The ICD established the Ijara Management Company (IMC), in August 2010, as its fully owned subsidiary. The ICD’s vision is to set up 20 Islamic leasing companies over a period of five years (either fully owned or with international local partners).
With ICD’s vision to set up 20 Islamic leasing companies over a period of five years and to ensure that all these companies follow the highest standards of corporate governance and best international practices, the IMC assists in the setting up of Ijarah companies with the following objectives:
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To conduct feasibility studies and arrange equity placements.
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To assist in setting up Islamic financing windows for the conventional leasing companies and also undertake the entire conversion process.
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To work with various regulators and governments to establish leasing laws to enable Ijarah companies to grow and add value to the economy.
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To restructure existing loss making Ijarah companies.
Why is leasing an attractive offering for the ICD?
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Medium to long-term finance to increase production and output: A medium/long-term financial instrument for SMEs to help them procure productive machinery, equipment, vehicles and/or properties.
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Shariah compliant nature: An asset-based leasing with the asset leased (in most situations) being the security for the leasing.
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Good fit for ICD member countries: Lack of collateral requirement offers an important advantage in countries without strong business environments, particularly those with weak creditors’ rights and collateral laws.
1. Medium to long-term financing to increase production and output
Leasing can fill the large finance gap for SMEs, described as the ‘missing middle’, which is currently estimated to have a value of more than US$2 trillion.
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Firms can access a variety of financing options with different tenors, depending on their size.
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Access to private investment, in the form of venture capital, is restricted to few innovative SMEs with proven growth potential
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Islamic Leasing products are the key in addressing the capital funding requirements of small and medium sized enterprises
2. Shariah compliant nature
In the Shariah context, leasing products are referred to as Ijarah. Both conventional leasing and Ijara serve the same function and involve similar transaction structures
The main similarities and differences between conventional leasing and Ijarah transactions are noted in Table 1.
3. Good fit with ICD member countries
Leasing would be a good fit for SMEs in ICD member countries facing issues with collateral requirements and cash constraints.
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No collateral requirement
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Asset-based financing, as opposed to the collateral based approach applied in traditional banking transactions.
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It works on the basic principle that businesses earn profits from the use of assets and not ownership of assets.
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Leasing is extended to firms on the basis of expected cash flows to the firm.
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Access to long-term finance
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Most SMEs cannot approach traditional banking channels as they lack the collateral required by the bank as a guarantee.
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In the absence of access to finance, many SMEs borrow money from informal sources at much higher rates of interest.
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Preserves cash — crucial in economic downturns
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Leasing is the preferred choice for financing investment in times of an economic downturn, as many firms want to preserve their cash and not spend it on capital expenditures.
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Increased flexibility
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Leasing enables SMEs to use equipment without being concerned with such issues as ownership, second hand asset values or the disposal of the asset when it is no longer required.
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Provides flexibility to change their leased equipment at the end of the rental period, enabling them to upgrade to the latest and most energy efficient equipment and to stay competitive in the market.
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In conclusion
In the last 20 years, the total size of global leasing industry has grown from US$345 billion to US$617 billion.
The IMC plans to become a leading Islamic advisory firm and expert in Islamic Ijarah management and consultancy. This will enable the spread of Ijarah across countries of interest, to both Islamic and conventional financial institutions alike.
And all this is being done by applying Islamic modes of finance.