Century Microfinance Bank recently signed a tripartite Memorandum of Understanding (MoU) between Swisscontact, Century Microfinance Bank and G. north & Sons Limited with the primary objective being to promote the concept and up-scaling of micro leasing for the acquisition of productive assets for rural smallholder farmers in support of economic development by leasing and acquisition of assets of small value which generate additional and diverse income for low income people. Leasing – in this context – is a means of helping individuals acquire equipment and realize profits from assets while purchasing them. This concept eliminates the need for smallholder farmers to commit capital to purchase equipment by either borrowing, or having to commit their resources up front. The concept is more convenient because smallholder farmers can access leasing finance more easily than bank loans due to the simpler security arrangements, lighter regulations and more flexible requirements. The model is essentially made up of three elements: the lease or pre-finance of assets, insurance of both the lessee and the asset and training of the lessee in the use and maintenance of the asset in order to achieve optimal results.
Primary objective of Microleasing
“Transforming the lives of micro entrepreneurs and smallholder farmers through an innovative financial solution”.
How Leasing Works
- Interested entrepreneurs/farmers subscribe to their local Microleasing service provider and receive training on forming groups, group dynamics and organizational development
- Once the group is successfully formed, lessees go through a credit process, apply for a lease and finally sign a contract with the financial service provider
- The financial service provider closes a contract with one or several suppliers for various assets in the portfolio
- Lessees pay suppliers directly for the leased assets after they have been shown to be fully functioning or in full health (for living assets) by third party service providers
- The supplier delivers the asset/s directly to the lessee
- The insurance company has an agreement on premiums with the financial service provider and sets up an insurance policy with the lessee – for himself, as well as for the acquired asset/s
- The lessee pays back the lease to the financial service provider with revenues gained from the productive asset
Benefits of Leasing
- The asset can be paid off over time with income generated through the asset itself (e.g. through increased milk production from dairy cows or increased crop yields due to an improved irrigation system). This avoids credit debts that spiral out of control
- There is no need for collateral because the productive asset is owned by the leasing company/supplier until it is fully paid
- The financial service provider does not disburse any cash to the lessee, which eliminates the risk of loans being used for other purposes, such as paying off a loan offered by another financial service provider
- In general, there is a grace period between the receipt of the asset and commencement of payment on the lease
- Microleasing contracts can be structured to meet the cash flow needs of the lessee and represent a viable vehicle for building up savings, enhancing and diversifying incomes and therefore stabilizing consumption and shielding or cushioning from risk.
- In addition to the asset, micro entrepreneurs receive training on the use and maintenance of the asset
- Lessees and assets are fully insured, which means the lessee does not stand to lose money or fall into poverty in event of a default. This is key for risk mitigation and contributes to lower interest rates
MICROLEASING BUSINESS MODEL