Module 8 - Madagascar: Microleasing for Agricultural Production

Benefits and Impacts

There are essentially two outcomes to this type of lease agreement: either the lease is paid in full and the client becomes the legal owner of the equipment, or the lease is terminated before the full value of the equipment has been paid, and the equipment remains legally in the hands of CECAM. The following benefits from microleasing can be identified.

Benefits for the leaseholder include:

• Business strengthening. During the lease term, entrepreneurs with scarce resources benefit from using the equipment. The impacts are: more efficient or increased agricultural production; crop or livestock diversification; or involvement and value-added in postharvest activities. Leasing can also enable diversification into secondary nonagricultural business. In all cases, the effect is to strengthen the farmer’s business and increase income.
  
  
• Asset building. Since no collateral is needed (except for such animals as dairy cows or draft oxen), this product is accessible to individuals who would not otherwise have sufficient collateral to qualify for an equivalent loan. If leaseholders can meet the lease term, they become the legal owner of the equipment. Ownership builds the farmer’s asset base and increases borrowing capacity for future lending transactions.

Benefits for the MFI are:

• Limited transaction costs and risk. Risk of default is reduced because the MFI retains legal ownership of the equipment—the collateral—until the lease is met. Transaction costs are lower than mid-term lending for agricultural equipment, because lease transactions can be arranged quickly and simply.

Lessons Learned and Issues for Wider Applicability

The key advantage of leasing compared to lending is that the leased equipment is usually sufficient to secure a lease transaction (although it can be complemented with a pledge, as in the case of CECAM), whereas lending usually involves the pledging of assets for collateral. The rapid growth of leasing in a number of countries suggests that leasing is addressing an unmet demand for financing.

Although it appears that rural MFIs are equipped to enter this market, MFIs should be aware of the risks involved in microleasing. These risks depend in part on the lifespan and salvage value of the asset, which influence the cost of the lease. In addition, the up-front costs of leasing may negatively affect the MFI’s liquidity and profitability. Finally, because there are many fixed costs in signing a lease agreement, these will weigh more heavily with microleasing (owing to a higher cost per dollar leased) than with larger-scale leasing.