A STUDY OF

THE LEASING MARKET

IN THE HASHIMITE KINGDOM OF JORDAN

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INTERNATIONAL FINANCE CORPORATION

A STUDY OF THE LEASING MARKET IN THE HASHIMITE KINGDOM OF JORDAN

December 2006

IFC Leasing Development Program Private Enterprise Partnership - MENA International Finance Corporation

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ACKNOW

ACKNOWLEDGEMENTS

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WLEDGEMENT
The International Finance Corporation would like to thank the Central Bank of Jordan, the Ministry of Industry and Trade, and the Ministry of Planning and International Cooperation who assisted greatly in providing guidance and in collecting the information for this study. We would also like to thank the leasing companies, banks and other leasing stakeholders in Jordan for their invaluable time and their contribution to this study.

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TABLE OF CONTENTS

TABLE

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OF CONTEN
EXECUTIVE SUMMARY INTRODUCTION I. COUNTRY BACKGROUND II. FINANCIAL SECTOR 1. Banking sector 2. Non-bank financial sector 3. Conclusion III. LEASING IN JORDAN IV. RECENT DEVELOPMENTS IN JORDAN’S LEASING MARKET V. LEASING OPERATIONS CONDUCTED BY BANKS VI. REGULATORY ENVIRONMENT 1. Introduction 2. Licensing and supervision of leasing activities 3. Banks as lessors 4. Definition of leasing 5. Registration of leased assets vs. registration of leasing agreements 6. Types of leases 7. Insurance of leased assets 8. Rights and obligations of the parties to a lease 9. Repossession of leased assets VII. ISLAMIC LEASING VIII. ACCOUNTING FOR FINANCE LEASES IX. TAXATION OF LEASING 1. Introduction 2. Income tax 3. General sales tax 4. Customs duties on leased assets 5. Other costs associated with leasing transactions X. OPPORTUNITIES TO GROW THE LEASING SECTOR ANNEX 1: LESSORS IN JORDAN ANNEX 2: IFC’S LEASING PROGRAM ANNEX 3: IFC PEP-MENA 6 8 10 12 13 15 17 18 20 24 26 26 26 28 28 29 31 31 31 32 34 36 38 38 39 40 41 41 42 44 45 46

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EXECUT

EXECUTIVE SUMMARY

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TIVE SUMMA
The leasing market in Jordan has experienced rapid growth over the past few years with the volume of leasing transactions more than doubling from 2004 to 2005 reaching approximately JD 80 million (or US$112 million1). The growth in the leasing sector, however, was largely due to leases written for real estate transactions, which accounted for almost 50% of the total growth. Leases to finance equipment purchases grew by over 50% but from a very low base. Other assets financed through leasing included transport, production and construction equipment. The average size of a lease in 2005 was JD 52,500. However, while the market in 2005 grew, the volume of leasing as a percent of total investments in fixed assets in Jordan remains insignificant as compared to other countries even after including real estate leases. Research confirms that there is significant potential to increase the usage of leasing to finance capital assets in Jordan. However, this potential has yet to be realized due to various constraints and impediments. These include ambiguous treatment of leasing for taxation purposes, the absence of an effective legal framework, limited access to long term funding for the sector as a whole, and a general lack of awareness in the market about leasing and its benefits. The Government of Jordan, in partnership with International Finance Corporation (IFC2), is currently working to improve the environment for leasing in Jordan and promote its use as a means to finance capital investment, spur production and create jobs. Working together, the aim is to improve the legislative environment, build capacity of financial institutions and others involved in leasing, and raise awareness among stakeholders about the benefits of leasing. It is hoped that this study will aid this process by providing readers current information on the state of the leasing market in Jordan, and describe efforts toward strengthening the enabling environment.

1 Unless otherwise noted, the Jordanian Dinar to the US dollar exchange rate used throughout this report is JD 1 equivalent to US$ 1.41. 2 The IFC is the private sector arm of the World Bank Group whose mission is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives.

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INTRODUCT
In September 2005, the International Finance Corporation, a member of the World Bank Group, established the Jordan Leasing Development Project (the Project) as one initiative under a regional program implemented by IFC’s Private Enterprise Partnership – MENA (PEP-MENA 3), to assist in the development of leasing markets across the MENA region. This market study (the Study) presents the state of the leasing market in the Hashemite Kingdom of Jordan (hereafter Jordan) as of year-end 2005. The objective of this study is to provide interested parties (e.g., policymakers, lessors, investors, etc.) a comprehensive overview of the state of the leasing market in Jordan at the end of 2005 in order to promote its further development. Specifically, it is hoped that the information presented will aid policymakers currently engaged in strengthening the legislative regime for leasing in Jordan. Thus, considerable attention is paid to the analysis of the legal, regulatory and tax frameworks related to leasing activities while highlighting international best practice 4. This Study is expected to be the first in a series of annual studies designed to track the development of leasing in Jordan over time. The study draws on extensive research and field interviews of leasing stakeholders (including government officials, representatives of banks and leasing companies, equipment suppliers, and private firms) in Jordan. In addition, IFC conducted a survey to understand the depth and breadth of the leasing market and to create a baseline of market data that could be tracked over time. The survey was conducted in July 2006 and covered the activities of all lessors in Jordan (both banks and leasing companies) through year-end 2005. With a response rate of 80%, it is believed that the data presents a fair and accurate picture of the leasing market through 2005. It should be emphasized, however, that this Study focuses primarily on financial leasing, which allows the lessor, as owner, to retain title of an asset while transferring substantially all the risks and rewards of ownership to the lessee. A finance lease is also known as a full payout lease, because payments made during the term of the lease typically amortize the lessor’s costs of purchasing the asset. The payments also cover the lessor’s funding costs and provide for a profit. Despite the legal form of the transaction, the economic essence of a finance lease transaction is one of “acquisition” finance rather than a mere rental. In contrast, an operating lease is essentially a rental contract for the shortterm or temporary use of an asset by the lessee. The maintenance and

INTRODUCTION

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3 PEP-MENA is based in Cairo, Egypt with offices across the MENA region, from Morocco to Pakistan. PEP-MENA focuses on improving business-enabling environments, strengthening financial sectors, SME development, and improving access to finance for micro, small and medium-sized enterprises as well as promoting private-public partnerships and privatization. 4 IFC has extensive experience promoting leasing worldwide. Over the past 30 years, IFC has advised 35 governments on legislative regimes, co-founded the first leasing companies in 26 countries, and invested over US$1.3 billion in leasing markets. See Annex 3 for additional information.

TION

insurance responsibilities (and most risks associated with the ownership of the asset) remain with the lessor who recovers costs and derives profits from multiple rentals and the final sale of the asset 5. Leasing 6 is a medium-term instrument for the financing of fixed assets such as machinery, equipment, vehicles and/or properties. Leasing is a means to finance purchases, not a transfer of money as with bank loans. Leasing institutions include banks, leasing companies, equipment producers or suppliers, and non-bank financial institutions which purchase assets and then provide them for a set period of time to their clients. During the period of the lease, the lessee makes periodic payments to the lessor with the asset typically being transferred to the ownership of the lessee, discarded or sold to a third party at the end of the leasing contract. Leasing offers a way to modernize production and develop micro, small and medium-sized enterprises (MSMEs). It is based on the idea that profits are earned from the use of assets, rather than from their ownership. Typically, lessors focus on the lessee’s ability to generate cash flow from use of the asset to service the lease payments, as opposed to the balance sheet or on past credit history. This is why leasing is particularly advantageous for new companies, and SMEs that usually do not have a lengthy credit history, nor a significant asset base to use for collateral. Leasing is an important source of financing, both in developed economies and in countries with economies in transition, to enable MSMEs to invest in capital assets, thus spurring production, promoting innovation and creating jobs. Leasing provides MSMEs additional financing options to meet specific needs. It complements other forms of financing and provides alternatives to clients in terms of maturities, pricing and structure. Leasing is also “Shari’a friendly” which is important to some business owners, especially in the MENA region. In addition, leasing promotes competition in the financial marketplace by providing alternatives to bank lending though in many markets businesses access both lease finance and additional bank loans based on their financing needs and options available. In addition, leasing can improve the profitability of equipment suppliers by offering domestic and foreign suppliers a powerful means to increase their sales, broaden their customer base and increase their income. Overall, a healthy leasing industry facilitates economic development through increased financing flows to the productive sector of the economy, which increases domestic production, improves profitability of domestic enterprises and promotes job creation.

5 For a more detailed discussion of the distinction between finance and operating leasing, see Section VII below. 6 The term “leasing” in this Study refers to “financial leasing” unless the context indicates otherwise or the Study makes express reference to the contrary.

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I. COUNTRY BACKGROUND

The Hashemite Kingdom of Jordan is notably resource-poor with limited agricultural land, no oil reserves, and scarce water resources. Jordan’s population of 5.5 million inhabitants is primarily urban with approximately 80% of its population living in cities. Demographically, Jordan is one of the youngest countries in the region with 38% of its population under the age of 14. Although demographic growth has slowed recently to an increase of 2.6% per year, Jordan’s population is expected to reach almost 7 million by 20157. Therefore, promoting economic growth and job creation is paramount to ensuring rising standards of living and social stability. Bordering Iraq, Israel, West Bank, Lebanon and Syria, Jordan is located in a volatile region, and, consequently, has been subject to various economic shocks over the years. However, following a decade of structural and fiscal reforms (implemented following the 1989 recession) the Jordanian economy has become more resilient, achieving increased rates of growth in GDP (Gross Domestic Product) from under 3.5% during the period 1996-2000 to an average of 5% over the period of 2000-2004. Since 2004, Jordan has experienced several economic shocks8, but also strong economic growth spurred by structural reforms, fiscal consolidation and capital inflows. Notwithstanding these shocks, real GDP growth reached 7.7% in 2004, and 7.2% in 2005. These growth rates are well above the statistically estimated GDP growth of 3.8%. However, given the average population growth rate of 2.8%, it is important that Jordan sustains growth rates of 7.5% or greater to deliver visible and widespread improvements in living standards9. Low productivity growth is a key factor limiting Jordan’s achievement of this sustainable GDP growth rate. Labor force productivity grew by only an average of 0.4% in the five years to 2003 (latest year of data available), which is well below the 1.6% average for Lower Middle Income countries in the Middle East and North Africa (MENA10).

