Micro leasing, a better alternative for SMEs

On Tuesday the International Finance Corporation (IFC), an investment arm of the World Bank group called upon Financial Institutions to embrace micro leasing for Small and Medium Enterprises (SMEs).

Sunday, May 03, 2009

On Tuesday the International Finance Corporation (IFC), an investment arm of the World Bank group called upon Financial Institutions to embrace micro leasing for Small and Medium Enterprises (SMEs).

According to Brian Kirungi, IFC’s Team Leader and Legal Specialist in Rwanda, micro leasing would reduce current barriers affecting those that have little or no access to finance. He argues that this would make it easier for SMEs to establish and expand their businesses.

His argument is justifiable since SMEs have consistently found it difficult to access credit yet equity resources are also scarce. This hinders domestic market expansion and potential export markets.

Governments of growing economies are increasingly recognizing the potential of SMEs in providing jobs and in poverty alleviation. 

Data for developing and developed countries indicates that SMEs account for between 60-90 percent of all enterprises. The same percentage of workers is employed by SMEs, when agricultural workers are excluded.

Rwanda’s SME sector is actively contributing to the growth in the manufacturing, services and agriculture sectors, as well as ICT services, in terms of output, value addition, employment and export.

The 2008 IMP study that covered 2,556 SME’s in 28 out of 30 districts in Rwanda, show that in manufacturing, less than 30 percent of the total manufacturing output of the entities surveyed.

Increased access to finance can intensify the role played by SMEs. Leasing now offers an alternative. Unlike bank loans, leasing uses asset based financing, which is not the case with collateral or security based approach applied by banks.

Leasing does not require a lessee to have land for mortgage and usually does not seek additional security from the borrower.

This is a significant distinction particularly for SMEs which are unable to access financing through the formal banking sector due to lack collateral.

Some urge that the concept of leasing limits ownership of the asset. But, business enterprises earn profit from use of assets, not ownership of these assets.

So what matters most is whether the cash flow generated by the asset is able to cover its lease rent. Leasing also offers an option of acquiring ownership of the asset at the end of the lease.

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