Leasing

Leasing is a medium term financing instrument which can be used for financing fixed and moveable assets, such as farm machinery, equipment, buildings, land, means of transport, etc. The core principle of leasing is the separation of ownership and use of a productive asset: The owner (lessor) hands the asset over to the lessee for an agreed period of time against a periodic payment which covers capital costs, depreciation and a profit margin.

The key benefit of leasing is the relaxation of collateral requirements because the leased asset itself stands as main security. A second advantage relates to the in-kind disbursement mode which avoids the risk of diversion of funds. However, rural lessors face high transaction costs for supervision of lessees, a lack of secondary markets for repossessed equipment, of appropriate insurance products and awareness amongst all stakeholders about the legal and operational features of leasing.

Library Resources

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Agricultural Leasing Market Scoping Study for Sub-Saharan Africa Report 2017 English (en)

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This scoping study applies a market systems approach to agricultural equipment leasing in sub-Saharan Africa in order to capture a holistic view of how the leasing market currently works. The study has analysed core market functions (supply and demand), as well as supporting market functions and the policy environment. The analysis has included both primary and secondary research, notably literature reviews and targeted interviews with key informants. A country selection framework has examined the breadth of the financial sector, relative importance of agriculture in the overall economy, total employment provided by the agriculture sector, presence of major agricultural equipment suppliers and the presence of leasing companies. It has led to a closer analysis of the following countries: Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia. Additional references have been made to South Sudan and Liberia, offering general insights on agricultural leasing in a selection of fragile and conflict-affected states (FCAS), as well as to Rwanda.

Agricultural Leasing Market Scoping Study for Sub-Saharan Africa  -  English (en)

Author FSD Africa, Nathan Associates
Publisher FSD Africa
Nairobi, Kenya
Number of Pages 29 pp.
Primary Language English (en)
Region / Country Global, Africa, Eastern and Central Africa, Northern Africa, Western Africa
Keywords Leasing, agricultural leasing, Agriculture
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Agricultural Leasing Market Scoping Study for Sub-Saharan Africa Report 2017 English (en)

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Agricultural Leasing Market Scoping Study for Sub-Saharan Africa is a publication of FSD Africa. It show cases leasing as a form of finance that is very relevant for agriculture but is rarely available to the agricultural sector. The study also helps to identify constraints within the core market (supply and demand), the market functions that support the sector and the policy and regulatory systems that govern the sector. The hope is that this market scoping can act as a starting block for development partners that may be interested in promoting growth within the agricultural leasing sector. 

Agricultural Leasing Market Scoping Study for Sub-Saharan Africa  -  English (en)

Author FSD Africa, Nathan Associates
Publisher FSD Africa, Nathan Associates
Number of Pages 29 pp.
Primary Language English (en)
Region / Country Global
Keywords agricultural leasing, Financial Services, Rural Finance, Agricultural Finance
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Leasing in Development: Guidelines for Emerging Economies Guideline 2009

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This guideline notes up front that there are many countries whose leasing sectors have not contributed to development as much as others elsewhere. This manual aims to help minimise this gap by sharing experiences on leasing development based upon IFC’s leasing technical assistance activities.

Leasing is described in the paper as a medium-term financial instrument for the procurement of machinery, equipment, vehicles, and/or properties. Leasing provides financial assets – equipment, vehicles – rather than direct capital. For the duration of the lease, the lessee makes periodic payments to the lessor at an agreed rate of interest. At the end of lease period, the equipment is either transferred to the ownership of the business, returned to the lessor, discarded, or sold to a third party. Under financial leasing, the lessee typically acquires or retains the asset.

The guideline aims to be a useful reference throughout the world to stakeholders, lessors, lessees/SMEs, governments, regulators, investors, legal/accounting, banks, international financial institutions and donors. In doing so it highlights which elements to look for locally, why experiences may be different between countries and what may be appropriate courses of action.

