Leaseback Talkback

In New Horizons issue 23 (Learning about Micro Leasing, page 9), we described the micro leasing scheme run by ECLOF Bolivia. Mauricio Dupleich developed the leasing methodology at ECLOF Bolivia and has recently been promoted to head its development department. He also recently obtained a Master’s degree with honours for his thesis on “Micro leasing: New financing technology to broaden the horizons of micro finance”. In the following letter to New Horizons, Mr Dupleich deals mainly with the leaseback component of micro leasing. Leaseback is when an owner sells a piece of property, usually equipment or machinery, to a leasing agency. The agency agrees to lease the property back to the seller with a future option to purchase.

Dear New Horizons

ECLOF Bolivia has been working with the leaseback methodology mainly in Oruro because we know the system there. In Bolivia, there are three main costs involved in the transfer of property, and particularly on titles to farmland. They are:

i) lawyer’s fee to draw up the documentation (transfer agreement and registration);

ii) cost to register the transaction and transfer of title with the Land Registry;

iii) 3% tax on the value of the property.

In a leaseback operation, the lawyer’s fees are between US$7–9 if a notary is involved. To register the transfer costs US$31–45. However, no taxes are levied on the operation. That means the total cost of transfer in a leaseback operation is US$38–54. A leaseback operation therefore is not practical for amounts under US$2,500. This cannot be compared to mortgage costs (0.3%) since land belonging to peasant farmers cannot be mortgaged. In my opinion, these costs are justifiable when large amounts of money are involved. At the same time, an informal leaseback agreement can be made which could be registered when and if a problem arises. Whilst not officially registered, the agreement can have a strong psychological effect on the borrower to repay the loan because, technically speaking, the borrower signs a contract to sell his land and to buy it back.

We know from experience that we can recover equipment, such as tractors, in a leaseback arrangement. Recently, a group with whom we had a leaseback agreement broke up. The person in charge took the group’s tractor and went to another community. The leasing contract proved to be enforceable because in less than two weeks the authorities ordered the head of the group to say where the tractor was or face imprisonment for fraud. As a result, we recovered the tractor. Whether the object leased is sold, rented or hidden, criminal action can be taken to get it back.

ECLOF Bolivia initially began monitoring leasing operations from its main office in La Paz. We have since developed a system whereby each manager of an ECLOF Bolivia branch office with leasing operations is responsible for evaluating applications, and then must follow up and collect leasing instalments. We still monitor clients’ payments of instalments from the main office but this will soon be decentralised. In all, ECLOF Bolivia has so far transacted US$450,000 worth of leasing contracts and we have around 400 clients. The Oruro portfolio is large enough to cover the monthly salary of a field officer like the one employed in La Paz. We estimate that Sucre and Tarija will soon be able to pay for a field officer as well.

The ECLOF Bolivia leasing programme is still independent of its credit programme. For the moment, there are certain advantages to this. Leasing operations require specialised leasing officers who are expert in evaluating cash flows and can determine the condition of equipment and machinery, make small repairs, and so on. A ‘multiple-use’ leasing officer in an independent leasing programme can also offer lessees related general services such as advice on running certain kinds of businesses and technical counselling. An independent leasing programme can also assume added value by offering sector-specific services that require specialised services such as the import of appropriate goods, as well as technical assistance in the form of access to data bases containing details of suppliers and goods.

If the leasing operation joined the ECLOF Bolivia credit programme it would be regulated as part of a block, so to speak. In Bolivia, regulations on credit institutions are strict and this could inhibit the development and consolidation of leasing activities. It would be better to integrate the more developed lines of credit among ECLOF Bolivia’s activities into the mainstream programme first. The leasing programme would then be under the jurisdiction of the official Banking Superintendency as an independent business. Leasing operations in Bolivia are subject only to value added tax (VAT) while ECLOF Bolivia’s lending activities are heavily taxed. To keep the leasing activities separate avoids the difficulty of determining an exact breakdown of the taxes charged on the different activities.

