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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
Islamic Leasing in Jordan (continued...) conventional and Islamic leasing sectors. Ignorance in this regard has led many to use conventional leasing thinking that it is an Islamic fi nancial product. 3. Transfer of expertise — Islamic fi nance institutions in Jordan should consider seeking expert advice from experienced Islamic fi nance institutions in the Islamic world, mainly Malaysia and the Gulf. 4. Bank on Sukuk — Islamic fi nance institutions in Jordan should get involved in Sukuk Al-Ijarah because it is the most popular and common type of investment in the Muslim world. Bright future ahead Jordan’s political system and economical stability encourage banks, investment fi rms and real estate companies to invest in Jordan. In 2006 and 2007, the Islamic leasing and fi nance sectors in Jordan saw major positive developments. Many Shariah compliant real estate, leasing and investment companies were launched, including the First Finance Company and the Jordan Real Estate Company for Development. In addition, several leading Arab Shariah compliant companies had announced their intentions to start operations in Jordan. The announcements include: Tameer Holding Co, a leading property development fi rm in the UAE. It is set to launch a unique residential project in Jordan. Kuwait Finance House Jordan registered as a private shareholding company with a capital of JOD35.4 million (US$50 million). It will be investing in real estate, fi nance, stocks, securities, industry, trade, agriculture and land reclamation, in addition to tourism and mining. Amlak Finance (PJSC), also from the UAE, will be setting up Amlak Finance (Jordan) this year. Islamic Dubai Bank forms a strategic partnership with the Industrial Development Bank to start an Islamic bank. Raed Rafi Al-Ali is a manager of the leasing department at Bank of Jordan. He can be contacted at +962 6554 2695. www.islamicfi nancenews.com Islamic Finance news Guide 2008 Upcoming supplements We will be publishing a series of sector and country focused out-bound supplements in 2008. These supplements will be a comprehensive roundup of the targeted sector and will feature the following: • Exclusive interviews • Roundtable discussions • Sector roundup Deals of the Year Handbook Indonesia Report Malaysia Report Bahrain Report Takaful Report Wealth Management Report Legal Guide UAE Report For advertising opportunities contact Geraldine Chan at +603 2141 6024 or email Geraldine.Chan@ REDmoneygroup.com to find out more. www.IslamicFinanceNews.com Page 73
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