Source: World Bank, Country Assistance Strategy report, April 2006. Jordan experienced “permanent” double external economic shocks: (i) the prices of oil more than doubled and free oil delivery from Iraq stopped and (ii) external grants were sharply reduced. 9 Source: Economic Performance Assistance report, USAID, Sep. 2005. 10 Ibid.
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I. COUNTRY BACKGROUND

World Bank divides member economies according to their GNI (Gross National Income) per capita, calculated using the World Bank Atlas method. The groups are: • Low income: $875 or less; • Lower middle income: $876 - $3,465; • Upper middle income: $3,466 - $10,725; • High income: $10,726 or more. Source: World Bank web page, data and statistics.

Additional evidence of low productivity is provided by Jordan’s low Incremental Capital Output Ratio (ICOR11). Though investment levels are in line with all benchmarks, the efficiency of investments overall in the Jordanian economy is low. Jordan’s ICOR of 5.5 over the past five years means that close to US$5.50 of gross investment has been needed to generate US$1 of extra output12. International experience suggests that countries using capital efficiently have an ICOR of 4 or below. Measures to improve both labor productivity and capital productivity (thus lowering the ICOR) are essential if Jordan is to emulate the transformational growth of countries like Ireland and Singapore, which have similar demographic profiles.

Chart 1: Investment Productivity in Jordan – higher ICOR indicates lower investment efficiency.

ICOR is a summary expression for the relationship between investments and additional output in a given economy. The lower the ICOR, the more efficient use a given economy makes of its incremental investments. 12 Source: World Bank, Development Indicators, 2005.
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II. FINANCIAL SECTOR

At the macro-economic level, Jordan has made solid progress in the areas of monetary and fiscal policy. GDP growth has been positive, inflation remains subdued, comfortable levels of foreign reserves have been maintained, and both current and capital accounts have been liberalized. This has been achieved by implementing a comprehensive economic adjustment and reform program which has resulted in a well-developed financial sector as measured by the Comprehensive Financial Development Index13 which is among the highest in the MENA region. A simple indicator of financial development is the degree of monetization, measured by the ratio of money supply (currency plus bank deposits) to GDP. In 2004, Jordan’s money supply was 133% of GDP, 66% higher than the Low Middle Income Country average in MENA. This figure was even slightly higher than those of Singapore and Ireland, indicating that Jordan’s banking system is quite developed. Another indicator of an active banking system is the volume of domestic credit to the private sector. In 2004, domestic credit to the private sector amounted to 73% of GDP. This far exceeds the Low Middle Income-MENA average of 56% although is significantly below that of Ireland and Singapore, where private sector credit amounts to 118% and 116% of GDP, respectively.
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Chart 2: Monetization of Jordanian Economy (Money supply to GDP)
CFDI is an index used by the International Monitory Fund to evaluate the degree of financial development. It is a composite of six sub-indices that includes 35 different indicators. The major sub-indices relate to the development of the monetary sector and monetary policy, banking and non-bank financial sector development, regulation and supervision of financial markets.
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II. FINANCIAL SECTOR

Looking beyond the banking system, the stock market capitalization rate is a key indicator of financial market development. The capitalization of Jordan’s stock market has been growing 12% per year, and stood at 326% of GDP in 200514. That was more than ten times the Low Middle Income-MENA average of 32% and significantly higher than that of Ireland (55%) and Singapore (159%). 1. Banking Sector Jordan’s financial sector is dominated by private banks which are, by and large, welldeveloped, profitable, and adequately capitalized. There are twenty-four banks in Jordan, which include fourteen local commercial banks, two Islamic banks, eight foreign banks, and four specialized credit institutions dealing with agricultural credit, housing, rural & urban development, and industry. These banks conduct business across the country through a network of 513 branches and 96 representative offices. In 2005, there was approximately one bank branch for every 11,000 Jordanian citizens. Jordanian banks also had 124 branches located abroad at the end of 2005 in addition to six representative offices15. Fifty two of the foreign branches were located in the West Bank and Gaza Strip.

Despite a relatively developed financial sector, access to finance remains an obstacle for Jordanian MSMEs.

Although the number of banks operating in the Jordanian market would indicate relative competition in the banking sector, market share is concentrated among a very small number of large banks. The banking system is characterized by adequate capital ratios, growing profitability and high liquidity. In fact, Jordanian banks maintained liquid assets equivalent to 65% of total customer deposits in 2005. As a result of strong growth of the overall economy, the Jordanian banking sector has reinforced its dominance of the domestic economy. In fact, banking sector assets increased by 13.4% in 2005 reaching JD 21.2 billion (Assets to GDP ratio of 305%), with the ratio of deposits to GDP amounting to 157% and that of loans to GDP approximating 112%. On the liabilities side, private sector deposits rose by 20.2 % in 2005 constituting more than half of the total increase in bank liabilities. A review of the above ratios implies that most of the assets of Jordanian banks are, in fact, not invested in loans meaning that the role of banks in Jordan as financial intermediaries has yet to be fully realized.

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Source: Amman Stock Exchange web page, key Historical Statistics for 2005. Source: Central Bank of Jordan, Yearly Statistical Series, Assets of Licensed Banks table, 2005.

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Only recently has fairly assertive price and product competition started to emerge in some business lines. On a positive note, banks have begun to turn toward personal and realestate financing to diversify earnings and reduce their dependence on corporate business. Responding to the increased demand for real estate financing, Jordan’s residential mortgage market is expanding with competition among mortgage lenders helping to reduce prices and lengthen maturities which combine to make housing more affordable to Jordanian households16. While progress has been made in the mortgage markets, access to finance for MSMEs still poses a problem. The ability of MSME’s to attract finance depends largely on whether the borrower has adequate collateral. Banks still have a general perception of MSMEs as being “too risky” and not profitable; thus, banks continue to shy away from financing MSMEs. Notably, spreads between lending rates and borrowing rates have been rising, reaching 6.8% in 2005. This suggests that financial intermediation in Jordan is increasingly costly, which is partially explained by the relative lack of competition in the banking system - something that an active leasing market can help correct.

Table 1: Weighted Average Interest Rate (%) on Deposits and Credit Facilities, 2001 – 200517

2001 Deposits Demand deposits Saving deposits Time deposits Average Credit facilities Overdrafts Loans and advances Discounted bills and bonds Average Spread 10.42 10.45 11.88 10.92 7.87 1.06 2.91 5.19 3.05

2002 0.91 1.84 3.97 2.24 9.35 9.85 10.95 10.05 7.81

2003 0.50 0.88 2.75 1.38 9.43 8.92 9.53 8.15

2004 0.38 0.73 2.49 1.20 8.79 7.59 8.45 7.25

2005 0.47 0.83 3.52 1.61 9.26 8.10 7.92 8.43 6.82

10.24 8.98

Despite the improvement in the ratio of non-performing loans to the aggregate loan portfolio, asset quality continues to be the major challenge, thus calling for more prudent credit policies and enhanced collection efforts. To further strengthen the financial system, steps have been taken to strengthen the capital position of banks and enhance supervision. For example, minimum capital requirements for banks have been raised from JD20 million to JD40 million, which must be reached by year-end 200718. This policy intends to promote consolidation and stronger balance sheets (in 2005, bank’s capital, reserves and allowances increased by JD 378.3 million representing a 20% increase over 2004 level19).
Ibid. Source: Central Bank of Jordan, Annual Report, Money Banking and Financial Markets, 2005. Source: Minimum Capital Requirement instructions No. 17/2003, Central Bank of Jordan. 19 Source: Annual Report, Central Bank of Jordan, 2005.
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II. FINANCIAL SECTOR

2. Non-Bank Financial Sector The non-bank financial system is reasonably well-diversified. As of 2005, there were 26 insurance companies, 86 authorized money changers, 37 investment companies (with assets equal to about 4% of GDP) and the Social Security Corporation with assets of private and public sector employees of about 21% of GDP, in addition to six MFIs (microfinance institutions). Insurance Sector With the exception of one foreign life insurance company, all insurance companies operating in Jordan are Jordanian public shareholding companies with seven of them focused on general insurance activities while the remaining 19 offering both general and life insurance. The most recent data on insurance companies indicates an increase of capital by JD 3.4 million (4.2%) at the end of 2004, bringing the total capital base to JD 84.7 million. The volume of insurance business increased in the same year by 18.4% to reach JD 365 million. Motor vehicle insurance ranked first in terms of premiums accounting for 46% of the market, followed by medical insurance at 16.5%. Other types of insurance such as fire, life, maritime and general accident insurance accounted for 12.4%, 11.2%, 8.4% and 5.4% respectively.
Table 2: Volume of Collected Insurance Premiums (%), 2001 - 200420

2001 Maritime Fire Motor vehicles Accident Life Medical Stock Market 7.6 8.8 42.7 8.8 14.4 19.6

2002 7.1 9.3 44.0 9.5 12.6 17.6

2003 6.9 13.0 45.0 5.5 11.5 18.2

2004 8.4 12.4 46.0 5.4 11.2 16.6

The Amman Stock Exchange (ASE) grew rapidly in 200521. The market capitalizationweighted price index (calculated by ASE) closed at 8191 points at the end of 2005, up 92% compared to the end of 200422. The market capitalization of shares listed in ASE rose by JD 13.6 billion by the end of 2005 and represented 327% of GDP, up from 185% at year-end 2004. In terms of trading activity, the total trading volume in 2005 reached JD 16.9 billion, up 345% from 200423. This high growth in stock prices benefited from surplus liquidity in the Gulf region and reflected a general improvement in most indicators of real economic activity for 2005. Given the potential gains in the stock market and relatively low fixed-income yields, bond markets were deemed less attractive to investors. The total value of fixed-income securities traded in 2005 amounted to only JD 3.1 million, of which JD 2.1 million represented treasury shares.

