## V. **Principal lessons learned**

51. A number of important lessons can be derived from the survey of experience in leasing and MSB finance undertaken for this report. These principal lessons deal with the affinities that leasing and MSBs have for each other; financial and technical skills needed for leasing; the macroeconomic, legal and regulatory environments under which leasing contributes to broadening access to financial services; the default experience which appears to be in line with general loan recovery experience in microfinance; and the role of direct and indirect subsidies in programs designed to promote lease financing, MSBs and alternative energy systems.

# **_Leasing and MSBs_** _have affinities_ **_for each other._**

52. As shown by the Bank's experience in the Pakistan Microenterprise Project leasing strengthens the financing and operating linkages between small-scale industry and microenterprises which relate to each other's business operations through sub-contracting arrangements. Sub-contracting arrangements promote the growth of MSBs and their expansion and integration into the organized fornal business sector as small- and medium-sized enterprises. In the case of Pakistan, data from the Surveys of Small and Household-based Manufacturing Industries (SHMI) for 1976-77 and 1983-84 clearly show (a) an over 100% increase in value added contributions from the small and microenterprise sector between the two survey periods, (b) an 80% increase in the microenterprise sector's employment-absorption rate, particularly for women in household-based production units, and (c) extensive linkages between microenterprises vis-a-vis (i) larger enterprises in urban areas where subcontracting accounted for about a fifth of the subsector's total value added, and (ii) the agricultural sector in rural villages where subcontracting accounted for about a third of total value added of the sector. 22 53. This observation is also supported in the Bangladesh experience,<sup>23</sup> which highlights the diversity in financing arrangements across industries. It also provides a clear picture of the use of credit by informal operators to finance those who purchase their goods. The study concluded that entrepreneurs seek independence which can be compromised by borrowing and that owners want to manage their finances in the most advantageous way possible. Widespread extension of credit by small firms suggests that informal producers are a tremendous source of finance in Bangladesh. Because the clients of informal firms are predominantly other informal firms or poor individuals, MSBs appear to be the largest and most effective providers of credit to the rest of the poor. MSBs create employment and wealth for people of modest means.

54. By improving access of MSBs to well-structured longer-term financial services leasing can strengthen and expand the opportunities for sub-contracting arrangements and expansion of operating scale which is conducive to "graduation" into the small- and medium-scale end of the formal manufacturing, commercial or industrial sector. In so

> 22 Staff Appraisal Report, Pakistan Microenterprise Project

> 23 Reazul Islarn, J. D. Von Pische and J. M. de Waard (eds.), Small Finns Informally Financed - Studies from Bangladesh. World Bank Discussion Papers, Washington, DC: The World Bank, 1994

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