The guideline also aims to identify the key policy issues on leasing development - it should help leasing development practitioners identify key local characteristics, assess their potential impact, and, therefore, make the decision required on which route to take.

The guideline begins with a look at the importance of leasing and IFC’s role. It covers:

  • What Is Leasing?
  • Why Develop Leasing?
  • IFC’s Role in Leasing

It then moves on to look at the legislation, regulation and supervision required, broken down into the following topic headings:

  • Legislation
  • Regulation, Supervision and Applications to Lessors

The final section covers the accounting and taxation of leases:

  • Accounting for Leases as a Lessee
  • Accounting for Leases as a Lessor
  • Tax Treatment of Leases
Author Fletcher, M, Freeman, R, Sultanov, M and Umarov, U
Publisher International Finance Corporation
Number of Pages 78 pp.
Primary Language English (en)
Region / Country Global
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Microfinance et investissement rural : l’expérience de crédit-bail du réseau CECAM de Madagascar Paper 2007

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L’offre de crédit moyen terme reste un point d’achoppement majeur de la microfinance rurale. Toutes les études de l’offre de la microfinance menées dans les pays du Sud depuis le début des années 2000 mettent en évidence la faible part du crédit de moyen et long terme. Réduire la contrainte de risque pour l’institution financière est un facteur essentiel de développement de l’offre de crédit moyen terme. Cette limitation du risque peut être recherchée en sélectionnant les zones ou des activités rurales relativement « sécurisées » par une politique de prix agricole ou des mécanismes de filière intégrée (à l’exemple des zones cotonnières : crédit équipement de KafoJiginew au Mali (Iram, 2002) ou de FECECAM au Bénin (Renard, 1999) ; financement de la traction animale au Nord Cameroun (Raubec, 1999)). La limitation du risque peut être recherchée aussi à travers l’adaptation par la microfinance de techniques bancaires spécifiques, tel que le crédit bail.

L’intérêt du crédit bail s’étend progressivement au sein de la microfinance et les expérimentations se développent , à destination des entreprises (Réseau Rampe (Pierret, 2003) ou du monde rural (ANED en Bolivie (Hollinger, 2002), Grameen Bank au Bangladesch). L’une des expériences les plus anciennes en matière de crédit bail rural est celle du réseau des Caisses d’Epargne et de Crédit Agricole Mutuel (CECAM ) de Madagascar qui développe ce produit financier depuis sa création en 1993 (Andriantsivaliana, Fraslin, 2002). Une étude d’impact commanditée par le Gouvernement malgache et l’Union européenne, en cours au sein de ce réseau offre l’opportunité d’évaluer les potentialités du crédit bail pour une institution de microfinance (IMF) et son impact sur les ménages ruraux.

S’appuyant sur les résultats intermédiaires de cette étude (Wampfler, Bouquet, Ralison, 2006), cette communication a pour objectifs d’étudier

  1. les conditions de mise en œuvre du crédit-bail par le réseau CECAM,
  2. d’analyser les conditions d’accès et de valorisation de ce crédit par les ménages ruraux, et
  3. d’en tirer des enseignements à visée opérationnelle, à l’intention du réseau CECAM , du secteur de la microfinance et des politiques publiques de financement rural.
Author Wampfler, B.; Bouquet, E.; Ralison, E.
Number of Pages 22 pp.
Primary Language French (fr)
Region / Country Global
Madagascar
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Buffalo, Bakeries, and Tractors: Cases in Rural Leasing From Pakistan, Uganda, and Mexico Paper 2006

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This discussion paper builds on a previous on previous work from the same series that assessed the relevance and potential of rural finance leasing as a financing tool. The previous paper suggested that the enhanced use of leasing in rural areas could be supported, because this practice would overcome some of the existing constraints in providing rural credit for investment financing. This current paper reinforces the case for supporting the development of leasing services in rural areas by presenting the case studies of three leasing companies. Examples of areas of support at the institutional level are provided and results that project managers can expect are also discussed.