Source: Central Bank of Jordan, Annual Report, Money Banking and Financial Markets, 2005. The ASE index stood at 5518 points as of December 27, 2006. Source: Yearly Report, Amman Stock Exchange, 2004 - 2005. 23 In addition to opportunities, such rapid appreciation in stocks prices can present a risk of over-inflated stock prices.
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Microfinance Sector The microfinance sector includes six major microfinance institutions (MFIs). The three largest private MFIs (in terms of number of active loans) include Microfund for Women, Jordan Micro Credit Co. (JMCC) and Middle East Microfinance Company (MEMCO) who together account for the 82% of the commercial microfinancing market. The National Microfinance Bank (NMB) with strong backing from the Jordanian government has already built a portfolio of JD 4.5 million as of November 2006, although it started operations only in March 2006. NMB is on track to become one of the major microfinance players in Jordan. Finally, the Development and Employment Fund (a quasi-governmental organization established in 1989 whose mission is to generate employment and finance start-ups), had a portfolio of more than 14,000 clients as of Dec. 2005. However, DEF is currently reconsidering its strategy to align with Jordan’s National Microfinance Strategy which was approved in 2005. This may involve withdrawing from retail lending over a period of time and focusing instead on providing wholesale funds to the sector.

Table 3: MFI Portfolio Data24

Dec. 05 MFW JMCC DEF MEMCO (Sep. 05) AMF

# of Active Borrowers 17,342 10,655 14,476 3,063 2003

Gross Loan Portfolio, JD 3,602,142 3,711,073 26,515,581 4,073,479 2,541,090

Other Financial Institutions As authorities recognized the need to encourage development of financing options for smaller firms, a number of institutions were established to foster long-term financing mechanisms for SMEs. In 1994, the Jordan Loan Guarantee Corporation (JLGC) was established to provide financial services to small and medium-sized enterprises, home loans for low and middle income borrowers, and financial support to craftsmen. JLGC services include industrial loan guarantees, individual loan guarantees, and export insurance. In 1996, the Jordan Mortgage Refinance Corporation (JMRC) was established to promote long term residential and mortgage loans through providing banks and financial institutions with medium and long term financing to extend such loans. Finally, the Deposit Insurance Corporation (DIC) was established in 2000 to guarantee deposits of banks and to help monitor the banking system in cooperation with the Central Bank of Jordan. The Social Security Corporation (SSC) is considered one of the major players in the Jordanian financial sector managing pension funds for state and private

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Source: www.themix.org

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II. FINANCIAL SECTOR

sector employees. The most recent information available about SSC reveals that the level of assets over liabilities rose significantly during 2004 by JD 620 million (30%) to reach JD 2.7 billion, making SSC one of the largest funds operating in Jordan. 3. Conclusion Despite a relatively developed and diversified financial sector, access to finance for Jordanian micro, small and medium enterprises is still quite limited. The recent surge in banking sector assets and the highly liquid position of banks has yet to translate significantly into more loans to MSMEs. Banks’ collateral requirements and concentration on short term lending still pose obstacles to improving access to finance for MSMEs. For consumers and MSMEs, a greater supply of longer-term, fixed-rate loans and mortgages would make acquisition of productive assets and housing more accessible and cheaper. Likewise for corporations, greater long-term investment requires longer-term, local-currency funding to avoid over-reliance on shareholders’ capital or dollar-denominated financing.

Notwithstanding a relatively high level of financial market development, MSMEs remain under-served in Jordan.

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III. LEASING IN JORDAN

Although there was no legal framework, leasing in Jordan dates back to the early 1980’s. The first leasing company, “Jordan Equipment and Machinery,” commenced operations in 1982 although ultimately ended in bankruptcy. According to a survey25 conducted in 2005, contradictory and inefficient regulations were a major cause of the company’s failure. The first attempt to regulate leasing in Jordan came in 1997, when the Jordanian government drafted a leasing law, but it was never enacted. Later, with the support of the International Monetary Fund, a draft “Secured Finance Transaction Law” was submitted to the Jordanian government in December 199826. However, this draft was also never enacted. Following these efforts, the Jordanian government drafted and adopted a Temporary Law on Leasing in 2002, which is still in force today27. In addition, a number of regulations were enacted by the Ministry of Industry and Trade (MIT) concerning the registration of leasing companies, registration of leased assets and leasing contracts. The Income Tax Department also issued regulations governing accounting treatment of leases for tax purposes28. Since the current regulatory framework was established, numerous entities have either established leasing companies or incorporated leasing as part of their core activities. This has raised the total number of lessors in Jordan to 18 29(See Table 4). Arab National Leasing Co. and Specialized Leasing Co. are affiliated with Arab Bank and the Housing Bank respectively, while the remaining ones have been established by machinery dealers, real estate companies and, in one case, a microfinance institution. While there are 18 registered lessors, only 6 are actively providing leasing services. (See Section IV below for details). It must be noted that under Jordanian law, banks are allowed to provide leasing services excluding real estate leases30, but as will be shown below, few have done so to date. Islamic banks, however, can provide leases for both movable property and for real estate.

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Source: “Finance Lease Contract, A Comparative Study,” Ziad Abu Haswa, 2005. Ibid. Temporary laws in Jordan are laws issued by the Cabinet in certain circumstances without being voted on by the Parliament. At a subsequent date, temporary laws are subject to Parliament review which can lead to their enactment on a permanent basis or their rejection. The status of a law as temporary does not, however, minimize its full force and effect. 28 For a detailed discussion of the legal aspects of leasing, see Section VI below. 29 Note that not all registered lessors are active in the market. 30 Although the Banking Law does allow commercial banks to conduct all types of leases, it prevents them from maintaining the ownership of any immovable assets for more than two years, thus rendering impossible or at least excessively difficult, the prospect of real estate leasing. For more details see Section VI.
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III. LEASING IN JORDAN

Table 4: Registered Lessors in Jordan, 2005

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IV. RECENT DEVELOPMENTS IN JORDAN’S LEASING MARKET

Since 2000, the volume of leasing has grown significantly, though there have been two distinct periods of growth. During the period 2000 – 2003, growth in the leasing sector averaged 16% per annum with the aggregate leasing portfolio reaching approximately JD 50 million by the end of 2003. In the following years, the growth rate accelerated with the volume of leases rising an average 78% annually in 2004 and 2005 reaching a cumulative total of JD 161 million. This level of growth exceeded that of banking facilities which averaged only 20% growth during this same period. The bulk of this growth was achieved by only three lessors: the Arab Leasing Company, the Industrial Development Bank and the Arab International Islamic National Bank. These firms combined to contribute more than 88% of the total new leases in the market. As noted, however, out of the 18 registered lessors, only 6 are actively providing leasing services (2 commercial banks, 2 Islamic banks and 2 leasing companies). The remaining firms which are registered and licensed to lease are, in fact, conducting other kinds of activities or providing other financial services. According to interviews conducted during the survey, these firms remain reluctant to enter the leasing market due to legislative uncertainties and contradictions.

180.000

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Chart 3: Volume of Leasing in Jordan, 2000-2005

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Chart 4: Total Leasing Volume and Real Estate Leasing, 2000 - 2005

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IV. RECENT DEVELOPMENTS IN JORDAN’S LEASING MARKET

While sector portfolio growth rates are impressive, a detailed examination reveals that much of the growth is due to an increase in real estate leasing. This demand for real estate leases has followed a general increase in demand for various types of mortgage financing by both residents and non–residents alike fueled by a real estate boom in Jordan. Real estate is the number one asset financed through leasing in Jordan with 2 of the 6 active lessors specializing only in real estate. As can be seen in Chart 5, real estate leases currently constitute about 48% of total leased assets in Jordan, followed by transport equipment with 27%, while production equipment represented less than 20%. With such a move towards real estate financing, the average lease amount climbed from JD 12,552 in 2000 to JD 52,426 in 2005.

While having dropped slightly in 2005, lessors in Jordan have typically financed 75% of the cost of an asset. With respect to geographic distribution, Amman accounted for 74% of total leases, followed by Irbed and Aqaba (representing the northern and southern areas of Jordan respectively) each having a relatively equal share of 12-14% of the market. Despite these developments, leasing remains underdeveloped in Jordan as evidenced by three main indicators. These include: 1) the share of leasing as a percent of investment in fixed assets, 2) the growth of leasing vis-à-vis bank credit and 3) the penetration rate of leasing.
Chart 5: Leased Asset Types

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Chart 6: Average Lease Amount
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Emerging economies like Jordan’s face multiple challenges, foremost of which is the need to stimulate investment that increases economic growth and spurs job creation. Unfortunately, banks in transition economies are rarely willing or able to finance the investment necessary to have a meaningful macroeconomic impact. With insufficient collateral and limited credit histories, MSMEs in transition economies face a shortage of credit available at prices and maturities to meet their financing needs. An active leasing sector provides an alternative to bank finance, broadening choices for MSMEs and promoting competition in financial services. Greater competition and financing options stimulate domestic production, economic growth and job creation. It is evident in Chart 7 that leasing as a means to finance productive assets remains under-utilized in Jordan31. With leasing used to a significant extent to finance real estate for personal use, the potential benefits that an active leasing sector can provide to MSMEs by financing equipment purchases have yet to be realized fully, and thus have not contributed significantly to the growth of the Jordanian economy.

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Chart 7: Leasing Volume as % of Investment in Fixed Assets

The growth of leasing in Jordan can not be fully attributed to the development of the sector per se as the volume of leasing finance increased proportionately with other types of finance such as bank loans which increased by more than JD 2 billion in 2005. As can be seen in Chart 8, the volume of leasing transactions in Jordan is dwarfed by the volume of bank lending. Despite the large increases in leasing volumes during 2004 and 2005, leasing represented only 1.7% of total banking credit, further evidence that leasing can play a much larger role in the Jordanian economy.

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Source: World Leasing Yearbook, Euromoney, 2006. The indicator for Jordan was calculated based on data provided by the Department of Statistics of Jordan regarding capital formation.
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IV. RECENT DEVELOPMENTS IN JORDAN’S LEASING MARKET

10.000.000

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Finance Leasing Bank Credits

8.000.000

7.000.000

6.000.000

5.000.000

JD 000s

4.000.000

3.000.000

2.000.000

1.000.000

0

2001

2002

2003

2004

2005

Chart 8: Financial Leasing vs. Bank Credit

Jordan’s volume of leasing as measured against gross domestic product with some comparisons is presented in Table 5. It is evident that the leasing sector in Jordan has significant room to grow given its penetration rate is only 0.01 compared to an average of 0.50 for countries with transitional economies and 2.12 for developed economies.

