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Islamic Finance news Guide 2008
Page 72
Islamic Leasing in Jordan (continued...)
Temporary Jordanian Leasing Law No 16/2002
This law considers leasing as conventional leasing and uses
international accounting standard (IAS). It was issued by the
Ministry of Industry and Trade and it states that an entity
practicing leasing must have a legal entity status with paid-up
capital of at least JOD1 million (US$1.41 million). This law is
set to be amended in early 2008 and among the issues are:
(a) Right of ownership: Leasing is a fi nancial instrument
if the right of ownership is held by the lessor. But in
this case, the right of possession and usage is held by
the lessee. The right of ownership of the leased asset
belongs to the lessor until the lessee has paid all of the
lease payments.
(b) Obligations: The lessee is obligated to make all leasing
payments without regard to the actual use of the asset
while the lessor’s responsibilities with regard to the
leased asset should be limited.
(c) The lessor should only be responsible for the failure on
the part of a supplier when the lessor selects the supplier
and the leased asset or if the supplier’s failures were
the result of the lessor’s wrongful acts or omissions the
rationale for this is that in a fi nance the lessor typically is
a fi nancing agent for a lessee who usually identifi es the
supplier and chooses the equipment.
Accounting treatment
Jordan’s law on leasing states that International Accounting
Standard (IAS) 17 is applicable to all leasing operations in
Jordan. IAS 17 covers many areas, including the allocation of
lease payments to fi nance charges and the reduction of the
outstanding liability. But Islamic fi nance institutions in Jordan
use standards set by the Accounting and Auditing Organization
for Islamic Financial Institutions (AAOIFI).
Ownership responsibilities
The conventional lease aims to move the lessor as far away
as possible from any ownership responsibilities in contrast
to the Ijarah, which requires the lessor to maintain the
basic responsibilities of ownership such as repairs and
maintenance.
Interest rates
In conventional leasing where an asset is fi nance fl oating rate
funds, the lessor will usually pass the risk of rate fl uctuations
down to the lessee through the rentals payable by the lessee.
But for Ijarah, lease rentals cannot be expressed by reference
to interest rates. Instead, the amount and timing of the lease
payments should be agreed upon in advance, although the
agreed schedule and amount of payments need not be
uniform.
www.islamicfi nancenews.com
Islamic International Arab Bank and Jordan Islamic Bank have
overcome the problem by referring to the rental payable under
the lease at the date of signing, but subject to adjustments by
reference to provisions in other documents, or the rent was
adjusted by using benchmarks (like the London interbank
offered rate, or LIBOR) to determine the rental amounts.
“Although many positive
developments took place in the
Islamic fi nance and Islamic leasing
sectors in Jordan, the number
of Islamic fi nance and Islamic
leasing institutions and their
entire operations is considered
to be minimal in comparison to
conventional leasing institutions”
Allowable assets
An asset subject to an Ijarah contract prohibits assets of
whatever kind that are connected with an activity or product
that is unIslamic or is not Shariah-compliant.
Penalty for late payment
In conventional leasing, a penalty is imposed on the lessee in
the event the payment of rent is delayed after due date. This
penalty fee adds to the income of the lessor. Ijarah does not
allow penalty for late payment.
Factors for success
Although many positive developments took place in the Islamic
fi nance and Islamic leasing sectors in Jordan, the number
of Islamic fi nance and Islamic leasing institutions and their
entire operations is considered to be minimal in comparison
to conventional leasing institutions.
The following recommendations can be considered to improve
the Islamic leasing sector in Jordan:
1. Improving the quality of services — Islamic leasing
institutions should develop their manpower and
working environment and the systems of marketing and
operations to be on par with the services provided by
their conventional counterpart.
2. Creating awareness — Marketing units within Islamic
leasing institutions must play a bigger role in improving
public awareness of the difference between the