WASHINGTON, D.C., Aug. 20 -- A new paper by the International Finance Corporation (IFC) titled
Leasing
in
Emerging
Markets, presents for the first time, the Corporation's two decades of experience with leasing and demonstrates the substantial impact that leasing has had in supporting the private sector in developing economies.
According to the paper, one-eighth of the world's private investment is financed through leasing with the proportion being as high as one-third in some economies. The leasing industry is growing fastest in developing countries -- reaching over $40 billion in 1994 -- with much of the growth coming from small and medium enterprises (SMEs).
The paper attributes the popularity of leasing to its availability, convenience, flexibility, lower transaction costs, and to the fact that SMEs can access lease finance more easily than bank loans. In many developing countries, leasing may be the only form of medium- to long-term finance available for purchasing equipment. Leasing can be arranged more quickly and simply than conventional loan financing because outside security and historical balance sheets are often not required.
IFC has vigorously promoted the leasing industry by advising governments on regulations, undertaking feasibility studies, identifying sponsors and technical partners, and investing in new leasing companies. The Corporation has invested in leasing companies in over half of the developing countries which have a leasing industry today and, most often, IFC's investments helped to create the first leasing companies in those countries. Beginning with the 1977 investment in the Korea Development Leasing Corporation -- Korea now has the world's fifth largest leasing industry -- IFC's Board of Directors approved 120 transactions to 63 leasing companies in 36 countries between 1977 and 1995. The impact has been substantial. For instance, in 1994, 16 leasing companies in which IFC invested world-wide wrote more than 10,000 new leases worth over US$2 billion.
Several of the countries that benefit from leasing are low income countries in Africa where leasing has played a critical role in financial sector development. In addition, leasing has proven particularly suitable to supporting the nascent private sector in the transition economies of the former Soviet Union and Eastern Europe where small and new firms have turned to leasing companies for financing because of large structural changes in existing banking systems.
Mrs. Farida Khambata, Director of IFC's Capital Markets Department said, "Leasing companies help to develop capital markets by introducing SMEs -- that previously relied on informal financing and internal cash generation -- to formal financial markets and to domestic financing. Working through leasing institutions, we hope to reach more SMEs at lower costs than through our direct financing programs. It should also be pointed out that leasing is one of three ways that IFC seeks to improve the access of SMEs to financing by working through financial intermediaries -- the others being credit lines to banks and venture capital funds."
Mrs. Khambata added that the demand for term debt by leasing companies also broadens the term lending options for banks, finance houses, pension funds, and insurance companies. In addition, leasing companies issue bonds or other marketable instruments; and can securitize their lease receivables, taking some assets off balance sheets to achieve higher leverage and better returns -- thus adding another tradable instrument to local capital markets.
The paper was written by IFC staff Laurence Carter, Teresa Barger, and Irving Kuczynski. It is one of several that IFC is issuing this year in its
Lessons
of
Experience
series. Forthcoming papers will feature IFC's experience with investment funds, infrastructure, and an overview of capital markets development.
IFC, a member of the World Bank Group, is the largest multilateral source of equity and loan financing for private sector projects in developing countries.
