvantage:
speedy processing: Its average processing time for a lease was one week,
compared to 48 weeks for the DFSs;
aggressive marketing;
leasing relatively small items, where other factors than simply the cost of
financing are important; and
close client relationships, which facilitate processing and supervision.
tightly regulated than banks. This may allow them to use higher leverage than some other financial institutions
(and frees them from directed lending mandates sometimes imposed on banks by governments).
Governments
Governments in many countries have realized that leasing facilitates investment in capital equipment and have
promoted the development of the industry. Furthermore, the benefits may go beyond improved access to
financing. A leasing industry broadens competition in financial services and introduces businesses and financiers
to financial innovations, such as cashflowbased credit analysis. And by facilitating the financing of imported
capital equipment, leasing companies can help transfer technology to domestic industries.
Leasing and Financial Sector Development
While there is no single universal pattern of financial sector development, a typical course of development has
been observed in many developing economies over the past 50 years. The banking system has been heavily
controlled or directly owned (private banks were nationalized and/or new stateowned banks set up) by
governments. Banks are the primary means of mobilizing domestic savings and are the major source of credit for
enterprises. Until the end of the 1980s, it was common for governments to direct bank lending to favored sectors,
including SMEs. Numerous stateowned development finance institutions were set up for this purpose. In some
countries, stateowned insurance companies and pension funds were established, sometimes as government
monopolies.
To complement the banking system, usually some form of money market evolves. In some countries government
bonds have provided mediumterm investment vehicles for the market. Where they have developed, security
markets provide vehicles for raising and trading debt and equity. Many LDCs' securities markets are dominatedby government bonds in the early stages but, as they develop, they provide debt and equity capital for enterprises
and new term instruments for investors.
As markets liberalize and governments become more committed to eliminating market distortions, interest rate
and credit controls have been loosened, banks have been privatized and new private banks have been allowed to
bring competition to oligopolistic markets. Banks have started lending more on commercial terms; initially they
focus on larger, established companies with a credit history and collateral. New enterprises and SMEs, without
these benefits, have still faced difficulties in accessing bank credit. Leasing has helped address these needs.
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As leasing develops, it helps fill gaps in the asset, liability and security markets:
Asset side . Leasing companies can profitably lease to smaller enterprises on the basis of the cash flow to be
generated by the leased asset instead of on the lessee's credit history and other collateral.
Liability side . In the early stages of leasing, lessors generally borrow from insurance companies, pension funds
and banks, giving these institutions a broader base of mediumterm assets in which to invest.
Securities markets . As a leasing company develops a credit history, it can issue commercial paper, notes or
bonds on the securities market. Often the companies enhance the security of this paper by giving the security
holders claim to the lease receivables, which represents a diverse pool of lessees and equipment. Lessors may also
tap the equity markets by going public once they have established a satisfactory operating history. At the next
level of sophistication, lessors can securitize their lease receivables (as is done in developed markets) thus
creating another marketable security, tapping a larger pool of funding, and increasing their debt capacity.
What Leasing Needs:A Conducive Macroeconomic Environment
A healthy leasing industry requires private investment activity which, in turn, is facilitated by a positivemacroeconomic environment: fiscal and price stability, undistorted prices of capital and foreign exchange,
competitive markets and availability of mediumterm local currency finance. Leasing companies particularly
need: 1) access to local currency in tenors of three years or more (from banks or institutions such as life insurance
companies); and 2) foreign exchange convertibility. Incontinue
most developing countries, foreign exchange is needed for importing capital equipment but lesseesespecially
small and domesticallyoriented firmsare unwilling to take foreign exchange risk by accepting
dollardenominated leases. So leasing companies need foreign exchange convertibility (or locally available
hedging mechanisms) in order to offer local currency leases to finance imported equipment.
What Leasing Needs:A Conducive Regulatory Environment
The appropriate regulatory treatment of leasing recognizes it as a viable alternative to outright purchase and
provides equal or more favorable regulatory treatment vis vis other methods of financing capital investment.
Creation of a suitable environment involves three elements: legal, supervision/regulation, and tax/accounting.
Legal
The rights and duties of the lessor as legal owner of the equipment and the rights and duties of the lessee as user
should be clearly stated. The legal owner needs a clear, simple, workable and timely process to reclaim an asset if
the terms of the lease are breached by the lessee, including automatic right of repossession without lengthy court
proceedings and the right to claim payments due and other damages. If repossession is legally and juridically
easy, leasing companies can then write riskier business than otherwise, and they can price their leases with a
lower risk premium, allowing them to make credit available more cheaply.