The three firms analysed in the case-studies are:

  • Network Leasing Corporation Limited (NLCL)
  • Development Finance Company Uganda (DFCU)
  • Arrendadora John Deere (AJD)

Finance leases are said to be close substitutes for loans as asset financing tools. In finance leases, the lease amortises most of the asset cost, usually cannot be cancelled during the lease-term, and maintenance and insurance costs rest with the lessee. Nearly all risks associated with owning an asset are transferred to the lessee without actually transferring the title. At the end of the lease period, the lessee has the option to purchase the asset for a token price.

The most significant benefit to the clients of the case-study firms that was noted is access to the formal financial system. The case studies suggest, however, that lease financing only partially overcomes the typical constraints to credit financing. Two of the three case-firms take additional collateral (unlike traditional leasing where the asset itself is usually considered security). The security deposit or down-payment required by all three companies is also higher than typically demanded in developing countries. Five lessons specific to rural leasing are drawn from the case studies:

  1. In rural areas leasing is a means to acquire productive assets
  2. Rural enterprises of different sizes benefit from leasing, but a provider may not be able to serve enterprises of all sizes
  3. Non-farm enterprises account for a significant proportion of rural leases
  4. Rural leasing can be profitable, but jump-starting rural leasing may require government and donor support
  5. A rural leasing company may not be viable
Author Nair, A and Kloeppinger-Todd, R
Publisher The World Bank
Number of Pages 32 pp.
Primary Language English (en)
Region / Country Global
Pakistan, Uganda, Mexico
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Leasing: a potential solution for SME expansion and rural financial sector deepening – a study of Russia Report 2006

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This paper explores how the development of leasing markets can effectively expand access to medium and long-term financing for rural small and medium enterprises (SMEs) and agribusinesses. Drawing upon recent field work in Russia, this paper investigates the experiences of leasing companies that received technical assistance and/or investment from International Finance Corporation (IFC). How have legal, regulatory, and policy issues been addressed to create a more equal playing field for leasing industry development? How does access to finance inhibit the growth and expansion of rural and agricultural SMEs in Russia? What are the main challenges facing leasing companies serving SMEs and how are they overcome? Are leasing industry development interventions in Russia replicable in other developing countries?

Author USAID
Number of Pages 53 pp.
Primary Language English (en)
Region / Country Global
Russia
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Rural Leasing Paper 2006

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This paper notes that in rural areas enterprises access to long-term finance is often limited by a lack of acceptable collateral. It points to leasing as a financing tool that has the potential to address this market failure in rural credit. While traditionally, more common in urban centres, leasing overcomes many of the constraints to accessing medium and longer-term financing in rural areas. Leasing can allow businesses with limited collateral, cash and credit history to acquire productivity-enhancing equipment, while providing lessors with the comfort they need to take on rural and agricultural clients.

The value of an asset from leasing is assumed to come from its use as opposed to lending where the value of an asset stems from its ownership. Leasing is defined here as a contractual arrangement between two parties, where the provider (the lessor) owns the asset and lets the client (the lessee) use the equipment in exchange for periodic payment. Leasing comes in two main forms: finance leases and operating leases – finance leases are seen as close substitutes for term loans for financing asset acquisition whereas operating leases are similar to rental agreements.

This paper from the Rural and Agricultural Finance Initiative explores the benefits that developing leasing markets can bring to farmers and rural businesses – it discusses accessibility, duration, flexibility, processing time, taxes, ownership and regulation. It also addresses the constraints that must be overcome in developing a viable leasing industry, and interventions that can help overcome those constraints, drawing on the leasing literature as well as recent donor experience in this sector.

