SMEs are the power house of the UK economy and the government is keen for banks to support them as a route to recovery.
According to the Department for Business Innovation and Skills, at the start of 2011 SMEs accounted for almost 60% of employment and just under half the turnover in the UK private sector. The European Commission estimates there to be 23 million SMEs in the European Union, representing 99% of all businesses and providing around 90 million jobs within the single market.
At a time when growth prospects remain depressed and working capital is under strain, the economic value of leasing should not be underestimated. A statistic released by Oxford Economics showed that if leasing had financed an additional £5 billion of business investment over the course of 2010 it would have potentially contributed an additional £1,960 million to the GDP and supported 37,960 new jobs in the UK.
The UK leasing market has shown notable growth over the last year. According to data released by the Financing & Leasing Association (FLA), Finance leasing new business grew by 12% and Operating leasing by 13% in May 2011 compared to May 2010.
In addition, figures from Leaseurope, the European Federation of Leasing Company Associations, showed that the European leasing market grew by 4.7% in 2010. But the figures alone are only half the story. As conventional banks grapple with regulatory requirements to strengthen their balance sheets and fresh scandals on a seemingly weekly basis, a new pool of finance providers has quietly entered the leasing market.
SMEs had their fingers badly burnt in 2008 when credit lines were cut overnight, and have subsequently moved to diversify their funding base. While price, and moreover the ability to lend remains of paramount importance, SMEs are looking for banks that can offer transparent, fair and ethical banking. They are increasingly looking for banks to work with them, who understand their business model and who offer a service based on partnership, proprieties and values at the heart of Islamic banking.
Islamic banks prioritise building partnerships with their clients and offer 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 requirements. Since UK Islamic banks are generally smaller than their conventional peers they are often more agile and they can meet financing requirements in a way that those operating a high volume, quick-turnover system cannot.
The type of contract used for leasing is an Ijara, one of the most commonly used Islamic finance products. This structure has been used by individuals and businesses for hundreds of years, allowing them to use equipment that they would have been unable to purchase outright and can be structured to match a finance lease or an operating lease.
As Ijara has a familiar look and feel to counterparties used to conventional leasing products, we’ve found that many businesses that are unused to Islamic financial products are comfortable using it. We have also found that businesses are increasingly looking for a flexible, solutions-based offering.
At BLME, leasing is a vital part of our business model. Since our launch 5 years ago we have provided over £500m in lease finance and a material portion of our current and new business is from SMEs across a wide range of industries. We have also made recent franchise developments in the transportation sector, while also increasing our growing presence in the renewable energy sector.
BLME’s commitment to the UK SME sector has been demonstrated by adding new resources to the business through an increase in staffing and by adding Lease Purchase to the existing product offerings of Operating and Finance Lease.
Over 60% of our UK leasing business is with SMEs that operate in the transportation sector including marine, rail and road in addition to traditional assets that are leased to support the construction industry. BLME also has some more specialist exposure in TV equipment and recycling companies. Financing business with sustainable practises such as recycling and renewable energies is a key part of our future business plans. This year BLME closed our first green energy deal with funding a cable laying barge to be used on the Gwynt Y Mor windfarm off Anglesey.
As the conventional banking section in particular sets off on a slow path to recovery, deterred by rumour and scandal, alternative finance providers have the opportunity to help rebuild the faltering UK economy by providing leasing solutions to increasing numbers of SMEs in the UK and we believe that Islamic leasing will go from strength to strength as a result over the next five years.
Graeme Laing is head of leasing at Bank of London and the Middle East