By remaining independent, the leasing operation also has the freedom to fix its own rates, determine its own policies and exercise more appropriate controls over costs because only one kind of operation is involved. This helps to achieve economy of scale.

The main challenge for ECLOF Bolivia’s leasing programme is to find additional sources of capital. The most interesting prospect in this sense would be a joint venture with other organisations in which ECLOF Bolivia has a controlling interest so as to ensure the social orientation of the leasing operations while not affecting sustainability. We have not yet determined what the capital participation would be but we are working on it. We are looking for strategic partners. While we have managed to arouse interest among certain major actors in the development sector, we have yet to go beyond the planning stages of such a venture.

Mauricio Dupleich, ECLOF Bolivia

Nothing ventured, nothing gained?

From an E-mail ‘round robin’ sent to New Horizons and others by Dave Richardson of the World Council of Credit Unions, as part of an engaging discussion going on in the development finance network concerning the role of venture capital in eradicating poverty:

Some reflections on joint venture/equity capital financing:

There is usually only one reason why venture capitalists invest: They see a huge opportunity to make lots of money in a relatively short period of time.

They are willing to take greater risks than traditional sources of financing, so they feel ‘justified’ in making large sums of money. It is the essence of capitalism.

For those of us who believe that you can’t buy everything in this world for money, it seems almost repulsive that venture capitalists and their accomplices would cater to the poor, or the poorest of the poor, to make their galactic internal rates of return… Pretty bizarre… the poorest people in the world paying the highest interest rates in the world, so that the richest people in the world can get richer!! Is this shameless or am I just a bleeding heart? Is there no other way?

I just finished an interesting evaluation of the impact of credit unions in El Salvador. One of the more interesting aspects of the evaluation was comparing 13 credit unions to Calpi·, the highly venerated and widely acclaimed ‘premier’ micro finance institution of El Salvador, which has been looking for equity capital to convert itself to a bank. After doing a little number crunching, we find the following comparisons for some key indicators as of year-end, 12/31/99:

The essence of the comparison is this: Credit unions can charge an interest rate on loans that is almost 8% lower, pay almost 1% more on savings deposits, cover all of their operating expenses, and still earn almost 1% more on total assets… you know, the kind of return that makes venture capitalists drool!.

But, you say, I thought credit unions were non-profit organisations??

Alas, the great difference between venture capitalists and co-operativists:

The dividends paid in a credit union go back to those who used the financial services to begin with, and the net profit (after dividends) is capitalised into the institutional capital reserves of the credit union, where the capital accumulates for the benefit of everyone collectively, and where NO ONE can touch it individually. The venture capitalists, on the other hand, are definitely smiling all the way to their off-shore, tax havens of anonymity, proclaiming an honest day’s work, for an honest day’s pay!!

My two cents,

Dave Richardson,
World Council of Credit Unions
dcr@bwn.net

Spreading the word

Dear New Horizons

Thank you so much for New Horizons! All of us are so eager to know and understand more about ECLOF that the newsletter comes to us as a blessing. We have distributed copies to ECLOF Cameroon members and other organisations in Yaounde, Garoua, Buea, Bamenda, Douala and other parts of the country.

Alice Kengne Youmbi
ECLOF Cameroon

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Hosting ECLOF

Dear New Horizons

I have received a copy of New Horizons. I send immense thanks to you for this publication.

I was recently very fortunate to spend a few days with ECLOF members from abroad when they visited my country. I also had the opportunity to take part in an ECLOF workshop. These few days spent among people from various countries and different nations of the world proved to me that all peoples can live together.

Your organisation is much more help to those in my country who are unable to get loans from the government or private banks.

We recently received an ECLOF loan and I am very happy to see that branches of ECLOF are established all over the world.

I very much appreciate your visit to my country and using your time and energy for the benefit of Sri Lanka.
R.M.S.Jayasinghe

ECLOF client
Matale District
Sri Lanka

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December 2000