Author Rozner, S
Publisher USAID
Number of Pages 7 pp.
Primary Language English (en)
Region / Country Global
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Leasing: An Underutilized Tool in Rural Finance Paper 2004

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This discussion paper, written for the Agricultural and Rural Development sector of the World Bank, examines the potential of leasing as a tool in rural finance. The authors make a strong case in favour of expanding World Bank support to develop access to leasing in rural areas. The paper’s audience is, in the narrowest sense, policy-makers at the World Bank, but more generally could be of use to organisations working in developing countries.

The authors use evidence drawn from Africa, South Asia, Central Asia, and Latin America, across a spectrum of different financial organizations including a bank, an NGO, a cooperative, private leasing companies and a state-owned company. Their study suggests that both small and medium enterprises in rural areas benefit from access to leasing. The authors assert that the two main conditions enabling development of leasing are a clear legal basis and minimal regulation. Elements of a good legal framework would include:

  • accepted accounting standards
  • a tax code not biased against leasing
  • a high degree of clarity in defining lease contracts, leased assets and the rights and responsibilities of all parties to a lease contract
  • well-defined methods of conflict resolution and asset repossession under strictly-defined circumstances

For an enabling regulatory environment, the authors isolate two main areas of importance:

  1. they suggest that leasing does not warrant prudential regulation and
  2. that institutions subject to prudential regulation, such as banks, ought to be allowed to provide leasing services, as they are no riskier than cash loans

The paper makes four recommendations for World Bank involvement in enhancing access to leasing in rural areas of developing countries. First, it should increase the availability of information on the demand and supply of leasing in rural areas. Second, it should incorporate technical and financial assistance for leasing into rural finance projects. Third, it should consider establishing leasing development facilities to provide technical assistance for policy reforms and leasing providers. Fourth, it should build relationships with other agencies that have more experience in supporting leasing development.

This study is both comprehensive and convincing, with its strong emphasis on practical case studies in a wide variety of different developing nations. Of the several appendices, perhaps most interesting is Appendix 4, which gives profiles of rural lessors, showing the variety of different types of lessors and giving a thumbnail of their successes and limitations.

Author Nair, A.; Kloeppinger-Todd, R.; Mulder, A.
Publisher The World Bank
Number of Pages 47 pp.
Primary Language English (en)
Region / Country Global
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Leasing for Small and Micro Enterprises Toolkit 2003

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This toolkit is designed to help managers of NGOs and microfinance institutions in developing countries who are contemplating starting a leasing scheme. It explains what leasing is, how to design and market a lease product and how to deal with regulatory and fiscal issues. The introductory material is clear and easy to understand, providing an invaluable resource for staff training. General notions on the regulatory aspects of leasing are explained through case studies on legal and fiscal practices from different countries.

The toolkit is divided into eight chapters:

  1. What is leasing? An introduction to the basic principles of lease operation.
  2. The leasing operation. This presents the life cycle of a lease from the moment an entrepreneur selects a piece of equipment to the transfer of ownership at the end of a lease term.
  3. Marketing the lease product. This chapter explores ways of packaging and presenting lease products adapted to the needs of identified client groups.
  4. Pricing the lease product. This topic is examined from both the perspective of the lessor and the lessee.
  5. The legal and regulatory framework - including licensing and prudential requirements.
  6. Taxation.
  7. Accounting. This chapter explains the accounting procedures for the two types of lease and how to manage operational leases with uneven rentals.
  8. Performance monitoring.

The authors have produced a book which shows that it is possible to avoid much of the complexity associated with leases for large enterprises and still design a sound scheme for small and micro enterprises.

Author Deelen, L.; Dupleich, M.; Othieno, L.; Wakelin , O.
Publisher ILO
Number of Pages 122 pp.
Primary Language English (en)
Region / Country Global
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Potential for Leasing Products: Asset Financing for Micro and Small Businesses in Tanzania and Uganda Paper 2001

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This study explores the potential for the development of products specifically targeted towards asset finance in the MSE sector in East Africa (specifically, Tanzania and Uganda). The study used a combination of in-depth interviews with key actors from MFIs, leasing companies, and commercial banks, and focus group discussions with entrepreneurs to examine both demand and supply issues.

