The leasing industries of Morocco, Turkey and Pakistan have doubled in size in less than a decade, according to a new report by the International Finance Corporation (IFC). The report says leasing is growing in importance as a way for small companies in the developing world to finance their operations.

The IFC, the arm of the World Bank which promotes the private sector, has formed joint ventures in several Middle Eastern states, bringing in international leasing firms as partners. The business is growing fast leasing accounted for 5.9 per cent of total private investment in Turkey and 4.8 per cent in Pakistan in 1993, compared with 0.7 per cent and 0.6 per cent respectively in 1988. In Morocco, the size of the industry nearly doubled during the period from 2.3 per cent to 4.1 per cent of private investment.

The IFC has been involved in leasing joint ventures in Jordan, Tunisia and Oman. It is a partner in Egypt’s first leasing company which is due to be launched in September in partnership with Japanese financial services provider Orix Corporation and two local banks. The venture made slow progress because of the need for legal approvals from the government.

‘As soon as a leasing industry begins to operate, you’d expect it to grow quickly,’ says Tariq Allouba, the IFC’s acting regional representative in Cairo. ‘In some cases leasing is the only way for small ventures to get finance.’ The IFC itself has minimum investment limits which prevent it from investing directly in smaller industries, and Allouba says that leasing joint ventures have proved a good way of providing funds to these businesses.

The IFC report says leasing has advantages for both sides of the deal. The lessor has security for its financial exposure because it owns the leased asset, and documentation for leasing is relatively simple and cheap. Leasing companies also tend to be less tightly regulated than banks.

Leasing an asset like a piece of machinery can also be easier than borrowing for a business because banks tend to want more financial data and collateral for their exposure, and in some cases are not prepared to lend to small companies. A lease can be quicker and cheaper to arrange than a bank loan and there may also be tax advantages, though spreads on leases can be more expensive than loans.

The IFC offers some caveats. Leasing companies need to have diversified portfolios, especially as their clients small and medium-sized companies tend to be hurt rapidly in an economic downturn. Lessors also need to be able to convert foreign exchange in order to buy imported assets for their clients, and the IFC says a foreign partner with a sizeable stake in the business is an important component in successful firms.

Allouba notes that there is not necessarily any relationship between the spread of leasing and the level of financial evolution that a country has reached. ‘In smaller countries there’s no need to wait until they reach the stage of development of a country like Turkey.’