financing agricultural investments: leasing as credit alternative expert meeting on managing risk in...

Financing Agricultural Investments: Leasing as Credit Alternative

Expert Meeting on Managing Risk in Financing

Agriculture

Johannesburg,1-3 April, 2009

The World Bank

Renate Kloeppinger-Todd

The World Bank

Expert Meeting on Managing Risk in Financing Agriculture, 1-3 April 2009, Johannesburg

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What is Leasing?

Contract between two parties: the party that owns an asset ( lessor) lets the other party (lessee) use the asset for a predetermined time in exchange of periodic payments

Separates ‘use’ of asset from ‘ownership’ of asset.

Finance Lease (The Credit Alternative) Amortizes asset price - includes purchase

option for a token amount at end of lease period

Lessee responsible for maintenance and all risks usually associated with ownership without actually owning the asset

Non-cancellable


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Advantages: The Client Perspective

Asset serves as collateral, less additional collateral required

Lesser credit history may suffice

May require less down payment

May have better prices

Potential tax-benefits


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Advantages: The Leasing Company Perspective

Lower transaction costs

Stronger security: ownership rights versus weaker collateral rights Less incentives to default, less costs of

repossession

Usually more flexible pricing Lease rates not usually regulated (loan

rates often are)

Less costs of regulatory compliance Leasing companies often exempt from

prudential regulations.


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Advantages in Rural / Agricultural Finance

Collateral

Absence of assets that can be collateralized.

Transaction Cost

Poorly functioning asset-registries

Regulation

Rural lending often subject to interest ceilings


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Economy Wide Benefits

Increase in capital investment, and thereby productivity Particularly for the ‘Missing Middle’

Capital market development Leasing companies borrowing from

insurance companies, pension funds

Increased competition in the financial market Competition for banks on products and

prices.


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Firm Case 1: John Deere, Mexico

Fully-owned subsidiary of John Deere

US$ 74million lease portfolio in 2004

85% in farm equipment

Rural leases: examples US$107,000 Harvester

US$ 21,000 Seeding Machine

US4 11,000 Cultivating Implements


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Firm Case 2: DFCU Leasing,Uganda

Profitable, publicly listed company, bank subsidiary.

US$ 25.7 million lease portfolio in 2004

20% portfolio in rural areas; 10% portfolio and 16% leases in Agriculture

Rural Leases- Examples

US$ 70,000 Cotton-ginning equipment US$34,000 bakery equipment US$ 6,000 milling equipment


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Firm Case 3: Uzselkhozmash Leasing, Uzbekistan

State-owned company

US$76.6 million lease portfolio, end-2005

100% rural leases

Primary client group: farm enterprises

Average lease size: US$13,700


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Firm Case 4: Network Leasing, Pakistan

Profitable, publicly listed private company.

US$ 11.6 million lease portfolio in 2004

21% portfolio & 43% leases in rural areas

Rural Leases- Examples US$ 420 Buffaloes

US$ 2793 clinic lab-equipment

US$ 402 school furniture


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Five Lessons specific to rural leasing

Leasing is a means to acquire productive assets

Rural enterprises of different sizes benefit, but providers may not be able to serve all markets

Non-farm enterprises account for a significant portion of rural leases

Rural leasing can be profitable but may require initial donor/government support

A rural-only leasing company may not be viable


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World Bank

Group: History of supporting leasing development

A Core Component of IFC’s Financial Markets Strategy Increase access to financing to Micro, Small &

Medium Businesses Broaden the range of financial services available

in Emerging Markets

An Historic Focus Area for the IFC Over the past 30 years, IFC has financed 200

leasing projects in 50 countries for $1.4 billion IFC has set-up or improved leasing legislation

and regulations in 60 countries IFC has operated 30 Leasing technical

assistance projects across the globe with $17 million of its own funding leveraged with Donor funding.

Also part of IDA-IFC MSME Project in SSA


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IFC’s Leasing Market

Support: Investment and advisory strategy

Help local banks create leasing operations Bringing technical partners and acting as

honest broker in JV Combining debt or risk sharing with advisory

services

Invest in start-up and existing leasing companies Equity and quasi equity, debt, structured

finance Foster SME Financing through advisory

services and performance-based grants

Facilitate development of enabling environment Support for drafting leasing laws, amendments

to commercial regulations


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IFC Leasing Market

Support: Regional Activities in Africa

Advisory Services IFC Africa Leasing Facility (Ghana, Tanzania,

Rwanda, Madagascar, Senegal, Cameroon, DRC, Mali, Ethiopia)

In Rwanda: CEDP Leasing Development Program – WB/IFC partnership to increase agribusiness finance (coffee bikes project)

Investments: Ethiopia Access Leasing Company – the first

leasing company in Ethiopia

Other projects in pipeline for 2009 (DRC,

Madagascar, West Africa)


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Contacts and Resources

• IFC Africa Advisory Facility: Private Enterprise Parternership for Africa http://www.ifc.org/ifcext/africa.nsf/Content/PEPAfrica

• IFC Headquarters:

Ary NaimPrincipal Financial Specialist, Global Financial Markets [email protected] – 1.202.458.1471

• Rural leasing papers

• Discussion Paper 1

• Discussion Paper 2

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