The lessee must have the right to use the equipment unimpeded and gain the full productivity of the asset.
Typically, the lessee also has the right to assume ownership upon the exercise of a preagreed purchase option at
the end of the contract. At the same time, the lessee is obligated to make timely lease payments, and insure and
maintain the equipment.3 In some transforming economies where laws have been evolving, it has been necessary
to clarify that the lessee also has no right to create a lien on leased assets.
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Supervision and Regulation
As most leasing companies do not take deposits from the public and do not participate in central bankoperated
money markets, they are rightly subject to much less regulation than commercial banks. This relative freedom
from government controls has been one key to their success. Governments have been much less tempted to use
leasing companies as vehicles for achieving noncommercial social or political goals.
In countries with regulatory bodies overseeing leasing (usually the central bank or the ministry of finance), thosebodies often oversee the prudential conditions for the operation of leasing companies, such as: maximum
debt/equity ratios, minimum capital requirements, ability to raise wholesale or retail deposits, whether leasing
companies must be standalone entities (for instance, if the company is part of a bank or is operated as a separate
subsidiary), and mandatory provision of transparent and standardized financial statements. IFC often encourages
the development of prudential guidelines to protect both leasing company creditors and their lessees from
unsound lessors, thereby promoting the expansion of the leasing industry.
Tax and Accounting
Tax and accounting regulations vary among countries due largely to differing views as to whether legal ownership
or use of the asset defines which party may depreciate the asset. Often the accounting treatment and the tax
treatment for leasing companies will differ to reflect the differing purposes of the two sets of accounts:
Financial accounting is designed to give shareholders a fair picture of the leasing company's health.
Tax accounting is intended to give national tax authorities the flexibility to encourage capital investment. Most
countries have tax regimes preferential to capital investment and to small businesses so it is consistent to offer
fiscal incentives through firms such as leasing companies that deal almost exclusively in financing capital
equipment and offer finance to new and small businesses.
In many countries with vibrant leasing industries, the lessoris treated as the owner of the asset for tax purposes,
and often for accounting purposes as well. The lessor treats the entire lease payment (interest and principal) as
income and depreciates the asset on its books, usually on an accelerated schedule. For the lessor, income is 1)accelerated and therefore taxed earlier than it would be for a bank, and 2) a larger taxable amount than it would be
for a bank as it includes interest andcontinue
repayment. On the other hand, to level the playing field the leasing company takes the depreciation of the asset.
The lessee claims the full lease payment as a deduction from taxable income. Since the lease payment includes
both interest and the full cost of the equipment, this allows the lessee an effective "depreciation" period equal to
the life of the lease, which is generally shorter than the economic life of the equipment.4
From the point of view of national fiscal authorities there may be a "double dip" in that the lessor takes full
depreciation and the lessee simultaneously expenses the repayment portion of the lease. Most governments have
embraced this fiscal treatment for these reasons:
Promoting investment. The "double dip" enables government to encourage the use and financing of productive
equipment and to facilitate the extension of credit to firms which would not qualify for bank loans and/or are "tax
exhausted" (see Box 1.3).
Limited cost in early stages . A new leasing company has virtually no taxable income with which to offset
depreciation. Thus there is no loss of income to the national treasury in the early years of the industry. Likewise,
SMEs and new enterprises often do not have sufficient taxable income to make the deduction of the full lease
Leasing in Emerging Markets
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payment useful.
Encouraging the industry . Empirically, IFC has found that leasing companies do not enter markets aggressively
unless the asset depreciation is available to them, even if they cannot make full use of it until later years.
The International Accounting Standards of 1991/1992 recommended that the lessee , as the economic if not legal
owner of the equipment, include the leased asset on its balance sheet and take the depreciation expense (Appendix
Box A1 gives a worked example). Under these recommendations, the lessor lists the lease receivable as an asset
on its books. While this may be a reasonable accounting treatment, empirically, IFC has found that the adoption
of this principle for tax accounting has led to the demise or decline of the leasing industry in some countries (for
example, Kenya) over certain periods.
