Microleasing Overview: The fundamental problem posed by credit extension to micro and small entrepreneurs: Micro and small enterprises exhibit a large demand for financial services, a demand which traditional commercial and development financial institutions have failed to satisfy. Generally speaking, the relationship between a borrower and a financial institution is characterized by an exchange of financial information between the two parties.  According to the rules of "traditional" credit extension, this problem is solved by the borrower providing, at his/her own expense, the kinds of data on his/her business which are needed to determine his/her creditworthiness, as well as a bankable collateral.  This reduces the informational asymmetry, and thus the loan in question becomes a calculable risk for the financial institution. However, micro and small entrepreneurs are not able to furnish the requisite information, or what a formal financial institution would consider to be an adequate collateral.  This precludes the use of traditional "asset-based" credit assessment, and as a consequence these entrepreneurs are frequently denied access to credit altogether. Furthermore, the volume of funds borrowed by each micro entrepreneur is small.  Thus, if conventional methods of assessing creditworthiness are applied, lending to small and micro enterprises does not appear likely to yield a profit.  This means that even if they meet the criteria for creditworthiness, they are still denied access to credit facilities because the administrative costs involved in extending such small loans seem likely to exceed the income which the bank could expect to receive from this kind of operation. However, taking into account the socioeconomic characteristics, the higher than normal recovery rate and periodically recurring financing requirements of this target group, does enable the financial institution to extend micro credit on a cost-covering basis.  It should be emphasised that microfinance is a specialised operation and therefore the practitioners need to be focused on this aspect.  Normal commerical banks may not possess the special skills required to deal with micro enterprises. Microleasing instrument: In microleasing, credit is given in the form of a productive, income generating asset to the client.  The asset is purchased by the leasing company and given on periodic rentals for a specified term (3 to 5 years).  As the title to the asset vests in the leasing company, no additional security or collateral is required.  Thus the major stumbling block in the access to credit to the micro enterprises is overcome by resorting to this instrument.  After the lease period, the asset is transferred to the lessee at no extra cost. Microleasing ensures that the credit is strictly utilised for productive/income generating purposes.  The rates charged are market based. Microleasing can also provide working capital by sale and lease back arrangement.  The existing assets need not be substantial.  Old household furniture or tools and implements can serve the purpose. Microenterprise financing landscape in Pakistan: General development scene: Until recently, the pattern of development in Pakistan was tilted towards mega projects and large undertakings.  It was hoped that such investments would result in raising the general income levels of the population under the "trickle down theory." Unfortunately this approach failed to produce the desired results and the planners are now realising that though large infrastructure projects are necessary, the emphasis must gradually shift from bricks and mortar development to human development. Unlike the other South Asian and the South East Asian countries, microfinance started rather late in Pakistan. In the mid 1980's, two NGOs, Dr. Akhtar Hameed Khan's Orangi Pilot Project (OPP) and the Aga Khan Rural Support Program (AKRSP) started microcredit operations with revolving grant funds, Subsequently other NGOs of varying sizes followed their lead and presently we have a number of NGOs and CBOs in the country practicing microcredit. NLC is the first formal sector financial institution (regulated by the Central Bank and the Securities & Exchange Commission) focusing on microenterprises at the grass root level. Funding sources: The major source of fund for the micro entrepreneurs is the informal sector such as friends, relatives and private moneylenders.  Depending on the source, the cost of fund varies from 50% to 120% for capital investments and upto 240% for working capital financing.  The experience shows that even friends and relatives may charge interest on informal loans (50 to 100 per cent per annum). The gendered nature of the problem is even worse Women have a negligible ownership presence in the urban/rural enterprises.  Study shows that nearly 30% percent of the workers are female in rural areas specially in the Punjab, whereas only 3 percent of the proprietors are female.  Due to the social set up in the country, women entrepreneurs face severe problems in getting a loan from the formal sector.  The studies however suggest that there is a reasonable demand for credit to finance their activities providing there is an enabling environment.  However, due to lack of fund or because of the stringent conditions that have to be met to obtain funds, many potential enterprises never take off. These general experiences show that the financial landscape faced by the micro entrepreneurs is not particularly bright.  They have to borrow from informal market at an exorbitant interest rate to start a business.  For expansion they have to rely on internal financing through reinvestment of profits.  However, the majority consumes a significant portion of profit, to the tune of 85 percent on average.  With insignificant retained earnings the growth and expansion of these activities become extremely difficult. NLC's microleasing program therefore has to be viewed against the backdrop of such ground realities.