Table 5: A Comparison of the Penetration Rates (Leasing Volume as % of Gross Domestic Product)

Penetration Rate Countries with developed economies Austria Germany Canada US France Countries with transitional economies Russia Egypt Malaysia Jordan 0.87 0.76 0.36 0.01 2.73 2.29 2.11 1.91 1.56

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23

V. LEASING OPERATIONS CONDUCTED BY BANKS
Reflecting the overall rise of the leasing industry, leasing by Jordanian banks (both conventional and Islamic) increased substantially in 2005. Leases written by commercial banks grew from JD 7 million in 2004 to JD 21 million in 2005. Islamic banks financed JD 27 million worth of leases in 2005 which is a significant increase compared to JD 3.5 million in 2004. It is interesting to note that in 2005, 100% of all Islamic banks’ leasing transactions were to finance real estate whereas such transactions represented only 38% of leases issued by commercial banks. The remaining 62% of commercial bank leases were issued to finance purchases of production equipment, vehicles and other assets.

30.000

25.000

Commercial Banks Islamic Banks

20.000

JD ‘000s

15.000

10.000

5.000

0

2003

2004

2005

Chart 9: Conventional Bank Leasing vs. Islamic Bank Ijarah

24
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V. LEASING OPERATIONS CONDUCTED BY BANKS

It should be noted that 12 out of 15 banks that were surveyed did not express interest in offering leasing despite the fact that legislation allows it. Some banks explained that leasing is not part of their credit policy while others pointed to legal constraints and lack of capacity. That said, a few banks did indicate that they are currently considering opportunities to enter the leasing market although at present only two conventional banks and two Islamic banks actively offer leasing. While the number of banks offering leasing is small, the share of “bank leasing” in the overall leasing market in Jordan increased considerably in 2005 with almost 30% of all leases having been written by banks.

Chart 10: Share of Banks in the Overall Leasing Portfolio

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A STUDY OF THE LEASING MARKET IN JORDAN

25

VI. REGULATORY ENVIRONMENT

One of the key factors which promote the development of leasing in any country is a transparent and effective legal framework which clearly regulates the relationships between the parties to a lease. It is crucial that legislation provides for a clear definition of what constitutes a leasing transaction, offers a fair balance of rights and responsibilities among the parties to a lease and establishes efficient mechanisms for repossessing leased assets. The following pages will provide a discussion of the current legal and regulatory regime for leasing in Jordan. 1. Introduction Leasing is governed in Jordan by the Civil Code (articles 659 – 779) which was adopted in 1976, and the Temporary Law on Leasing (the Law on Leasing) which was adopted in 2002. The Law on Leasing is a specialized law, and therefore takes precedence over more general norms of the Civil Code. However, certain provisions of the Civil Code can be applicable to a leasing transaction if they are not specifically addressed by the Law on Leasing. Additionally, there is a set of regulations and instructions issued by the Ministry of Industry and Trade which deal with such issues as licensing of leasing activities and registration of both leasing contracts and leased assets. 2. Licensing and supervision of leasing activities Leasing is a licensed activity in Jordan. Legislation requires that in order for an entity to practice leasing it must have the status of a legal entity with paid-up capital of at least JD 1 million. Licenses to conduct leasing are issued by the Ministry of Industry and Trade and are renewable annually. In countries with limited experience with leasing and where it is at an early stage of development, there is often a desire to regulate and supervise leasing activities. International experience, however, cautions against this since it has often proven counter-productive. Overly-aggressive supervision and regulation can burden emerging lessors with unnecessary regulatory and reporting requirements. It may also provide third parties unnecessary rights to interfere in the work of leasing companies and restrict growth, innovation and competition.

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VI. REGULATORY ENVIRONMENT

The following are the key elements of effective leasing legislation: • a clear definition of what leasing is; • an appropriate balance of rights and responsibilities among parties to a lease; • limitations to the responsibilities of the lessor; • an unconditional obligation of the lessee to make the lease payments; • lessee’s direct recourse against the equipment supplier; • fast and efficient repossession procedures; and, • an accurate system to register leased assets.

International experience demonstrates that the best regulator for lessors is typically the market, meaning the lessor’s shareholders, creditors and clients. Without active shareholders to ensure good corporate governance or in cases where creditors and clients are unsatisfied, lessors will be unable to raise sufficient capital to sustain operations. In this way, the market acts as an “informal” regulator or supervisor ensuring adherence to high operating standards. In emerging economies, regulatory bodies charged with overseeing the development of leasing often do not possess the requisite skills or knowledge of leasing to supervise lessors in an active and effective manner. In fact, regulatory bodies may adversely affect competition by introducing artificial barriers to the development of the leasing sector. Unnecessary regulation of the sector burdens lessors with unnecessary costs, and may also limit the ability of new lessors to enter the market. In Jordan, there is no supervision of the leasing activities, nor is any body empowered to regulate lessors. However, legislation does impose licensing and minimum capital requirements on lessors, which restricts competition and limits the entry of new players. International best practice demonstrates that licensing and minimum capital requirements may hamper the development of leasing markets. The rationale for not requiring licenses for most lessors includes the following: • Usually licensing is necessary only for those activities that can cause considerable public loss, are detrimental to public safety, or cannot be regulated by any other means. Leasing companies are not deposit-taking institutions, so their failure would not jeopardize depositors nor would there typically be any systemic risk as may be the case with the failure of a bank32. • If a lessor goes into bankruptcy, there is no risk for the lessees either. With proper legislative protections, the lessee could simply continue to use the asset under the terms of the original lease agreement although the asset’s title would be transferred to a new lessor. Only the lessor’s shareholders suffer a loss, as with losses experienced by any other company. As for the lessor’s creditors, employees and other stakeholders, their position is also no different from that of any other enterprise facing liquidation.

Regulatory bodies may extend supervisory functions to subsidiaries of banks, such as leasing companies, to ensure compliance with any prudential or other regulations deemed necessary to ensure integrity of the financial system. However, a clear distinction between prudential and non-prudential regulations should be maintained to avoid unnecessary regulatory burdens.
32

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27

• If licensing of leasing is considered because of potential abuse of tax privileges (which is often a rationale for licensing) it should be sufficient to set clear parameters and eligibility criteria by the tax authority and other regulating bodies to ensure tax privileges are not abused. It must be stressed that licensing of leasing does not necessarily create a shield against potential tax abuses. • On an operational level, licenses are typically issued for a specific period of time which, in the case of Jordan is one year. This creates a situation whereby a lessor could be at risk of not having its license renewed, thus putting into question the validity of any leases with terms in excess of the licensing renewal date.

Establishing minimum capital requirements are necessary for deposit-taking institutions primarily as a means to protect depositors. However, since leasing companies do not accept deposits, the imposition of high minimum capital requirements unnecessarily reduces new entrants, thus restricts competition and innovation.

The establishment of minimum capital requirements is an impediment for the development of leasing operations as those companies unable to meet the minimum requirements are simply excluded from the market. This situation is particularly acute for potential lessors who may envisage small-scale operations, such as microfinance institutions who wish to offer leasing. 3. Banks as Lessors According to the Banking Law, leasing is an activity that can be practiced by banks without a specialized license. A general banking license issued by the Central Bank includes leasing among other services banks are allowed to provide. However, the Banking Law imposes certain restrictions for banks regarding ownership of real estate and, therefore, the provision of real estate leases. Banks, pursuant to Article 40 of the Banking Law, are entitled to provide loans for construction or the purchase of real estate. Article 48 of the Banking Law, however, effectively prevents banks from conducting leasing operations when the leased asset is real estate due to the fact that banks are allowed to acquire real estate only for certain limited purposes. This creates an unequal playing field between loans and leasing operations performed by banks. 4. Definition of leasing In general, leasing should be treated no less favorably than bank lending to ensure both methods can compete fairly. Further, leasing represents a different legal instrument than a simple rent. It is important, therefore, to ensure that governing legislation contains a clear, precise definition of leasing which describes the specific characteristics of the particular set of relationships involved in a lease. Possibly more important is the need to establish clear criteria which allow parties to differentiate leasing from other forms of property hire or rent, thus preventing potential abuses of tax benefits. The definition of leasing that the Law on Leasing provides does not, in fact, make a clear distinction between leasing and ordinary rent. For example, according to the Law on Leasing, a transaction in which one party leases an asset to another party for a certain period of time and for certain payments is considered a finance lease provided that, for

28

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VI. REGULATORY ENVIRONMENT

instance, the lessee receives the title over the leased asset at the end of the lease. However there is nothing in the Civil Code which would preclude calling the very same transaction a generic lease (i.e., rent) and not a finance lease. As a result, it may be difficult or impossible to distinguish finance leasing from ordinary rent which could create confusion regarding the legal and tax regime that applies to a particular leasing transaction. It should be noted that the definition of leasing according to the Law on Leasing does not make transfer of title of the leased asset to the lessee compulsory at the end of the lease term. However, in Jordan, the title is usually transferred automatically upon fulfillment of all monetary obligations of the lessee per the leasing contract. That said, there are also cases when the title is transferred on the basis of a separate agreement or with payment of a redemption price.

Temporary Law on Leasing: Definition of a Leasing Contract A finance leasing contract is a contract which allows the lessee to use the leased asset in return for lease rentals paid to the lessor, provided the lessee undertakes risks related to the leased asset. The contract shall be considered a finance leasing contract upon the realization of any of the following conditions included in the contract: • If the contract includes a liability or condition entailing the transfer of the leased asset’s title from the lessor to the lessee upon the expiry of the duration of the contract. • If the contract includes a condition permitting the transfer of the title of the leased asset to the lessor upon the expiry of the duration of the contract in return for payment of the amounts agreed upon in the contract. • If the duration of the contract is not less than 75% of the estimated useful life of the leased asset. • If the present value of the amount of lease payments, agreed upon in the contract, is not less than 90% of the value of the leased asset stipulated in the contract.

