Financial leasing

1. FINANCIAL LEASE
Presented to : Dr. Mohamed Tarek
By: Ahmed Selim – Khaled Gamal
Group 2DD – Dokki Branch
July 2020

2. Main Points
• Definition / History
• Leasing Types
• “Ijara” Leasing in Islamic finance.
• Advantages / Disadvantages.
• Lease calculations.
• Loan vs lease.
• Leasing in Egypt.
• Conclusion

4. Lease Definition
• A lease can be defined as an arrangement between
the lessor (owner of the asset) and the lessee (user
of the asset) whereby the lessor purchases an asset
for the lessee and allows him to use it in exchange
for periodical payments called lease rentals or
minimum lease payments (MLP).
• A famous quote by Donald B. Grant says:
“Why own a cow when the milk is so cheap? All you
really need is milk and not the cow.”
The concept of Lease is influenced by this quote.
We can compare ‘milk’ with the ‘rights to use an asset’ and
‘cow’ with the ‘asset’ itself.

5. Early Background
 Equipment leasing is one of the world’s oldest professions. The ancient
Sumerians evidently produced leases on clay tablets for agricultural
tools, land and water rights and animals pre-date 2000 BC, Although
many ancient civilizations used leasing as a financing tool, including
the Greeks, Romans, Egyptians the oldest “hard evidences” found was
a record of Babylonian leasing law, by King Hammurabi, dating back to
1700 BC (Code of Hammurabi).
 In 1066 AD two invasion fleets, sent to England by the Norwegians and
the Normans, were both leased. They utilized forms of lease financing
to gain the use of the ships and crews.
 “Railroad Era” With the onset of the Industrial Revolution in the UK
and North America brand new equipment was needed for
manufacturing or transportation and investors particularly for railroads..
Which arise more opportunities for leasing

6. The Recent Years
 While leasing can be traced back thousands of years,
it has evolved considerably over the last fifty or so.
The industry has grown from being a manufacturer-
selling technique into a specialized financial service
with the formation of the first independent leasing
company in 1952 in the United States. The industry
extended to Europe and Japan in the 1960s, then to
Canada, and has been spreading throughout
developing countries since the mid-1970s.
 By 1994, leasing had been established in over 80
countries.

7. Leasing Types
• Capital/financial Lease
• Operating Lease
• Sale and Leaseback
• Leveraged Leasing
• Direct Lease

8. Capital/financial Lease
 Long-term, non-cancellable lease contracts where the
lessee is obligated to pay lease rent till the expiry of lease
period.
 The period of lease agreement generally corresponds to the
useful life of the asset
 Must give an option to the lessee to purchase the asset he
has used at the expiry of the lease.
 All the risks incidental to the asset ownership are transferred
to the lessee who bears:
The cost of maintenance
Repairs and insurance
 Only title deeds remain with the lessor
 Examples High cost and high technological equipment

9. Operating Lease
 Also called as an ‘Open end Lease Arrangement’
 The Lease Term is shorter than the economic life of the
asset
 Contrast to the financial lease A lease agreement gives
to the lessee only a limited right to use the asset.
 The lessor is responsible for the upkeep and
maintenance of the asset.
 The lessee is not given any uplift to purchase the asset
at the end of the lease period.
 Examples of operating lease are leasing of copying
machines, certain computer hardware, world processors
and automobiles.