IFC has encountered instances where tax incentives, investment allowances and sales taxes have become tax and
accounting issues. In general, leasing companies should receive the same treatment as an industrial company
which is buying an asset with bank finance. For example, the leasing company should be allowed to take the
investment credit or accelerated depreciation that industrial companies are given, as this will simply be passed on
to the user of the equipment in the lease price. Likewise, sales taxes on the original asset purchase should be
levied once. Where a second sales tax is levied when the lessee exercises a purchase option, this should be based
on the amount actually paid and not on the assessed value, as the equipment has usually already been depreciatedfully by the original owner (that is, the lessor).break
1. Definitions of leasing differ between countries. The World Leasing Yearbookuses the local definition. The
denominator used to calculate market penetration varies. In the United States, for example, it is total private
nonresidential investment in producers' durable equipment. In many developing countries such series do not exist;
in these cases the denominator used was total private investment, as reported in Trends in Private Investment in
Developing Countries 1994 (IFC).
2. Examples include: 1) stepup/stepdown lease, which increases/decreases payments over the lease term to fit
in with the lessee's cash flow; 2) seasonal/skipped payments lease, which is structured to meet seasonal cash flow
constraints; 3) fixed or floating payments; 4) adjustable payment terms: in advance or arrears, and at varying
periods.
3. Often lessors actually provide these services on behalf of their clients for a fee.
4. The tax benefit is thus one oftiming , not forgiveness .
2IFC's Leasing Experience
In addition to carrying out over 50 technical assistance projects to advise governments on how to introduce or
promote leasing, IFC has invested in numerous leasing companies in developing countries and worked with alarge number of technical partners and other private investors.
Accelerating Approvals
Between its first investment in the Korea Development Leasing Corporation in 1977 and June 1995, IFC's Board
approved US$523 million via 120 transactions to leasing companies (see Table 2.1 and Appendix Tables A2A5
for a full list). These approvals covered 63 companies in 36 countriesover half of the developing countries that
have leasing industries. IFC supported the growth of many of the companies with several loans and investments
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2 IFC's Leasing Experience 25
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over time. For example, IFC's Board approved eight investments in Colombia's Leasing Bolivar between 1980
and June 1995.
Table 2.1: IFC Approvals, 1977June 1995: The Big Picture
Number US$m US$m
Approvals 120 IFC approvals 523 Average approval: 4.4
Companies 63 of which: Debt 6.5
Countries 36 FY77FY90 122 Equity 0.5
FY91FY95 401
Debt 483
Equity 40 Approved for IFC
syndication
232
IFC's average leasing approval was US$4.4 million, well below its overall average of about US$11 million per
project. Even more striking is the small size of the average equity approval of just under US$500,000. Thisreflects several characteristics of leasing companies and IFC's involvement in them:
IFC often participates at the startup stage, which may only require a modest amount of equity and perhaps a
small loan;
Leasing companies are relatively small financial institutions; they raise much of their debt from local financial
markets; and,
Much of their growth is typically financed by internal cash generation.
A frequently observed pattern involves an initial equity investment by IFC in a new leasing company, followedlater by a loan. For example, IFC invested US$0.6 million in Ghana's first independent leasing company in 1991,
invested a further US$0.15 million in 1993, andcontinue
provided a US$5 million loan in mid1993 to help expand the company's foreign currency lease portfolio.
Much of IFC's financing has occurred during the last five years (Figure 2.1 shows the historical pattern of IFC's
equity approvals since 1977). Over threequarters of the US$523 million of IFC's leasing financing was approved
during FY91FY95, reflecting:
Industry growth . This relatively young industry is quickly spreading to more countries.
Needs of transition economies and lowincome economies . The emerging private sector in transition economies
is finding leasing an increasingly important financing source. And leasing has proven an appropriate and
financially successful way of supporting firms in lower per capita income regions, such as SubSaharan Africa.
IFC has been closely involved in promoting leasing industries in both these areas.
Financial sector stabilization and liberalization . Following severe macroeconomic and financial sector
instability during the 1980s debt crisis, many countries have implemented stabilization and liberalization
programs that have allowed leasing industries to flourish.
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2 IFC's Leasing Experience 26
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IFC focus . As the importance of leasing to new, small and mediumsized enterprises has become
Table 2.2: IFC Commitments, 1977June 1995
Number US$m
Commitments 92 IFC commitments 374
Companies 49 of which:
Countries 31 FY77FY90 88
FY91FY95 286
Debt 342
Equity 32
more evident with experience, IFC has promoted the industry more vigorously.