5. Registration of leased assets vs. registration of leasing agreements In accordance with the Law on Leasing and related regulations, leasing contracts as well as information regarding movable leased assets, are required to be registered by the Ministry of Industry and Trade. International best practice demonstrates the usefulness of legislation that requires registration of titles to movable assets. Creation of a movable asset registry which would cover leased assets as well is undoubtedly an important step to ensure the protection and enforcement of property rights. In this respect, Jordan is ahead of many other countries in the region which do not have registries for movable assets. Modern secured financing systems enable financial transactions in which property is used to secure obligations that arise as a result of a financial agreement. Such financial transactions include, among others, loans secured with property, leasing, and sales with reservation of title (i.e., conditional sales agreements). In these secured transactions, the financier has the right to seize and sell the property that secures the obligation and allocate the proceeds of the sale of the property to satisfy the outstanding portion of the obligation.

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29

Registration of property rights pursues 2 objectives. It allows creditors to register and determine their priority vis-à-vis other claimants by examining a database of records and also allows a prospective buyer of property to determine beforehand if there are prior claims against the property. Registration gives protection to the registrant against parties who deal with the property subsequently. The effect of a Public Registry is to give notice to third parties about the existence of a property right. The absence of such a recording system for movable assets increases the risk to equipment lessors since they would be unable to determine whether or not third parties have prior or superior claims to the same property. This would jeopardize the enforceability of their claims against others. In the absence of a public registration system, a lessee could sell leased equipment to a third party, who would typically be protected under the law for the presumption of ownership that arises from the mere fact of possession in good faith of the asset. Thus, the lessor could lose title to the property and would only be able to pursue the lessee for compensation. By contrast, when a registration system exists, third parties are often required, in order to assert their good faith, to prove they have conducted due diligence and reviewed public records prior to acquiring the equipment. The Law on Leasing requires registration of titles to leased assets with the Ministry of Industry and Trade who manages the Leased Asset Registry. However, in addition to registering titles, leasing contracts themselves are also subject to registration according to implementing regulations. This additional administrative burden does not, in essence, provide any benefits to the parties to a lease, nor does it serve any economic or regulatory purpose. Further, legislation requires that certain transactions involving special types of assets, such as real estate or vehicles, be recorded in specialized governmental agencies. Thus, a contract to lease, for example, a vehicle would have to be registered in the traffic police department. As discussed above, registration of titles over leased assets and additional registrations for select assets can have benefits and economic justification. However, the mandatory registration of leasing contracts solely by virtue of the fact that parties have entered into a leasing agreement is an administrative burden, increasing transaction costs and acting as a disincentive to leasing. There is little to no economic justification for mandatory registration, though parties to a lease may register their contracts should they deem it necessary.

Mandatory registration of all leasing contracts is an administrative burden for the parties to a lease, increasing transaction costs and acting as a disincentive to conduct leasing. There is little to no economic justification for mandatory registration of leasing contracts.

Finally, regulations on registering leased assets impose a fee of JD 50 to be paid for registering each contract. For certain parties, such as microfinance clients whose leases may be only worth a few hundred dinars, this fee could be considered high and may be an additional disincentive to use leasing.

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VI. REGULATORY ENVIRONMENT

6. Types of leases It is important that legislation recognizes various types of leasing such as sale and lease-back, and sub-leasing. Sale and lease-back arrangements are essentially a means to finance working capital whereby an entity or person who already owns an asset, sells it to a lessor and simultaneously leases the asset back. This frees up cash that can be used as working capital while retaining use of the equipment. Sub-leasing is an important arrangement to reduce the risk of a lessor in cases when a lessee cannot meet its obligations under a contract. It involves a lessor who gives permission to a lessee to allow a third party (the sub-lessee) to use the leased asset under a separate agreement between the lessee and the sub-lessee. With sub-leasing, the sub-lessee is responsible to the lessee, but has no ongoing obligation to the lessor. Sub-leasing arrangements are also effective in cross border leasing where a lessor located in one country leases an asset in a different country to its subsidiary or agent. The subsidiary or agent (the sub-lessor) then sub-leases the asset to an end user – the sub-lessee. Among other benefits, this arrangement helps the lessor better monitor the lease compared with a direct lease from its own country to a firm in another country. Sale and lease-back transactions and sub-leasing require specialized legal treatment to avoid abuse, but they are important financing instruments for MSMEs. At present, Jordan’s Law on Leasing does not address either situation. 7. Insurance of leased assets The Law on Leasing provides that a lessor can require a lessee to insure the leased asset or the lessor can insure the leased asset himself and then seek compensation for the cost of the insurance from the lessee. According to the survey, lessors in Jordan insured 70% of all assets leased in 2005 although this figure drops to 55% if one excludes leases written by banks. For Islamic banks, 100% of leases were insured by the lessors33, which is in contrast to non-Islamic, conventional bank leasing where lessees are typically held responsible for insuring leased assets. 8. Rights and obligations of the parties to a lease Leasing transactions are relatively complex contractual arrangements involving three parties who, under international best practice, should be free to determine their relative rights and responsibilities as they see fit. All of the potential variations in a leasing contract are impossible to account for in a single law, so best practice leasing laws typically provide only a general framework for sharing risk among the parties to a lease. Jordan’s Law on Leasing establishes one of the most fundamental principles of leasing transactions – that the lessee is obligated to make all leasing payments without regard to the actual use of the asset. This is in line with international best practice as is the fact that the lessor’s responsibilities with regard to the leased asset should be limited. However, this latter point is not entirely clear in Jordan’s Law on Leasing.

Islamic leasing requires the lessor to assume the basic responsibilities of ownership, such as maintenance and insurance. For more details see Section VII.
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31

Under international best practice, parties to a lease should be free to determine their relative rights and responsibilities as they see fit. All of the potential variations to a leasing arrangement are impossible to account for in a single law, so best practice leasing laws typically provide only a general framework for sharing risk among the parties to a lease.

International best practice suggests that a 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 finance lease, the lessor typically is a financing agent for a lessee who usually identifies the supplier and chooses the equipment, thus the lessor should be liable for any failures related to nonperformance of the supply contract only in select cases. Article 10 of the Law on Leasing provides for the right of the lessee to refuse to accept the leased asset although the conditions of such refusal are not clear. This ambiguity creates significant risk to the lessor who has purchased an asset on the good faith of the lessee and may not have ready means of disposal if the lessee ultimately refuses it. 9. Repossession of leased assets Leasing is a financial instrument where the right of ownership is held by one party (the lessor), but the right of possession and usage is held by another (the lessee). The right of ownership of the leased asset belongs to the lessor until the lessee has paid all of the lease payments, assuming the contract foresaw the transfer of ownership. The right of a lessor to repossess leased property from the lessee in cases when the lessee does not fulfill its obligations to the lessor is a necessary condition for the lessor to enter into a lease in the first place. While lenders (typically banks and finance companies) require collateral to mitigate their financial risk, lessors do this through maintaining ownership of the leased asset throughout the life of the transaction in case the lessee breaches his or her obligations. When repossession of leased assets is excessively time-consuming or costly, leasing markets are unlikely to develop. While it is vital that the right of repossession be clearly articulated in legislation, it is equally important that efficient mechanisms are in place to ensure speedy and efficient repossession in practice. Lengthy judicial repossession procedures result in greater loss and uncertainty for lessors, especially since assets can lose value over time. Facing such situations, lessors may require addition forms of security such as

32

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VI. REGULATORY ENVIRONMENT

collateral. This defeats the fundamental principle of leasing, and eliminates one of the key advantages of leasing for MSMEs who may not have sufficient additional assets to pledge. Countries such as the United States and the United Kingdom have demonstrated that an active leasing sector develops best when leased assets can be efficiently and transparently repossessed. Article 19 of the Law on Leasing contains an important provision which recognizes the significance of speedy repossession procedures via orders from Judges for Urgent Matters. A resolution from an Urgent Matter Judge represents a nonjudicial process in which a decision is made by a commercial court judge within a relatively short period of time on the basis of certain documents presented by the claimant without interviewing the respondent, hearing of arguments or involving attorneys. This procedure is seen as an effective remedy for lessors seeking to regain possession of their property in a cost efficient and speedy manner. In fact, similar non-judicial procedures for leased asset repossession exist and are successfully applied in many other jurisdictions. Jordan’s Law on Leasing recognizes the right of the lessors to apply to Urgent Matters Judges, however the scope of this right is limited and the Law itself does not sufficiently elaborate on several important technical aspects of the procedure, such as types of documents which lessors need to present, timeframes of each step along the process of issuing an order and others, which significantly restrict the effectiveness of this remedy34.

34

See Section X for further discussion on repossession and recommendations to improve this procedure.

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VII. ISLAMIC LEASING
Islamic leasing, or Ijarah, is the most rapidly growing segment of Islamic finance where in Jordan the value of Ijarah transactions grew seven-fold in 2005 compared to 200435. The ability of Ijarah leases to be sold on secondary markets36, makes this Islamic product increasingly desirable37. 1. Legal aspects Literally, Ijarah means to give something on rent. In the context of Islamic banking, Ijarah can be defined as a process by which the right of possession of a particular property is transferred to another person in exchange for a rent. Ijarah contracts have in the past typically not involved the transfer of ownership. Over time, however, Ijarah has developed into transactions with more complex features that give rise to variations from the basic structure of Ijarah conducted by Islamic finance institutions. Today, Ijarah is very similar to conventional finance leasing in principle. Both leasing and contemporary Ijarah are based on the proposition that the title to an asset is divided into three components: the right of ownership which remains with the lessor, the right of use and the right of possession. These last two rights are transferred to a lessee for a specific period in exchange for payment of specific amounts. While serving essentially the same function, there are a number of differences between Ijarah and conventional leasing as illustrated in the table below. The key differences include: • Ownership responsibilities: The conventional lease aims to move the lessor as far away as possible from any ownership responsibilities. In contrast, the Ijarah requires the lessor to maintain the basic responsibilities of ownership such as repairs and maintenance. • Interest related characteristics: As with other Islamic financial products, Ijarah does not allow interest related characteristics as part of its contractual terms and conditions. • Allowable assets: An asset subject to an Ijarah contract must not be “haram” or unacceptable under Islamic standards. This would prohibit assets of whatever kind that are connected with an activity or product that is considered harmful to mankind or society as defined by Islamic practice. Examples would include assets used in the production or distribution of alcoholic beverages or pork products. • Late fees: Ijarah does not allow late fees and penalties to be imposed on lessees in cases when lease payments are delayed although some alternative forms of compensation may be allowable.