Included in this study is an examination of the demand for and supply of leasing services in East Africa. Provided is an overview of formal sector leasing with an explanation of the legal and tax advantages of leasing for formal sector businesses. The myriad of informal and semi-formal mechanisms used by micro- and small entrepreneurs to finance their assets is listed. These financing sources far exceed the financing provided to small and micro-entrepreneurs by formal sector enterprises.

Leasing products are examined in detail, including lease amounts, terms, degrees of flexibility, grace periods and interest rates. Other costs such as insurance, deposits, collateral, and requirements for guarantors have all been considered. Integrated in the analysis are the processes surrounding the leasing product including: selection criteria, speed of processing, appraisal, approval, selection of asset, mode of disbursement, follow up and collection, payment incentives and repossession.

Options are considered for viable lending to this sector for leasing companies, MFIs and conventional banks in turn. The case for creating strategic relationships between leasing companies and MFIs or business associations is disputed and found to be a poor choice.

The findings of the study are broken into the following categories:

Demand and Supply Issues: There is a large unmet demand for leasing among MSEs seeking medium term (2-3 years) financing ranging from approximately $1,500 to $100,000. The study reflects a preference amongst lessees and leasor for finance leases - Whilst micro and small entrepreneurs demonstrate an overwhelming desire to own the assets they use in their businesses, there are sectors where informal operating lease arrangements are widely used, especially where the entrepreneur cannot use an asset to its full capacity or is not able to purchase outright.

Product/Concept Refinement: Most small enterprise operators were very positive about the typical leasing product. They tend to prefer a product with a low initial deposit of 2-5%, a grace period of 1-4 months, and flexible repayment schedules that are responsive to variations in cash flow.

Minimal collateral, in the form of the asset itself, has often been cited as one of the attractions to leasing. However, in the East African markets, leasors routinely require large deposits ranging from 15-30% of the value of the asset in addition to the asset and other collateral, compared to 1-4% elsewhere in the world. Many upper end micro- and small enterprises feel that this large deposit is not only difficult to raise but that it ties up working capital, which can no longer be pledged as security for working capital credit.

The effective interest rate of leasing companies is frequently much higher than that of conventional banks. Although nominal interest rates are comparable to those of banks, large deposit requirements (15-30%) combined with transaction fees increase effective interest to a level sometimes equivalent to interest rates charged by East Africa MFIs.

The document is broken down into the following sections:

  1. Introduction and Background
  2. Demand for MSE asset financing by enterprise sector
  3. Current Sources of Asset Financing for Micro and Small Enterprises (both formal and informal, including banks, hire purchase, MFIs, relatives, savings, liquidating assets, reciprocal asset useage agreements, informal operating leases, RoSCAs, ASCAs, moneylenders, and layaway arrangements)
  4. Overview of Leasing (covers finance, hire purchase, and operational leases; also financial and tax classifications of leasing)
  5. Potential for Leasing—Examining the Leasing Concept in the East African Context (investigates issues such as lease amounts, terms, flexibility, grace periods, interest rates, insurance, deposits and collateral, ownership, guarantors, information, sensitisation, eligibility, selection, disbursement, payment, follow-up, repossession, legal action, and auctioning)
  6. Strategic Considerations for Venturing into SME leasing (including staffing and management, information systems, liquidity concerns, pilot testing, regulatory considerations, strategic partnerships, delivery channels, and options for the various actors)
  7. Filling the MSE Financing Gap—What Can Donors and Governments Do?

There are also a number of appendices attached to the document which include a glossary, product comparison matrices for Uganda and Tanzania, terms of reference, and a list of the institutions involved in the study.

