• A contractual arrangement that allows one party (the lessee) to use an asset owned by the leasing company (the lessor) in exchange for specific periodic payments.
– Separation of legal ownership from economic use
– Credit analysis focuses on lessor’s cash generation capacity to finance lease payments rather than relying on credit history
– Security is the asset itself
• As such, this product is particularly suitable for new Micro, Small or Medium Sized Enterprises
(MSMEs) without a long credit history of
Why Has leasing grown so fast?
Beneficial to both lessee and lessor.
• Fewer requirements about balance sheets.
• Leasing may be the only source of financing
• No outside security/collateral needed
• Low documentation cost
• Leasing can finance a higher % of equipment than bank loans
• Governments allow lessees to deduct full lease payments from their income before tax.
• Ownership of asset
• Transaction costs lower
• Lighter regulations, because they are not deposit taking institutions.
• Tax incentives, although they are eroding.
• Better control on utilization of funds.
Impacts Of Leasing:
• Impact on Broadening the Financial Sector Development: Leasing companies have helped develop capital markets by increasing financing options for segments of the market which previously relied on informal financing, supplier credit, and internal cash generation – Filled the gap left by banks
• Impact on Capital Markets: As leasing firms grow, their needs for diversified funding sources becomes eminent – leading to the use of securitization, issuances of bonds and other capital instruments.
• Increased Competition: The entry of leasing firms in financing the MSME has encouraged competition in many markets, whereby some of the banks started to go down-market in order to serve the smaller clients.