The acquisition of equipment is often vital for micro entrepreneurs to expand their businesses and raise their incomes but many microfinance providers do not offer longer term loan products. Leasing provides financial institutions with a mechanism to reduce the risk of longer term lending by offering a stronger legal position for equipment seizure and sale in the event of client payment default. This article explains the importance of understanding different types of lease agreement and suggests that most MFIs will be interested in financial leasing rather than operational leasing. However, the complexity of dealing with banking regulations and legal risks in relation to leasing is also made very clear. In the end an MFI will have to decide if the benefits of leasing outweigh the somewhat higher setup and operating costs of lending. Clients may find repayment terms and transaction costs are more favourable with leases and in some countries it may offer tax benefits.

The article concludes with best practice recommendations for microfinance institutions to use in their equipment leasing and lending programmes and with policy recommendations for governments and donors. It is a very useful summary of an extended paper about equipment leasing which is available from the IDB website using the link below.