34

For more details see also Section IV. Typically, Islamic debt cannot be resold. Once it is created, it must be held to maturity by the originator of the transaction. The exception to this is Ijarah. 37 Source: “The Islamic Lease”, W.R Johnnie Johnson, Euromoney Leasing Yearbook, 2005.
35 36

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Table 6: Conventional vs. Islamic Leases
Issue Conventional Ijarah38 If required to be accounted for under IFRS or FASB, can be either finance or operating. If accounted for under AAOIFI39 standards, all leases are treated as operating. Shari’a principles require the lessor to maintain basic responsibilities of ownership, including major maintenance, insurance and taxes. Shari’a may require a clear “promise to buy” by the lessee or “promise to sell” by the lessor to avoid any uncertainty in the transaction. Comments Treating all leasing transactions as operating leases means that lease payments are expenses and the leased asset does not appear on the lessee’s balance sheet, thus potentially understating a lessee’s liabilities and assets. Ijarah imposes greater ownership responsibilities and risks on lessor compared with conventional leasing. To be compliant with Shari’a, financial contracts must typically define unambiguous obligations for the respective parties. An option clause in a lease leaves it unclear whether the title will transfer or not so is generally not allowed. Instead, Islamic leases require a clear statement of intent to buy or sell. Cost of insurance paid by Islamic lessor may be passed on to the lessee. Islamic lessors have greater maintenance responsibilities which increase complexity and, at times, cost relative to conventional leasing. Inability of Islamic lessors to collect late fees and related interest could have pricing implications for Ijarah contracts, and could lessen incentives to pay. Conventional lessors can lease broader range of assets, possibly giving them a competitive advantage.

Accounting treatment

Finance or operating

Responsibilities of ownership

Legal and contractual terms attempt to remove all responsibilities of ownership from lessor. Flexible purchase options are commonly used which can be exercised at the discretion of the lessee. Typically made the responsibility of the lessee in the contract. Lessee typically has responsibility for all maintenance. Late fees commonly charged together with interest on amounts past due. Unrestricted.

Lessee purchase option

Insurance

Responsibility for insurance and its cost remains with the lessor. Major maintenance is an ownership responsibility of the lessor. Not usually allowed. If collected must be donated to charity. Lessor may request the lessee to make an early payment to compensate for late payment. Assets that are used in relation to activities or products prohibited under Islam are not permitted.

Maintenance

Late fees and interest on past due amounts Types of assets leased

2. Accounting Standards for Ijarah The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an organization that develops standards for Islamic accounting. The AAOIFI standards which are used by the Islamic finance institutions in Jordan classify Ijarah as Operating Ijarah and Ijarah Muntahia Bittamleek (the Islamic equivalent of finance leasing). The main criterion used in the classification is whether the lease includes a promise that the legal title will pass to the lessee at the end of the Ijarah term. The AAOIFI standard on Ijarah states that when a lease does not include a promise that the legal title of the leased asset will pass to the lessee, it is classified as Operating Ijarah, and if there is a promise to transfer title, then it is Ijarah Muntahia Bittamleek. In essence the difference between Ijarah and Ijarah Muntahia Bittamleek lies in the pre-existence of that promise whereby an Ijarah Muntahia Bittamleek lease concludes with the legal title passing to the lessee: (i) as a gift (i.e., transfer of legal title for no consideration); (ii) for a token consideration or other amount as specified in the lease; (iii) prior to the end of a lease for a price equivalent to the remaining Ijarah installments; or (iv) by a gradual transfer40 of the legal title of the leased asset41.

The term “Ijara” in this Section refers to “Ijarah Muntahia Bittamleek” unless the context indicates otherwise. The Accounting and Auditing Organization for Islamic Financial Institutions. The concept of gradual transfer of a title proportionally to the amount of payments is a known legal concept in some jurisdictions. It is primarily applicable to conditional sale agreements. Application of this concept with regard to leasing can create potential problems such as disputes regarding key ownership rights over the leased asset. To avoid such disputes, it would be best to avoid “gradual transfer” clauses in lease contracts whenever possible. 41 Source: “An Explanatory Study of Ijarah Accounting Practices in Malaysian Financial Institutions”, Abdul Rahim Abdul Rahman, International Journal of Islamic Financial Services, Vol. 5 # 3.
38 39 40

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VIII. ACCOUNTING FOR FINANCE LEASES
There are a number of accounting standards which address accounting for leasing. While many countries operate under their own standards42, there is a growing consensus towards a universal, international standard - International Accounting Standard (IAS 17). The Law on Leasing states that IAS 17 is applied to leasing operations in Jordan. IAS 17 covers many areas relating to leasing, including the allocation of lease payments to finance charges and the reduction of the outstanding liability. However, IAS 17 concentrates primarily on distinguishing finance leases from operating leases. IAS 17 defines a lease as a finance lease if the contract transfers substantially all of the risks and rewards related to ownership to the lessee, while legal ownership remains with the lessor. Such a lease must usually be non-cancelable43 and the lease payments received by the lessor be sufficient to recover the lessor’s capital outlay plus his or her financial return. Alternatively, a lease is classified as an operating lease if substantially all the risks and rewards related to ownership remain with the lessor. Under IAS 17, accounting for lease transactions is based on the economic nature of the transaction rather than its strict, legal form. Essentially, in a finance lease, the lessee is financing the acquisition of an asset (in terms of usage as opposed strictly to title) using the capital of a lessor, rather than the lessee’s own resources. In this way, the lessee extracts the economic benefit of “ownership,” but may never actually “own” the asset in a strict legal sense except in those cases where title is transferred at the end of the lease. IAS 17 provides a number of characteristics of a lease transaction which would classify the underlying lease as a finance lease. These include: (a) the lease transfers ownership of the asset to the lessee at the end of the lease term; (b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option to purchase becomes exercisable and that at the inception of the lease, it is reasonably certain that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred; and, (d) the present value of the minimum lease payments at the inception of the lease is greater than, or equal to substantially all of the fair value of the leased asset. From an accounting perspective, the classification of a lease as finance or operating is significant for the lessee. This is because when a lease is classified as a finance lease, the asset

36

For example, the United Kingdom operates under SSAP 21 - Standard Statement of Accounting Practice (Section 21) and the United States uses FASB13 - Federal Accounting Standards Board (Section 13). 43 Under a non-cancelable lease, the lessee cannot back out on his or her obligations or terminate the leasing agreement except in a limited number of cases.
42

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VIII. ACCOUNTING FOR FINANCE LEASES

must be capitalized in the accounts of the lessee along with a corresponding lease liability. On the other hand, if a lease is classified as an operating lease then the asset is not capitalized by the lessee and the transaction is considered “off balance sheet” for the lessee. Under a finance lease, the lessee must account for the asset on its books as if purchased, and depreciate the asset in a way that is consistent with that of owned assets. The lessee will then recognize a lease liability for the sales price of the asset since a finance lease represents a transaction where money is, in essence, “borrowed” from the lessor (who acts like a self-financing “seller” of the asset). The asset’s value is calculated as the present value of all payments to be made under the lease agreement using the rate of interest that is the lower of the rate implicit in the leasing contract or the market rate for a similar transaction. IAS 17 requires that finance lease payments made by a lessee be apportioned between the lease finance charge (expensed like interest paid on a loan) and the reduction of the outstanding lease liability, similar to the reduction in outstanding principle for loan transactions. The lease finance charge should be allocated to the accounting periods so as to produce a constant rate of interest during the whole duration of the lease. The depreciation policy for assets under finance leases should be consistent with that for owned assets. If there is no reasonable certainty that the lessee will obtain ownership of the leased asset at the end of the lease, the asset should be depreciated over the shorter of the lease term or the life of the asset. As for the lessor, the lease is seen as a financing arrangement with the lease payments considered as a repayment of principle plus financing income from the lease. The leased asset is, therefore, recorded in the books of the lessor as a receivable, and not as a fixed asset. Thus, lessors can not depreciate assets leased to others under finance leases. The Law on Leasing specifies that the accounting basis for leasing should be IAS and provides a definition of leasing that borrows from the classification criteria outlined in various accounting standards. Some of the criteria in the definition are taken from IAS 17 while others come from Federal Accounting Standard 13 (FAS 13). Following adoption of the Law on Leasing, the Income Tax Department issued Regulation 16 “IAS Implementation for Leasing Contracts for the Purpose of Income Tax”, which governs tax accounting for leasing contracts in Jordan. This regulation was developed based on IAS 17, but gives a slightly different interpretation to the definitions of fair value, present value and option price. In addition, the scope of the regulation was expanded to include details of the mechanisms for depreciating leased assets and the treatment of doubtful leases. While the Law on Leasing states that IAS 17 should govern leasing operations in Jordan, Regulation 16 contains some definitions that are not in line with those in IAS 17 and lack sufficient clarity to guide lessors and lessees. Finally, while bank loans and finance leases are similar instruments to finance asset acquisition, bank loans receive preferential tax treatment with respect to provisioning for bad loans. In accordance with the Banking Law and Income Tax Law, banks are allowed to provision for doubtful loans within 30 days from the date of default and can deduct from taxable income 100% of provisions within one year. However, non-bank lessors do not have such an opportunity44. Instead, finance leases are treated like commercial receivables, which require at least one year before starting to provision and considerably longer to write-off the full amount. The effect is that non-bank lessors will overstate their revenues compared to banks and will not be able to recognize tax benefits of doubtful and bad leases on the same terms as banks.
While bank-affiliated leasing companies are subject to Central Bank provisioning guidelines related to loans, these provisions are not fully tax deductible.
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IX. TAXATION OF LEASING

1. Introduction In many countries leasing is referred to as a “tax driven” financial instrument where tax considerations and treatment are some of the major advantages of leasing. Governments have often used tax incentives for leasing to encourage investment in plant and machinery because SMEs, which are the main drivers of economic growth and job creation in most countries, typically can access leasing finance more easily than bank loans. Apart from possible tax benefits, leasing allows lessors to manage risks better through retention of titles to leased assets and greater control over lease proceeds, benefits that are particularly important in emerging market economies. Globally, the development of tax frameworks for leasing has evolved over time, but the trend more recently has been to provide preferential treatment for leasing to stimulate increases in capital stock and promote domestic production. While such practices can, indeed, stimulate leasing, contemporary practice recommends that tax incentives, if any, be moderate in nature and of limited duration in order to avoid distortions of competition in the financial marketplace and to avoid abuse. In general, tax policy should aim to level the playing field for leasing versus other forms of finance and to avoid special treatment for either. Importantly, any contemplated tax incentives should be made available to all and not only for select firms. This will help ensure a level playing field and avoid market distortions which can have a negative effect on the financial sector in general. Regardless of whether a leasing sector in a given country receives special tax privileges or not, the minimum requirement for the development of leasing in any country is tax treatment that is no worse than that provided for traditional loans.

