Ijarah Companies Can Still Thrive By Focusing On Their Product Base

Transcription

1.       Ijarah companies can still thrive by focusing on their product base LEASING By Youssef Aboul-Naja A common misconception in the leasing industry is that banks are their primary rivals. This mistaken belief permeates most companies, irrespective of the mode they oěer; including the ones extending Ijarah services. What this results in is leasing companies engaging in endless losing baĴles of ‘price wars’, as banks will always have access to cheaper funds. That being said, leasing companies do not exist in their own universe; banks are present in their operational space. But once leasing companies really understand their clients’ needs, along with the aĴributes of their products, it becomes clearer that banks are not their direct competitors. In order to appreciate this view, leasing companies must embody the notion that: “The customer’s perspective is your reality" (Kate Zabriskie). So what do customers want when they seek a leasing company? The tip-ofthe-tongue answer is ‘ęnancing’, which happens to be what banks also oěer, thus resulting in the aforementioned confusion. Although, if one digs deeper, the right question to ask is: Why do individuals seek ęnancing from leasing companies, knowing that banks would oěer them lower rates? To answer this, we must look at the features that characterize the leasing industry. A leasing company (and its accompanying instrument(s)) usually extend the following beneęts: ȣ Higher likelihood of approval, as leasing companies are less risk-averse compared to banks. ȣ Faster processing time, given the complexity of the product. Accordingly, leasing tends to appeal to time-sensitive clients, such as the construction industry. ȣ Fewer documentation requirements compared to government grants or bank loans. This works in favor of SMEs, as the task of satisfying ęnancial institutions with the required documentation can be burdensome and time-consuming. © ȣ No collateral needed since the underlying asset serves as the collateral for the transaction. This again works in favor of SMEs and start-ups, as their asset base tends to be limited. Although banks may offer lower rates and a wider range of products, leasing companies can still thrive by focusing on their product base ȣ Higher Ěexibility in terms of structuring transactions. It follows that it is easier to cater to key clients’ requirements, considering that special approvals are simpler to aĴain; leasing companies are usually privately held entities with only a handful of shareholders. Additionally, in many developing countries, leasing is still not regulated by the central bank. This provides management with further Ěexibility in their ongoing aěairs. ȣ Leaner balance sheet and lower taxes in the case of the operating lease. According to the International Financial Reporting Standards, International Accounting Standards (IAS) #17 states that: “Assets held for operating leases should be presented in the balance sheet of the lessor [ęnancing entity]”. lease; when the lessee happens to be in one of jurisdictions that follow AAOIFI, namely: Dubai, Indonesia, Pakistan, South Africa and Syria. To that respect, when we start enumerating the features of leasing, a stark diěerence emerges compared to that of banking instruments. An example can be seen in a case from the technology industry. Apple products, when compared to their rivals, always seem to be oěering a subset of the available features at the time. Yet, part of what sets their products apart, is that they deliver unparalleled user experience. What this creates for Apple is a niche customer base. This scenario should exemplify the aspiration of the leasing industry as a whole. Although banks may oěer lower rates and a wider range of products, leasing companies can still thrive by focusing on their product base. “Excellence is the unlimited ability to improve the quality of what you have to oěer” (Rick Pitino). Any public opinion or media appearance is the author's independent personal opinion and should not be construed to represent any institution with whom the author is aĜliated. Youssef Aboul-Naja is an Ijarah specialist at a supranational banking institution. He can be contacted at yaboulnaja@gmail.com. Receive all the latest news via the No.1 Islamic finance based feed Subsequently, “lease payments should be recognized as an expense in the income statement” of the lessee (the customer). This feature also extends to Ijarah and Ijarah Muntahia BiĴamleek, since according to AAOIFI, Financial Accounting Standard No. 9 states that both modes are treated similar to an operating 20 ʹ͸–Š —‰—•– ʹͲͳͷ