Islamic leasing could provide a funding lifeline for
SMEs, says Graeme Laing.
After a tough year, the UK leasing
industry appears to be bouncing back. Growth remains patchy, but
one of the bright spots is the growing demand for Islamic
leasing.
In the UK, much of the demand for
Islamic leasing is coming from small and medium-sized
companies.
Amid a squeeze on traditional forms
of lending, such as bank loans, many small businesses are looking
for alternative and competitive funding streams, and
a more open and transparent service.
Given the context of the economic
crisis and its aftermath, companies are searching for alternative
means to achieve the optimum balance between service and
cost-effectiveness in what remains a tough environment.
For those willing to look beyond
familiar territory, Islamic leasing has become an increasingly
attractive option, mainly due to its competitive business approach
and relationship-based model.
Islamic leasing is very similar to
conventional leasing, as the redemption features in an Islamic
lease have a similar structure to a finance lease. The only
difference is that Islamic leasing must uphold the principles of
Islamic law (Sharia).
Islamic leasing most commonly takes
the form of an Ijara (Arabic for lease) and, as with most
conventional leases, Ijaras must be structured so they are
asset-backed – the reason why leasing naturally lends itself to
Islamic finance.
Complying with Sharia means Islamic
financial institutions are not permitted to invest in prohibited
activities such as arms production or trade, alcohol, pork-related
products, pornography and gambling.
To ensure compliance with these
requirements leases are reviewed and approved by a Sharia
Supervisory Board.
The Sharia-specific requirements
are in addition to the conventional regulations that apply to all
UK-based financial institutions, and ensures a further layer of
approval.
In the current economic climate,
this risk averse approach is integral, and lends itself to the
appeal of Islamic leasing.
Islamic finance is similar in many
ways to ethical finance. Under Sharia, Islamic banks must not
partake in any activity against the public interest.
Islamic finance offers a
straightforward, transparent and ethical approach to finance, where
risk and reward are shared. As Islamic banks share the risk with
the client it is vital that they understand their client’s business
plans and work together to find the most appropriate solution to
their funding needs. This approach has led to 70% of BLME’s 2011
first-half leasing business being repeat.
Graeme Laing is head of leasing
at the Bank of London and the Middle East