A level playing field in terms of tax effects for leasing versus credit is a necessary condition for the development of leasing in any country.

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2. Income Tax From an economic point of view there is little difference between leasing and loan finance. Both are similar instruments of financing the purchase of assets. It is therefore crucial that leasing transactions (as alternatives to bank loans) have tax treatment similar in effect to bank loans in order for leasing to compete on equal terms. Tax exemptions, rules and regulations governing loans and leases should be alike or should have similar effect to the extent possible. Leasing in Jordan suffers from a lack of appropriate tax treatment in the Income Tax Law45. This is due to the fact that current income tax legislation was enacted before the concept of leasing as a financing tool existed in Jordan. Hence, it does not clearly address the income tax treatment of financial leasing transactions. This lack of clarity and effective regulation has resulted in leasing being treated unequally with respect to bank loans in terms of income tax treatment. One example of such discrimination can be found in the in Income Tax Law provisions where Article 9a provides the list of expenses which can be deducted from the taxable income of the taxpayer. Among such expenses are Murabaha profits or “debit interest.” However, this article, as well as the Income Tax Law in general, does not specify what “debit interest” may include. Therefore, it is unclear what would be the treatment of interest paid by a lessee on a finance lease. Because legislation does not provide clarity on whether interest paid on a finance lease can be considered as a deductible expense, it appears that various government authorities interpret related legislation differently. Present tax legislation not only creates inconsistent treatment of interest paid on loans versus finance leases, but also creates the situation where different lessees may be treated unequally for similar transactions. There are several other examples when the Income Tax Law and related regulations discriminate against leasing with respect to other instruments of finance. If not corrected, leasing will continue to have an inferior status compared to other forms of credit and development of the leasing sector will be restricted. 3. General Sales Tax46 According to Article 3 of the General Sales Tax Law47 and its annex Schedule (3), financial intermediary services provided by associations and firms licensed pursuant to the Banking Law are exempt from sales tax. Further, the General Sales Tax Law indicates that International Standard Industrial Classifications (ISIC48) issued by the Secretariat of the United Nations should be adopted as the reference for the identification of what constitutes “Financial Intermediary Services.” As ISIC includes financial leasing under Financial Intermediation Services, this would indicate that leasing services should be exempt from sales tax.

Income Tax Law No. 57 of 1985 as amended and regulations issued with regards to income tax. A note of caution is necessary with regards to the topic of sales tax. It is quite technical, and though an attempt has been made to describe the aspects of current sales tax legislation related to leasing, readers should refer to the legislation itself and seek advice from tax professionals to answer specific questions. 47 Sales Tax Law No. 6 for the year 1994 as amended. 48 ISIC Classification: Section: K - Financial and insurance activities, Division: 64 - Financial intermediation, except insurance and pension funding, Group: 649 - Other financial intermediation, Class: 6491 - Finance leasing.
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However, Schedule (3) noted above restricts the exemption on sales tax for “Financial Intermediary Services” (which per the ISIC includes leases) to associations and firms licensed pursuant to the Banking Law. Since the Banking Law only addresses banks which are licensed under its provisions, only leases originated by banks are exempt from sales tax. Any leases originated by non-banks, which include specialized leasing companies, are not exempt and hence, are more expensive and less competitive compared with those of banks. Further, the General Sales Tax Law does not define exactly how the exemption will be applicable to leasing transactions even for banks. According to the Sales Tax Law, “In the case where a financial service exempted under Schedule (3) of this Law is supplied in combination with a supply of taxable goods, such supply of goods shall remain taxable.”49As leasing transactions are (from a sales tax perspective) a combination of the sale of an asset and the supply of a financial service, leasing should be subject to this general rule. However, application in practice is unclear as neither the general rule nor the Sales Tax Law itself specify how such a rule should be implemented for leasing. They also do not specify which part of the lease is exempted - whether the total value of the leasing contract (asset value and financial return) or only the financial return component. Due to ambiguities regarding the treatment of sales tax for leasing transactions, sales tax is not consistently calculated by lessors, lessees or tax authorities. Instead, each party appears to interpret the General Sales Tax Law and related regulations in a different way. Some lessors subject the whole amount of lease payments to sales tax, while others consider leasing a wholly-exempted service. A third group applies various formulas to determine the amount of sales tax due. In addition, sales tax legislation is not clear on the mechanism for setting-off sales tax for leasing transactions. Sales taxes are “indirect taxes” that should be channeled to the final consumer. In essence, any person (except the final consumer) in the chain of sales leading to a good’s final sale should be able to deduct the amount already paid in sales tax for that good (or components to make it) from amounts owed to the tax authority. This “setting-off” of sales tax is similar to the mechanism used for value added tax (VAT). When aggregated, the seller of goods should be able to deduct the sales tax paid in the process of providing goods from sales tax due to the tax authority. This assumes that the final goods are not exempt from sales tax, in which case, any sales tax paid would not be offset, but would ultimately become part of the cost of the goods. For application and setting-off of sales tax, finance leasing transactions should be clearly seen as two distinct transactions: 1) the purchase of an asset whose associated sales tax (if any) should be eligible for set-off, and 2) a financial service which is exempt from sales tax under current legislation. If this distinction is not made, then the value of a finance lease contract as a whole could be considered “exempt” with the effect that any sales tax charged by the lessor being fully paid to the tax authority instead of being reduced by sales taxes previously paid. This increases the final cost to the lessee as the lessor would, logically, pass on the additional tax burden to the lessee. With a loan, the bank only finances the purchase of an asset while the purchase is handled by the borrower. Therefore, loan financing avoids these complications. The absence of a simple and consistent approach to calculating and setting-off sales tax has significant implications including higher costs to lessees and potential legal liabilities for all parties concerned. In fact, the survey indicated that uncertainty related to sales tax was a major reason that some potential lessors, who have already been licensed, have yet to venture actively into the market.

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General Sales Tax Law, Article 7, sub-paragraph “d”.

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IX. TAXATION OF LEASING

4. Customs Duties on Leased Assets The treatment of customs duties related to leased assets is another area that has a profound effect on the development of leasing. Provisions in the Law on Leasing allow exemptions enjoyed by lessees to be transferred to the lessors50. However, actual implementation of these provisions has revealed two major problems. The first relates to Article 21 of the Law on Leasing which states that if a leasing contract terminates, liability for paying customs duties reverts to the lessor. In such situations, the benefit of exemption from duties that was transferred from the lessee to the lessor has only a temporary effect within the duration of the leasing contract. Since all leasing contracts do, in fact, terminate at some point, customs duties would have to be paid at some point by the lessor which appears counter to the intent of the provision. A second issue relates to the fact that authorities have, in some cases, refused to extend exemptions to lessors due to the fact that they may not use the leased asset, but merely finance its acquisition. The Law on Customs Duties and related regulations do not make a distinction regarding exemption from customs duties based on whether an imported asset will be used by the legal owner or another party. This again creates discrimination between leasing and bank loans with the cost of the asset becoming more expensive for the lessee who would absorb the cost of any customs duties paid by the lessor. Alternatively, a bank’s client who has borrowed to purchase an imported asset (which is exempt from customs duties) has an unambiguous exemption from customs duties. 5. Other Costs Associated with Leasing Transactions There are several other areas where leasing operations are at a distinct disadvantage relative to other forms of finance. The first relates to the fact that while vehicles in general must be registered with the Traffic Department, leased vehicles must also be registered in the Ministry of Industry and Trade (MIT) which is responsible for registering all movable leased assets51. As noted earlier, this adds to the cost of leasing assets and adds to bureaucratic delays. The second problem arises during registration of real estate in the Land Department. Based on a resolution issued by the Bureau of Interpretation of Laws, leasing contracts for real estate are considered simply rental contracts for which a series of fees are charged against the “rentals value”52. In the aggregate, these fees represent approximately 2.75% of the value of the real estate. This additional fee significantly increases the cost of leasing vis-à-vis loan finance as banks and non-bank mortgage lenders are not subject to such fees when financing real estate purchases. The above-mentioned impediments increase the cost of leasing transactions and result in unnecessary delays for the parties to a lease. Improvements to registration procedures along with the establishment of consistent and simple processes will help to eliminate costly duplication and eliminate unnecessary steps in the registration process for leased assets. More balanced registration fees would put leasing on an equal footing with bank loans.

