Islamic leasing is a product that is growing in popularity, with the top four Islamic leasing markets comprising of the UAE, Iran, Kuwait and Saudi Arabia and constituting 60% of the total leasing market in the Middle East and Africa. Sectors including real estate, aircraft, shipping and industrial and domestic leasing have all seen strong Islamic finance activity in the past year — REBECCA SIMMONDS investigates.
ICD leasing project
In 2014, the Islamic Corporation for the Development of the Private Sector (ICD) identified leasing as an area of focus within its 10-year expansion plan and a key element in assisting economic development within the countries to which the ICD has extended financing. In partnership with the Bahrain-based Ijarah Management Company (IMC), a fully-owned ICD subsidiary, so far this year Ijarah leasing companies have been launched in Malaysia, with the rebranding in May of PMB Tijari, formerly known as KFH Ijarah House (Malaysia); Palestine and Kyrgyzstan, with companies in Chad and Tunisia due to open in 2014 subject to regulatory approval and exploration of Turkmenistan as another possible location. PMB Tijari hopes to expand into other ASEAN countries including Indonesia and the ICD and IMC plan to establish more than a dozen Ijarah companies in total around in Islamic countries.
In April this year, the ICD in collaboration with the Public Investment Fund of the Saudi Ministry of Finance predicted that the launch of ‘Bidaya’, Saudi Arabia’s national home finance venture, could be expected at the end of 2014, dependent on regulatory approval. The agency is targeting a paid-up capital size of SAR900 million (US$239.94 million) and the venture will utilize financing contracts including Ijarah and hybrid structure to assist middle-income buyers to finance homes. The ICD also in June signed a line of financing agreement for US$5 million with Uzbek Leasing International.
Aircraft leasing fund
Towards the end of June 2014, Quantum Investment Bank and Palma Capital launched the ALIF Fund, a Shariah compliant aircraft leasing fund managed by International Airfinance Corporation (IAFC), with Islamic Development Bank (IDB) and Airbus as investors and strategic partners. The fund, which operates according to Shariah principles, has a targeted size of US$5 billion which will be comprised of a combination of equity and debt, and will focus exclusively on the purchase of new and second hand Airbus aircraft to be leased to airline companies in the GCC and OIC member countries. Aircraft leasing is predicted to reach a 50% share of the global airline fleet by 2020. According to industry data, Islamic financing has contributed about US$10 billion towards the financing of aircraft since the first transactions, accounting for less than 2% of the current overall aviation finance market in terms of bank lending.
Recent activity
In the US in January, the leasing division of Continental Rail in collaboration with US-based investment bank Taylor-DeJongh announced the development of a Shariah compliant railcar acquisition finance program, based on the initial leasing of approximately 6,000 railcars to third parties and the formation of a financing platform that allows Continental Rail to acquire and manage portfolios of railcars. The rail company ultimately plans to lease the railcars to freight railroads and rail customers throughout North America and globally, with the aim of attracting funds from Islamic banks seeking to diversify into new sectors or entering the US marketplace.
In March 2014, Shariah compliant Bahrain-based Venture Capital Bank (VCBank) in collaboration with Saudi-based car rental and leasing company, Hanco, acquired Saudi-based Byrne Investment and its subsidiaries (Byrne Equipment Rental and Spacemaker) in a deal worth AED600 million (US$163.32 million). The opportunity to purchase a company which can only thrive given the growing demand for industrial machines, temporary power and purpose built structures, which Byrne specializes in, was taken up by Hanco, one of the top three car leasing companies in Saudi Arabia and VCBank, in preparation for the development of the state’s infrastructure, outsourcing and power industries. Also in March, Hong Kong-based international container leasing company Pacific Tycoon announced the intension to develop a Shariah compliant container leasing investment plan. The company has appointed Shariyah Review Bureau as a Shariah advisor to conduct Shariah compliance checks and provide technical support in the development of the scheme.
In July, Bereket Varlik Kiralama issued US$350 million in lease certificates with a profit rate of 6.25% per year. Al Baraka Turk Participation Bank was named as obligor for the issuance, which has a tenor of five year and is payable on the 30th June 2019. Emirates NBD Capital, Nomura, QInvest and Standard Chartered Bank acted as lead managers for the issuance which is listed on the Irish Stock Exchange.
Challenges and opportunities
Venture leasing is a new area under development, that could be implemented using Shariah compliant structures and assets to allow micro and small businesses to improve their cash flow by acquiring or using equipment with a smaller upfront investment and by paying for them over a period of time, with that payment coming from money raised from future equity venture capital rounds. Micro-leasing for the financing of essential equipment is also a product that could very simply be provided under Islamic leasing structures.
Leasing for small and medium companies in Pakistan is an area that has been highlighted by the government’s push for the development of the sector — the Union of Small and Medium Enterprises (UNISAME) has submitted recommendations regarding SMEs that include leasing, hire purchase and commercial property leasing.
The leasing industry in the GCC is in its fledging stages when compared to the market in other countries such as the US or those in Europe, however opportunities exist for the developing of industrial leasing in sectors such as real estate, construction and healthcare, which have huge potential to grow the industry across the Middle East.