IFC's Commitments
By June 1995, IFC had committed US$374 million to 49 leasing companies in 31 countries (see Table 2.2).1 The
difference between approvals (US$523 million) and commitments is partly explained by the large number of
projects approved in 1994 and 1995, many of which had still not been committed. In addition, about 15% of IFC's
leasing approvals (mostly loans) have been dropped or cancelled. The reasons include declines in local interest
rates which have made foreign loans uncompetitive, and the unwillingness of leasing customers to take on the
foreign exchangedenominated leases,2 business difficulties in some leasing companies, and governmentrelated
problems (slow or revoked approvalscontinue
Figure 2.1:
IFC's Leasing Equity Approvals, FY77FY95
source: IFC
Leasing in Emerging Markets
IFC's Commitments 27
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Figure 2.2:
IFC's Leasing Commitments by Region, 1977June 1995
source: IFC
and inappropriate regulations). In some cases, the approval of IFC's Board for a new leasing project may be used
to help trigger changes in leasing regulations by a government, or to seal commitment by foreign or domestic
partners to the project. Occasionally these followup actions do not happen, and IFC is unable to participate in the
project.
Wide Geographic Coverage
In terms of volume, nearly half of IFC's commitments have been to leasing companies in Asia (see Figure 2.2 and
Table 2.3). IFC has helped develop leasing in several Asian countries, including setting up the first company in
Korea, Bangladesh, Sri Lanka, Thailand, and some regions of India, as well as encouraging competition by
financing new entrants in Indonesia, Thailand, the Philippines and India.
IFC's US$94 million of commitments to the Middle East and North Africa region are dominated by loans to
several leasing companies in Pakistan. But IFC has been active throughout the region, financing the first
specialized leasing companies in Jordan, Oman, Pakistan, Tunisia, the Lebanon and, most recently, Uzbekistan.
In Latin America , IFC helped introduce leasing to the Dominican Republic and Peru. IFC also helped the leading
Chilean leasing company to access sevenyear finance in the international markets by syndicating half of a
US$30 million loan in 1993.
IFC's involvement in promoting leasing in SubSaharan Africa has been substantial. Leasing companiesoften
the first in the countryhave been financed in Zimbabwe, Botswana, Malawi, Ghana, Senegal, Benin, Tanzania,
Uganda, and Cte d'Ivoire. Reflecting the size of the domestic markets, most of these transactions have been
small and many have involved providing startup equity, so the region does not stand out significantly in overall
volume terms. IFC's leasing activities have intensified in SubSaharan Africa as economic reforms have helped to
improve distressed banking sectors, and governments have recognized the importance of leasing for financing
small and mediumsized companies.
IFC accelerated its leasing promotion activities in Europe with the fall of the Berlin Wall. Leasing has proven a
particularly appropriate financing source for the emerging private sector in the transition economies, where most
firms have a limited track record, legal difficulties often restrict the use of collateral, and many banks are
undergoing major restructuring programs. IFC has financed leasing companies in the Czech Republic, Romania,
Slovenia, and Estonia, with investments in other transition economies being appraised. In addition IFC drafted the
leasing regulations and supported one of the first companies in Turkey.
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Table 2.3: Regional Distribution of IFC Commitments, 1977June 1995
(US$ million )
Companies
% of
total
Equity
(US$m)
Loans
(US$m )
Total
(US$m )
% of
total
Asia 18 37 21.6 155.7 177.3 47LAC 5 10 2.4 58.0 60.4 16
CAMENA 11 22 2.2 91.5 93.6 25
Africa 8 16 2.8 18.2 21.0 6
Europe 7 14 3.0 18.6 21.6 6
Total 49 100 32.0 342.0 373.9 100
Source: IFC.
Mobilization
For each dollar provided by IFC to leasing companies, other sponsors have put in over three dollars. Thus, IFC's
commitments of US$374 million have been associated with total financing of US$1.5 billion. Mobilization rates
werecontinue
higher in Europe and Middle East/North Africa (see Table 2.4).
In practice mobilization rates are significantly higher, at least for the equity that IFC invests, as leasing companies
leverage themselves through borrowing (see Figure 2.3). While a dollar of IFC equity is matched by three other
dollars of sponsor equity, the company will leverage its equity by raising 56 times as much debt. Thus, each dollar
of equity that IFC invests typically e