Liberia Leasing Investment Forum

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1 Finance Leasing in Liberia: Unlocking Accelerated Market and Business Development Adopting Best Practice Models to Make Leasing Work in Liberia Minerva Kotei Monrovia,

2 A 40 Year Commitment to Leasing A Core Component of IFC s FM Strategy - Increase access to financing to Small & Medium Businesses - Broaden the range of financial services available in EMs A Historic Focus Area - Financed 239 leasing projects in 60 countries for $1.62 billion over 40 years, - IFC has participated in the set-up of the first leasing company in 30 countries Set-up or improved leasing regulations in 96 countries - IFC has operated 60 Leasing advisory projects across the globe with $30 million of its own funding leveraged with Donor funding. Legal & Regulatory, Market Research, Institution Building, Public Awareness, Promotion of local and foreign investment

3 Historic/Current Commitments July June 2011 Region Transactions (#) US$m % Africa % Asia % Europe, ME, North Africa, CA % South America % World % EAP 2% SA 0% MENA 12% ECA 0% LAC 4% Cumulative Total % CAF 0% CLA 10% CEA 8% CSA 2% CME 24% SSA 82% Leasing Advisory Portfolio (June 2011) $6 million CEU 56% Leasing Investment Portfolio (Sep 2011) $541 million

4 Strategic Focus Support WBG/Global Strategic Priorities IDA Focus, Frontier/Post Conflict Markets Climate change agenda through sustainable energy financing Global food crisis agenda through agri-business financing, etc Develop Sustainable Financing Products Micro, Small and Medium Enterprise financing Energy Efficiency, Clean Production and Renewable Energy lines of credit Agriculture Equipment Financing, Islamic Finance, Gender, etc

5 IFC Investment and Advisory Products Investment Products Private Equity Common shares Preferred shares Senior Debt On-lending Syndicated loans Local currency financing Structured Finance & Risk Management Partial credit guarantees Securitization Credit enhancement facilities Bond underwriting Advisory Products Sector Level Work Products & Initiatives Client Institution Building Building the Basic Blocks Legal and Regulatory Environment Tax and Accounting Framework Raising Public Awareness SME banking Sustainable Energy Finance Agri-Equipment Leasing Gender Finance Micro Leasing Islamic Finance Banks and Bank Related Institutions Select NBFIs Working with Technical Partners

6 Examples of Typical IFC Leasing Interventions Help local banks create leasing operations Bringing technical partners and acting as honest broker in JV Combining debt or risk sharing with advisory services Invest in start-up or existing leasing companies Equity and quasi equity, debt, structured finance Foster SME Financing through advisory services and performance-based grants Help multinational players invest in emerging markets Bringing IFC political umbrella, local knowledge, risk mitigation Develop sustainable financing products Micro, Small and Medium Enterprise financing Energy Efficiency, Clean Production and Renewable Energy lines of credit Agriculture Equipment Financing, Gender, etc

7 Legislative Goals for Achieving a Sustainable Leasing Sector Clarify Rights and Responsibilities of the Parties to a Lease The Lessor and Lessee Remove Contradictions within Existing Legislation Create Non-Judicial Repossession Mechanisms Ensure Minimum Level of Leasing Industry Supervision & Licensing Create a Level Playing Field between Leasing, Bank Loan and Other Credit Instruments

8 Structures of Leasing Entities STRUCTURE COMPARATIVE ADVANTAGE PLAYERS BANKS Internal Division Wholly Owned Subsidiary Joint Venture Access to low-cost funding Branch Network Risk Management CAPTIVES Owned by Manufacturer/ Vendor Primarily Finance Parent Co. Equipment Asset Management Point of Sale Financing Strong operating lease skills INDEPENDENTS Multiple Investors Mostly Non-Deposit Taking Source External Funding Lease Diverse Equipment Operational Flexibility Focus on one product Often the first movers Financial Lease Transfer substantially all the risks and rewards incident of ownership to the lessee Operating Lease Lessor seeks to recover investment in a lease by leasing the equipment to more than one lessee

9 Key Lessor Success Factors Excellent Management - Credit Risk Management: High standards of cashflow analysis - Asset-Liability Management - Internal Control and Financial Control Sound Strategy - Growth perspectives, diversified portfolio and funding sources - Competitive niche and Natural market share for stand-alone leasing companies (i.e. independent from banking groups) Financial Strength & Profitability - Equity, Leverage, ROA - Access to Sustainable Local Currency Funding Stable and Conducive Environment - Regulatory Framework establishing level playing field for Leasing - Contract enforcement, property rights, efficient judicial system

10 IFC Case Studies Uzbek Leasing, Uzbekistan Partner of IFC AS program since 2002 Further strengthened operational Capacity Leasing Sector Small but growing rapidly IFC helped amend 11 pieces of legislation Market grew by USD 220 m ( ) Co. clients SMEs Banks not meeting SME needs IFC $3m loan Targeted at addressing FX scarcity for SME equipment import Loan created platform for SME expansion Increase SME access to long term finance Served as model for other LeaseCos to launch operations Yemen, Middle East President signs Law in 2007 Drafted by CB drawing on IFC advice Rights & Responsibilities of Lease Parties New Lease Registry System Speedy Repossession Procedures Basic tax & accounting system Create level playing field Governor stated law will benefit SMEs, encourage investment in sector, New LeaseCos. Only one Co. prior to law. By end of new entrants Four fold increase in Lease No. & Vol USD 56m mid 2009 USD 13 m in 18 months