10. Sale and Leaseback
 Sub-part of finance lease such type of
lease is very popular with companies
facing short-term liquidity crisis.
 The owner of an asset sells the asset to a
party (the buyer), who in turn leases back
the same asset to the owner in
consideration of lease rentals.
 Under this arrangement, the assets are
not physically exchanged but
it happens in records only

11. United Airlines has signed on Sunday a deal with an
Asian aircraft leasing company Bank of China Aviation
to sell and then lease back 22 aircraft.
The agreement will help United conserve cash and
give its balance sheet greater flexibility as it faces
significant losses due to the coronavirus pandemic
which is causing a global plunge in airline travel.
United chief executive Oscar Munoz said business has essentially fallen to zero.
“We expect to fly fewer people during the entire month of May than we did on a single
day in May 2019,”
Sale and Leaseback

12. Leveraged Leasing
 A third party is involved beside lessor and lessee.
 The lessor borrows a part of the purchase cost (say
80%) of the asset from the third party “lender”
 The asset so purchased is held as security against
the loan.
 The lender is paid off from the lease rentals directly
by the lessee and the surplus after meeting the
claims of the lender goes to the lessor.
 Examples are big ticket assets such as aircraft and
oil rigs

13. Direct Lease
 Under direct leasing, a firm acquires the
right to use an asset from the
manufacturer directly.
 The ownership of the asset leased out
remains with the manufacturer itself
 Examples are IBM leases servers and
computers , Xerox Lease Copiers.

14. Ijara
• What is Ijara?
• Ijara is a mode of Islamic leasing contract, involving a lessor
and a lessee, where the lessor transfers the right to use a
specific asset to the lessee for a pre-determined length of time
and in return for some periodic rental payment.
• The lessor, however, retains the right of ownership of the asset
and is legally bound to bear the risks of the asset,which also
includes obligations to repair any damage caused.

15. Aspect Conventional leasing Islamic leasing (Ijarah)
Leased asset The leased asset is not owned by the
leasing bank.
The leased asset is owned by the leasing bank.
Liability for
losses
The bank cannot be held liable for any
losses that might be incurred on the asset.
The bank bears the risk of loss if it is not caused
by negligence of the lessee.
Rent payment Rent is charged and billed prior to
delivery of the leased asset.
No rent (ujrah) can be charged and billed prior
to delivery of the leased asset.
Late payment Penalty on late payment is charged. Penalty on late payment is considered
impermissible and hence it cannot be charged.
Note: in some cases sent to “charity”

16. Advantages and Disadvantages

17. Advantages of Leasing to “LESSEE”
 Saving of capital: Leasing covers the full cost of the equipment used in
the business by providing 100% finance. The lessee is not to provide or
pay any margin money as there is no down payment. In this way the
saving in capital or financial resources can be used for other productive
purposes e.g. purchase of inventories.
 Flexibility And Convenience: The lease agreement can be tailor- made
in respect of lease period and lease rentals according to the convenience
and requirements of all lessees.
 Planning Cash Flows: Leasing enables the lessee to plan its cash flows
properly. The rentals can be paid out of the cash coming into the business
from the use of the same assets.
 Improvement In Liquidity: Leasing enables the lessee to improve their
liquidity position by adopting the sale and lease back technique.
 Shifting of Risk of Obsolescence: The lessee can shift the risk upon
lessor by acquiring the use of asset rather than buying the asset.
 TAX Benefit: Leasing expense or lease payments are considered as
operating expenses which are tax deductible.

18. Disadvantages of Leasing to “LESSEE”
 Higher Cost: The lease rental includes a margin for the
lessor as also the cost of risk of obsolescence, it is, thus
regarded as a form of financing at higher cost.
 Risk of being deprived the use of asset in case the
leasing company winds up.
 No Alteration In Asset: Lessee cannot make changes in
asset as per his requirement.
 Penalties On Termination Of Lease: The lessee has to
pay penalties in case he has to terminate the lease
before expiry of lease period.

19. Advantages of Leasing to “LESSOR’”
 Higher profits: The lessor can get higher profits
by leasing the asset.
 Quick Returns: By leasing the asset, the
Lessor can get quick returns than investing in
other projects of long gestation period.
 Tax Benefits: The lessor being owner of asset
can claim various tax benefits such as
depreciation.

