The need for a new financing option:
By Hussein Habbab, CEO of Ijara Company
It is well known that access to finance is fundamental to the growth and development of any economy. Such access enables individuals and enterprises alike to initiate and grow their business activities in a manner that instigates economic growth, employment generation, competition, and well being of societies at large. Palestine is no different. The need for financing is of great importance to support the business initiatives and activities and further alleviate the economic challenges that constrain and hamper businesses’ survival and competency. It is worth mentioning that 96% of the 116,000 enterprises and companies registered and operating in Palestine are Small to Medium (SMEs). This necessitates adequate access to financial services including credit, insurance as well as other risk management services. However, and similar to most emerging economies across the region and beyond, traditional banking’s orientation and financing is in itself limited by constraints attributed to banks’ own knowledge and understanding of the SME market, risk appetite and capital adequacy resulting in a tightened credit orientation, policies and pertinent solutions.
Leasing has emerged as an effective alternative and solution to this supply-demand financing gap in Palestine. Although in its growth phase, leasing comes across as a preferred solution to the underbanked segments by providing simpler and more convenient forms of financing. This is achieved through adopting a more focused and designated approach that is aimed at understating these segments in a manner that is informed, responsive and adaptive. Such orientation is achieved through acquiring the asset of choice by the leasing company (lessor) and leasing it back to the lessee (beneficiary) for an-agreed-upon profit margin via flexible payment schemes/terms to meet the clients’ business model and cash flow needs. While this is done over short-to-medium term time periods, the pledge/title of ownership continues to be in the name of the lessor throughout the lease agreement resulting in a progressive orientation focused on the asset as both a production tool plus the main form of security.
This is quite different from the conventional collateral-oriented financing adopted by banks which are not set up for such step payments, delayed start of repayments, or other unique structures. Other forms of benefits derived from leasing are in the form of tax benefits as businesses may treat lease payments as expense on top of other inherent benefits. Additionally, the Islamic/Sharia-compliant version of leasing is called Ijara. Ijara (leasing) in Arabic literally means ‘to give something on rent’. Although comparable, Ijara is not identical to conventional leasing as it is governed and guided by Sharia as its primary guiding principle. This is manifested in the nature of assets leased (not being forbidden or Haraam) and the fact that the Ijara installments cover the cost of the asset or value of investment plus a fair return rather than conventional/floating interest which is considered of usurious nature under Sharia Law.
This is on top of other differences such as the ownership related rights-and-liabilities clearly set and tied to benefits derived from leased asset, among others. Needless to say that this form of financing is exceedingly important for new as well as existing businesses which may wish to acquire and upgrade their productive assets out of necessity or opportunity.