Author Mutesasira, Leonard K.; Osinde, Sylvia; Mule, Nthenya R.
Publisher MicroSave-Africa
Number of Pages 55 pp.
Primary Language English (en)
Region / Country Global
Tanzania, Uganda
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Leasing: a new option for microfinance institutions Document 2000

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This Technical Note is one of a series designed to showcase innovative microfinance programmes from the February 2000 conference on "Advancing Microfinance in Rural West Africa" conference held in Bamako, Mali. The Note presents leasing as a type of business financing that is well suited to the microfinance industry, providing clients with access to medium term capital for fixed assets.

There is an excellent section describing the basic principles of lease agreements, the different types of leases and the comparative advantages and disadvantages of leasing. There is also a useful summary of the differences between leasing and lending and a checklist of the characteristics of clients for whom leasing might be suitable. Some guidance is given on determining leasing costs and the minimum legal framework that is required for implementing leasing contracts.

The Note includes brief summaries of leasing programmes that have been implemented in Kenya, Madagascar and Bangladesh and reaches the general conclusion that leasing does provide MFIs with new opportunities to reach borrowers and expand into existing, untapped markets.

Author Bass, J.; Henderson, K.
Publisher Microenterprise Best Practices Project
Number of Pages 12 pp.
Primary Language English (en)
Region / Country Global
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ANED, Bolivia: Pioneering Rural Microleasing Book Chapter 1999

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Featured as chapter 10 in the IDB publication Promising Practices in Rural Finance, this case study examines the microleasing programme that ANED (Asociación National Ecuménica de Desarollo) began in 1997. ANED’s financial leasing programme is an innovative mechanism for small producers of Bolivia’s rural areas to finance investment capital such as tractors, farm ploughs, motorised pumps and other fixed assets. By financing the acquisition of fixed assets, and ANED's practice of purchasing directly from the supplier, this alternative to credit circumvents some of the most important bottlenecks small producers often face in expanding their production and productivity possibilities. Inherent to this financial product is a solution to the lack of collateral that often limit small producers' access to financial services. Financial leasing also lowers portfolio risks for ANED.

The results of this programme are analysed from the perspective of its outreach and financial performance. This case study demonstrates how ANED has succeeded in creating an innovative financial product that was well received and appears to have great perspectives for future consolidation as an alternative for a large sector of small rural producers. The study also identifies challenges to the expansion of this programme (e.g., funding availability, product promotion, market exploration, training for inexperienced clients, legal framework and regulation, insurance mechanisms for leasing products) and draws conclusions based on these challenges.

This chapter is also available, via the link below, in Spanish.

Author Alvarado, J.; Galarza, R.
Publisher Inter-American Development Bank
Primary Language English (en)
Region / Country Global
Bolivia
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Micro-Leasing, The Grameen Bank Experience Paper 1998

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This paper critically examines the Grameen Bank leasing program but is not a full impact assessment. The paper is divided into the following sections:

  • An introduction and review of the financial landscape of leasing;
  • A description of the operational aspects of the leasing programat Grameen Bank;
  • A case study of one borrower’s experience with the Grameen leasing program;
  • An evaluation of the leasing program and its successes and failures;
  • Recommendations of new products and practices that will improve the efficacy of the leasing program.

 

Analysis of program level data and a case study show that the program is successful in terms of outreach and repayment performance. Key conclusions are:

  • Poor people have diverse credit needs.
  • Different and flexible products are needed to help poor people graduate out of poverty.
  • It is possible to issue medium term loans without large down payment to small borrowers.
  • Good institutional set-up and a carefully designed product is needed for members to use the product to their advantage.
  • Despite the success of the group lending methodology of credit delivery, members within a group have different entrepreneurial ability. New products such as leasing can be used to reward a good member within a group.
  • The key to success is constant supervision, monitoring and knowing one’s clients well.
Author Dowla, A.U.
Primary Language English (en)
Region / Country Global
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Exploring micro-leasing services for poor peoples' enterprises Website English (en)

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Exploring micro-leasing services for poor peoples' enterprises  -  English (en)

Primary Language English (en)
Region / Country Global
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