20. Disadvantages of Leasing to “LESSOR’”
 High Risk of Obsolescence: The lessor has to bear
the risk of obsolescence as there are rapid
technology changes.
 Price Level Changes: In case of inflation, the prices
of asset rises but the lease rentals remain fixed.
 Long term Investment: Leasing requires the long
term investment in purchase of an asset, and takes
long time to cover the cost of that asset.

21. Lease Calculations

22. Lease Calculations
#1 – Depreciation Fee
 Net Capitalized Cost: is the addition of the selling price, any
additional dealer fees, taxes that are not paid up-front, and
outstanding loan balances (if any) minus any down payment if
exists.
 Residual value is the resale value of the asset at the end of the
lease.
 Term of lease is the length of the lease contract (usually in
months).

23. Lease Calculations
#2 – Finance Fee
 The money factor: can be calculated on the basis of the interest
rate mentioned in the lease agreement which is mathematically
expressed as shown below:
Money Factor = Interest rate (%) / 24

24. Lease Calculations
#3 – Sales Tax
 The Sales Tax: It is the state or local tax charged on the sale
price. It is usually paid at the time of signing the lease contract
as part of the “due at lease signing” amount.

25. Which Source Of Fund
Loan
Lease

26. LOAN LEASE
Financed purchase of equipment will give the
borrower the ownership of such an asset.
In a lease, the lessee has the right to use the equipment
and doesn’t have the ownership rights
Interest rate is variable based on an index. If
the index changes the rate will also change
In a lease, most of the time the periodic payment
would be fixed
Loan: Banks generally lend a portion (60%-
80%) of the equipment or vehicle cost;
exclusive of soft costs such as shipping,
training,
Lease: Up to 100% financing is available including
soft costs and sales tax.
Banks usually secure their loans by requiring
additional collateral such as real estate,
equipment, inventory,
For lease, in most cases, the equipment leased act as
the collaterals. Lessee need not have to bring any
collaterals.
Loan vs Lease

27. LOAN LEASE
In the case of the loan, the borrower has to
bring some amount of money in the form of
down payment
Generally, in the lease, lessee need not bring any
down payment unless there are some special
provisions in the contract.
A loan has to record as a liability in the
balance sheet of firm/ business
Lease (operating lease) is an off-balance sheet item.
The lessee can derive benefits from leased assets
without recording the leased assets on the balance
sheet. They have to just record the lease payments as
an expense.
Loan: Banks tend to be less flexible than
leasing companies. That is good if you are
looking for a standard term but not so good if
you need flexibility.
Lease: In most cases you choose the terms, the
purchase option, and the down payment (if exists) of
your equipment lease
Loan vs Lease

28. Egyptian Leasing
First Leasing Companies in Egypt

29. Egyptian Leasing
Rank Company’s Name Market Share
#1 Technolease “Bayt EL Khebra” 20.2%
#2 CORPLEASE “CIB” 15.56%
#3 GB Lease “Ghabour” 8.35%
#4 Cairo Leasing “Cairo Bank” 5.50%
#5 QNB AlAhli Leasing 5.36%
#6 Global Leasing “Wadi Degla” 4.56%
#7 BM Leasing “Misr Bank” 4.11%
#8 Al Tawfeek Leasing “Baraka Bank” 3.70%
#9 Ahly Leasing 3.51%
#10 Incolease 3.36%
The Egyptian Financial Supervisory Authority (EFSA) revealed in a
recent report the biggest leasing companies in the country in terms
of market between January 2019 and November 2019.

30. Egyptian Leasing

31. Conclusion
 Studies show that countries characterized with a diversified financial system, and
a well-developed non-bank financial institution are more resilient to shocks
where can spread risk and provide a sound base for sustainable economic
development and the Middle East and North African (MENA) countries are no
exception.
 As for Egypt the country is at a turning point and the requirement of capital
equipment for industrial expansion and huge infrastructural projects will increase
the demand for leasing where the efficient and cost effective leasing companies
could have a bright future.

32. Thank You