Opportunities to lease agricultural equipment are increasing © Joerg Boethling/Alamy Stock Photo
Buying agricultural equipment like tractors outright is impossible for most farmers, many of whom also lack collateral such as land rights against which to secure a traditional loan. With leasing, the farmer pays a percentage of the equipment’s value upfront, followed for a fixed period of time by monthly payments which, in the case of agriculture, can be structured to vary in size based on when in the year the farmer generates revenue – after which he or she owns it. If the farmer defaults, the lender reclaims the equipment.
Reliable estimates of the size of Africa’s agri-leasing market are near-impossible to find, according to Amalia Johnsson, co-author of Nathan Associate’s Agricultural Leasing Market Scoping Study for Sub-Saharan Africa. However, the report outlines supply, demand and regulatory conditions for agri-leasing in Ethiopia, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia and offers recommendations aimed at stimulating market growth.
The report highlights that the supply of agri-leasing is constrained by banks’ difficulty pricing the risk of lending to farmers, partly due to poor understanding of their needs and behaviour. Lenders are also concerned that equipment, which acts as collateral for the lease, may not be well maintained. The lack of a developed market for used agricultural equipment also makes it hard to resell equipment after a default. And, while banks and leasing companies are starting to eye agriculture, they make enough profit elsewhere for the sector to be low priority.
In terms of demand, whilst agriculture is key to the economy in all countries studied, most smallholder farmers lack knowledge of agri-leasing, or do not work enough land to justify the expense and may not have the skills or motivation to maintain equipment. Typically, only mid- to large-sized farmers or cooperatives can realistically be leased to.
To raise awareness, the authors recommend that banks, leasing companies, equipment suppliers and governments or NGOs should co-fund targeted marketing campaigns, especially in Ghana, Kenya or Zambia that already show good potential for leasing growth, or Ethiopia, where agri-leasing is gaining momentum. Providing training sessions about leasing could also benefit equipment suppliers’ sales, the authors suggest.
Tanzanian agri-leasing provider, EFTA Ltd, attends agricultural fairs with its equipment suppliers, which then refer potential customers to EFTA for finance. The company uses radio advertising and, to be more visible, has moved many of its branches to the same street as the banks farmers use. “It’s about getting your brand out there so that farmers know you exist,” says EFTA chairman, Michiel Timmerman.
Government or NGO grants could also enable IT companies to develop tailor-made platforms that would help banks and leasing companies cut costs and scale up. A Rwandan bank told Nathan Associates it stopped offering leasing because it was not compatible with the bank’s existing management information system. For example, while banking is usually VAT-exempt, leasing is not.
The report also recommends providing technical assistance to financial service providers, which a number of them have said to the authors would encourage them to pursue more leasing activities, including in agriculture. While such assistance would need to focus on leasing in general, entry into agriculture could be a precondition to receiving this support. The bulk of a €175 million credit facility that Ethiopia’s government will offer SME finance providers will be used as liquidity and technical assistance for leasing, note the authors.
Leasing companies also told Nathan Associates that access to affordable finance limits their ability to grow, with bank loans needing to be continually refinanced. If banks provided revolving credit facilities to leasing companies – managing their risk by requesting regular structured reports and creating covenants that allow them to take extra security or break loan contracts if the leasing company defaults – the provision of agri-leasing could grow further and faster.
Although farmers do not need to provide collateral when entering a leasing contract, they must make a down payment, which averages 20-40% of the equipment’s value in the report countries. The authors state that creating a fund to help farmers cover this often unaffordable cost could increase leasing’s reach.
Timmerman, though, is concerned that subsidising deposits would make farmers less motivated to honour contracts and could raise default rates. EFTA initially asked for a deposit of 5% of the typically €21,900 asset value involved and saw defaults shrink dramatically after deposits were increased to 10-20%.
Despite the challenges of offering agri-leasing in Africa, Johnsson is optimistic that if governments create a supportive regulatory framework and the above recommendations are followed, it can gradually reach scale in Africa. EFTA too is confident of the market’s potential and is considering entering neighbouring Kenya or Uganda within 2 years, now they have developed a ‘model that works’, Timmerman says.