Except for income tax exemptions. MIT charges a registration fee in the amount of 50 JD per contract. At one point, the entire lease payment including principle and interest was considered as “rentals” such that the ultimate fee was calculated on the total
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X. OPPORTUNITIES TO GROW THE LEASING SECTOR
Although there has been growth in recent years, the leasing sector in Jordan still faces many impediments and could play a much larger role in Jordan’s economy. The lack of large scale, diversified leasing operations that cut across industry lines and serve all organizations, especially MSMEs, is due to several important factors. Unless these are addressed in a comprehensive and effective fashion, the leasing sector in Jordan will not reach its true potential. Although discussed in detail above, the key issues facing the Jordan leasing sector are summarized below. These are not necessarily listed in order of importance since all impediments would ideally be addressed comprehensively as piece-meal efforts will unlikely result in a significant improvement in the market for leasing. However, special and immediate attention should be given to correct the discriminatory and ambiguous treatment of non-bank lessors regarding sales tax legislation. Resolving this issue is the single most important support the Government of Jordan can give to the leasing sector in the short term. To improve the enabling environment for leasing in Jordan, it is important to: • Equalize the treatment of leasing as compared to other forms of finance To ensure the development of leasing it is critical that leasing is competitive with similar forms of finance. In Jordan, leasing operations on several fronts are subject to inferior treatment, in particular regarding tax policy, which is detrimental to the growth in the leasing sector. Legislation (in particular tax laws) should capture the true nature of leasing as a financing mechanism as opposed to simply a form of rental. • Strengthen the legislative framework governing leasing operations Legislation related to leasing should be strengthened to provide a more effective and unambiguous legal framework. Among others, the definition of leasing needs to be clarified53 and a fairer balance established between the rights and responsibilities of the parties to a lease. The process for registering leased assets should be streamlined and the requirement for registering leasing contracts abolished. The definition of events and consequences of default should be clearer and it is important to establish regulations for other forms and types of leasing such as sale and lease-back and sub-leasing. • Improve leased asset repossession procedures The right of the lessor (as owner) to repossess a leased asset in an expedient manner should be independent from the type of breach committed by the lessee as is currently

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Ideally, the definition of leasing transactions should take into account two key important factors. First, finance leases must be clearly differentiated from other types of property hire. Second, legislation must acknowledge leasing as a financial instrument used primarily for the acquisition of equipment and other fixed assets. The status of finance leasing as a “financial instrument,” therefore, should be duly reflected in legislation so any applicable benefits awarded to “financial instruments” are captured by lessors and/or lessees as well.
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the case in the Law on Leasing54. Should a leasing agreement be rescinded for any reason or if the lessee does not exercise his or her right to purchase the leased asset, then the lessee must be required to return the asset to the lessor. If the leased asset is not returned, then the lessor should have the right to turn to any legal remedy available to repossess the asset, including the Urgent Matter Judge order. Further, it is important that the Law establishes clear timeframes for certain procedural steps along the process of issuance of the order. It should also define requirements which lessors and lessees must fulfill to streamline this process (e.g., types of documents needed to apply for an order etc.) • Increase knowledge about leasing among stakeholders Leasing is still relatively new in Jordan and many market participants would benefit from increased exposure to international best practice and how it could translate into the Jordanian market. All stakeholders are likely to benefit including lessors, lessees, suppliers, government officials and others. • Reduce transaction costs for leasing Many regulatory provisions still treat leasing as just another form of rent without regard to its financing nature. Thus, a number of unnecessary and redundant registration requirements and fees are imposed on leasing, making the cost of doing leasing in Jordan higher than for other forms of finance. Registration for leased assets should be simplified and fees eliminated or reduced in line with similar financing instruments. As a final point, a major constraint to expanding leasing in Jordan is the lack of long-term financing for leasing companies. Whereas banks can rely on term deposits (being mindful to avoid maturity mismatches) which are relatively cheap sources of funds, leasing companies must rely on equity or longer-term loans to fund their leasing portfolios, both of which are relatively more costly than bank deposits. In the absence of longer-term options, many leasing companies are forced to rely on short-term loans and lines of credits which create a serious danger of mismatched maturities whereby the terms of their assets (outstanding multi-year leases) are longer than their funding sources (mainly short-term borrowings). Fixed rate and local-currency funding is also scarce which creates similar interest rate and currency risks. Leasing companies, as all financing companies, should match fixed rate assets with fixed rate liabilities. If a leasing company, therefore, does not have sufficient access to fixed rate loans, it will either restrict its leasing portfolio, offer only variable rate leases or risk having their cost of funds (being mainly variable rate loans) rising above the rate they can earn on their leasing portfolio. None of these are conducive to the long-term health or sustainability of the leasing sector. As most leases are written in local currencies, it is equally important that sufficient local-currency funding is available to avoid having assets expressed in one currency and liabilities in another, thus creating foreign exchange risks that leasing companies should avoid whenever possible. Long-term, fixed-rate funding in local currency is essential to the long-term health of the leasing sector in Jordan. While scarce today, more appropriate funding sources will likely be made available once the enabling environment for leasing in Jordan improves. This will require strengthening the legislative environment, removing imbalances in tax treatment, and improving the market’s knowledge of leasing and its potential. With all stakeholders working together, the leasing sector in Jordan can play a much bigger role, helping MSMEs to improve access to finance and broaden their financing options, thus promoting sustainable growth and job creation.
The Law on Leasing establishes that only in cases when the lessee fails to perform his monetary obligations under a leasing contract or there are bankruptcy procedures initiated against the lessee, can the lessor apply to the Urgent Matters Judge order. In other cases, the lessor must revert to the court system which is often costly in terms of time and money.
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ANNEX 1: LESSORS IN JORDAN
ARAB NATIONAL LEASING Co. (Member of Arab Bank Group) Dr. Taher Assaf General Manager Tel +962 6 553 1640 Fax + 962 6 552 9891 P.O. Box 940638 Shmeisani-Amman 11194 Jordan COMPREHENSIVE LEASE (Started operations in 2006) Mr. Elia J. Wakileh General Manager Tel + 962 6 580 3600 Fax + 962 6 581 3896 P.O. Box 739 Amman 11118 Jordan JORDAN ISLAMIC BANK Mr. Mousa Shehada General Manager Tel + 962 6 567 7377 Fax + 962 6 562 4560 www.jordanislamicbank.com P.O. Box 926225 Amman 11190 Jordan INDUSTRIAL DEVELEOPMENT BANK Mr. Khaled Moh’d AI-Najjar Leasing Manager Tel + 962 6 460 2200 Fax + 962 6 460 2207 www.indevbank.com.jo P.O. Box 1982 Amman 11118 Jordan ISLAMIC INTERNATIONAL ARAB BANK PLC (Member of Arab Bank Group) Mr. Ghassan Bundukgi General Manager Tel + 962 6 569 4901 Fax + 962 6 569 4914 www.iibank.com.jo P.O. Box 925802 111190 Jordan LEASING SOLUTIONS Mr. Sahm A.Yaghi General Manager Tel + 962 6 568 1113 Fax + 962 6 562 4654 www.leasingsolutions.com.jo P.O. Box 23113 Amman 11118 Jordan SPECIALIZED LEASING Co. (Member of Housing Bank Group) (Started operations in 2006) Mr. Amjad U. AI-Sayeh General Manager Tel + 962 6 581 1990 Fax + 962 6 582 1210 www.hbtf.com P.O.Box 1174 Amman 11118 Jordan

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ANNEX 2: IFC’S LEASING PROGRAM
The International Finance Corporation, a member of the World Bank Group, has extensive experience supporting leasing markets in emerging market economies. In the past 30 years, IFC has invested over US$1.3 billion in 57 different countries. The IFC has co-founded the first leasing company in 26 countries, and advised 35 governments regarding legal and regulatory environments for leasing. The IFC works closely with governments, financial institutions and entrepreneurs to help promote leasing in emerging market economies as a means to increase access to finance, primarily for micro, small and medium-sized enterprises. Through its regional technical assistance facility, the Private Enterprise Partnership for the Middle East and Northern Africa, IFC aims to promote the development of leasing across the MENA region. In Jordan and other countries where the Leasing Program is active (e.g., the Republic of Yemen and the Islamic Republic of Afghanistan), IFC works with leasing stakeholders to: • Advise policymakers seeking to create legal and regulatory environments favorable to the development of leasing. This involves legal reviews and market studies to identify legislative and other constraints, drafting legislation and raising awareness of international best practice. • Build capacity and raise awareness of local financial institutions (e.g., banks, leasing companies, MFIs, etc.), equipment suppliers, investors and the like to increase the usage of leasing. • Increase awareness of the benefits of leasing to MSMEs as a means to finance business assets; and, • Promote and facilitate leasing investments. For further information on IFC’s activities in Jordan or specific queries related to leasing, please contact Murat Sultanov or Bilal Sugheyer in Amman, Jordan at (+962-6) 567 8050, (+962-6) 565 1183; fax: (+962-6) 567 8040. E-mail addresses are msultanov@ifc.org and bsugheyer@ifc.org, respectively. Additional information can also be obtained from IFC’s Cairo office by contacting Thomas Jacobs at tjacobs@ifc.org.

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ANNEX 3: IFC PEP-MENA
IFC’s PEP-MENA is a multi-donor facility for technical assistance to support private sector development in the MENA region. From its headquarters in Cairo, Egypt, PEP-MENA covers a total of 19 countries, spanning Morocco in the west to Pakistan in the east, with field staff in 10 offices across the region. Its mandate is to promote private sector growth and stimulate job creation, especially among the young and female entrants into the labor markets. PEP-MENA is organized into four thematic areas or pillars, each consisting of a number of core programs and projects: • Improving the Business Enabling Environment • Strengthening Financial Markets • Supporting SME Development • Promoting Privatizations and Public-Private Partnerships From its inception through FY06, PEP-MENA has committed more than $20 million in technical assistance and advisory services projects. Its activities are funded jointly by IFC and the following donors: Canada, France, the Islamic Development Bank, Japan, Kuwait, the Netherlands, the United Kingdom, and the United States. PEP-MENA is an integral part of IFC’s operations guided by the World Bank Group’s strategic approach in the region, and it works closely with governments in the region as well as other bilateral and multilateral donors.

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© 2007 The International Finance Corporation and The International Bank for Reconstruction and Development/The World Bank 2121 Pennsylvania Ave., N.W. Washington, D.C. 20433 Telephone: 202-473-3800 Internet: www.ifc.org; www.worldbank.org All rights reserved The findings, interpretations, and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the Executive Directors of the International Finance Corporation or of the Bank for Reconstruction and Development/the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the International Finance Corporation or the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Information this work contains shall not be construed, implicitly or explicitly, as containing any investment recommendations. This information does not constitute an offer of or on behalf of IFC to purchase or sell any of the enterprises mentioned, nor should it be considered as investment advice. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Finance Corporation and the International Bank for Reconstruction and Development/the World Bank encourage dissemination of their work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www. copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.

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