11 IFC Leasing Lessons Learned Leasing is generally Profitable 11 Significant contribution to PS/FM Development Stand-alone Leasing companies generally more effective in building markets, Take initial SME Risk Strong Sponsors/Technical Partners critical Banks more effective in SME outreach, generally Profitable, strong comparative advantage Leasing brings strong value to the Bank and its Clients Sustainable access to diversified sources of medium to long term local currency funding is Essential Stable and conducive legal, regulatory and fiscal environments important Creating a level playing field for all Institution types to develop

12 IFC Global Leasing Toolkit

13 Global Leasing Toolkit A comprehensive Working Manual to provide a practical guide to manage and operate a Leasing entity targeting the SME market. - Universally accepted Principles and Best Practices - Targeted at Bank and Non-Bank Financial Inst. - MFIs, Equipment Sellers (Vendors), Private Equity Inst. Draws on IFC s 35 years of experience supporting equipment leasing entities in emerging markets - Team of Experienced IFC staff, Diverse Backgrounds and Regions - Practical experience of external Leasing Professionals Respond to New Markets - Sustainable Energy Equipment Leasing - Agricultural Equipment Leasing - Islamic Finance

14 Why the Global Leasing Toolkit Four Emerging Market Needs 1. Improved Financing Availability Availability, Term Structure, Price 2. Information about the Benefits of Leasing SMEs unaware/do not understand benefits Limited ability of FIs to explain benefits of leasing to SMEs 3. Respond to New Markets Industry constantly evolving in response to new market opportunities in EMs Agricultural Equipment Leasing Sustainable Energy Equipment Leasing Islamic Finance 4. Need to Adapt to Local Conditions How principles and best practices are applied in different regulatory and supervisory regimes in use around the world 14

15 The Life Cycle Concept Life Cycle of a Leasing Entity Inception Life Cycle of a Leasing Transaction Origination Start-Up Operations Capital /Funding Servicing Credit Evaluation Initial Organization Closing Processing Case Study: Establishment of Bank Affiliated Lessor Case Study: Creation of an Activity based Costing System & Flexible Budget Analysis 15

16 Practical Tools and Case Studies Over 80 Practical Case Studies and Examples applicable to EMs Funding Marketing and Sales Lease Mathematics Risk Management and Credit Insurance Lease and Leasing Entity Accounting Information Technology (IT) Lease Pricing Tools Sample Lease Documents Policies & Procedures Manual Available on interactive CD Rom Case Study Rift Valley Manufacturing Kenya Rift Valley Manufacturing in Kenya wants to lease production equipment, including lathes, drill presses, and other machine tools. The equipment cost is $100,000. The lessor determines that the auction value of this equipment at the end of the first year of the lease will be 60 percent of the original price; at the end of the second year it will be 40 percent, and at the end of the third year it will be 20 percent. Lesson Learned For the lessor, the first 12 months of the lease term presents the highest level of risk. The net lease balance is high, and the equipment depreciates rapidly. To be conservative, the lessor will consider the equipment to be worth 60 percent of original cost at the beginning of the lease, thus reducing the lessors exposure to $40,000. The lessor may feel the lessee has enough resources to protect the lessor against the loss of $40,000, but if the lessee s credit is poor the lessor will ask for additional collateral in the form of a security deposit, a security interest in some other equipment owned by the lessee, or even a cash down payment. If the lessor is owned by the manufacturer of the equipment, it may consider its exposure to be based on the wholesale cost, not the retail price. If that is the case, the only risk is the manufacturing profit, and the lessor may be willing to provide the lease to a company that has a poor credit rating without additional collateral. Some collateral lessors make it a policy to require additional support with every transaction, most commonly two times the cost of the new equipment. 16

17 The Focused Toolkits (FTKs) Four (4) Focused Toolkits Practical Information on Three (3) Specialty Markets expected to account for Major Leasing Industry Growth in EMs Agricultural Equipment Leasing Sustainable Energy Equipment Leasing Islamic Finance The 4 th Focused Toolkit Leasing Under Various Legal Systems and Regulatory & Supervisory Regimes FTKs not designed to be used as Stand Alone Toolkits - Principles and best practices discussed in Base Toolkit applied to each FTK - Base Toolkit sets out fundamental techniques and methods 17

18 Agricultural Leasing Focused Toolkit (FTK) Farmers obtain equipment to improve productivity, reduce waste, and adopt sustainable methods Variety of Specialized Approaches applicable to Agri-Leasing - Draws on General Principles Governing Leasing Equipment Used by Farmers and entire Value Chain Agricultural Leasing and Conventional leasing Lease Types & Structures Common to Agri Equipment Pricing Calculations for Agri Leases Pricing Calculations for Agri Leases Agricultural Credit and Underwriting Considerations in EMs Documentation of Agricultural leases Role of Insurance in Agri Leasing Leasing Irrigation Equipment 18

19 Conclusion Toolkit is best if used to complement range of investment and advisory services provided by IFC 19