A STUDY OF

THE LEASING MARKET

IN THE HASHIMITE KINGDOM OF JORDAN

1
2 0 0 6
2
 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

1
 ACKNOWLEDGEMENTS

ACKNOW

2
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.

3
 TABLE OF CONTENTS

TABLE

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

5
 EXECUTIVE SUMMARY

EXECUT

6
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. 7
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.
 INTRODUCTION

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 short-

term or temporary use of an asset by the lessee. The maintenance and

3 PEP-MENA is based in Cairo, Egypt with offices across the MENA region, from Morocco to Pakistan. PEP-MENA
8 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 9
makes express reference to the contrary.
 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).

7
Source: World Bank, Country Assistance Strategy report, April 2006.
8
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.

10 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.

11
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.

A STUDY OF THE LEASING MARKET IN JORDAN 11

 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.

140

120

100

80

% 60

40

20

0
Jordan Lower Middle Lower Middle Ireland Singapore
Income MENA Income

Chart 2: Monetization of Jordanian Economy

(Money supply to GDP)

13
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
12 financial sector development, regulation and supervision of financial markets.

12 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, well-
developed, 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.

14
Source: Amman Stock Exchange web page, key Historical Statistics for 2005.
15
Source: Central Bank of Jordan, Yearly Statistical Series, Assets of Licensed Banks table, 2005.
13

A STUDY OF THE LEASING MARKET IN JORDAN 13

 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 real-
estate 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 2002 2003 2004 2005

Deposits
Demand deposits 1.06 0.91 0.50 0.38 0.47
Saving deposits 2.91 1.84 0.88 0.73 0.83
Time deposits 5.19 3.97 2.75 2.49 3.52
Average 3.05 2.24 1.38 1.20 1.61
Credit facilities
Overdrafts 10.42 9.35 9.43 8.79 9.26
Loans and advances 10.45 9.85 8.92 7.59 8.10
Discounted bills and bonds 11.88 10.95 10.24 8.98 7.92
Average 10.92 10.05 9.53 8.45 8.43
Spread 7.87 7.81 8.15 7.25 6.82

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).

16
Ibid.
17
Source: Central Bank of Jordan, Annual Report, Money Banking and Financial Markets, 2005.
18
Source: Minimum Capital Requirement instructions No. 17/2003, Central Bank of Jordan.
19
Source: Annual Report, Central Bank of Jordan, 2005.

14 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 2002 2003 2004

Maritime 7.6 7.1 6.9 8.4
Fire 8.8 9.3 13.0 12.4
Motor vehicles 42.7 44.0 45.0 46.0
Accident 8.8 9.5 5.5 5.4
Life 14.4 12.6 11.5 11.2
Medical 19.6 17.6 18.2 16.6

Stock Market

The Amman Stock Exchange (ASE) grew rapidly in 200521. The market capitalization-
weighted 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.

20
Source: Central Bank of Jordan, Annual Report, Money Banking and Financial Markets, 2005.
21
The ASE index stood at 5518 points as of December 27, 2006.
22
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.

A STUDY OF THE LEASING MARKET IN JORDAN 15

 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 # of Active Borrowers Gross Loan Portfolio, JD

MFW 17,342 3,602,142
JMCC 10,655 3,711,073
DEF 14,476 26,515,581
MEMCO (Sep. 05) 3,063 4,073,479
AMF 2003 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

24
Source: www.themix.org

16

16 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 re-

main under-served in Jordan.

17

A STUDY OF THE LEASING MARKET IN JORDAN 17

 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.

25
Source: “Finance Lease Contract, A Comparative Study,” Ziad Abu Haswa, 2005.
26
Ibid.
27
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.
18 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.

18 III. LEASING IN JORDAN

Table 4: Registered Lessors in Jordan, 2005

19

A STUDY OF THE LEASING MARKET IN JORDAN 19

 IV. RECENT DEVELOPMENTS IN JORDAN’S
LEASING MARKET

Since 2000, the volume of leasing has grown 180.000

significantly, though there have been

two distinct periods of growth. During the
160.000

period 2000 – 2003, growth in the leasing 140.000

sector averaged 16% per annum with 120.000

Comulative Leasing Portfolio Outstanding
Annual Leasing Volume

the aggregate leasing portfolio reaching 100.000

approximately JD 50 million by the end

JD 000s

of 2003. In the following years, the growth 80.000

rate accelerated with the volume of leases 60.000

rising an average 78% annually in 2004 and

2005 reaching a cumulative total of JD 161
40.000

million. This level of growth exceeded that of 20.000

banking facilities which averaged only 20% 0

growth during this same period. 2000 2001 2002 2003 2004 2005

Chart 3: Volume of Leasing in Jordan,

The bulk of this growth was achieved by only 2000-2005
three lessors: the Arab Leasing Company, the
Industrial Development Bank and the Arab
International Islamic National Bank. These
firms combined to contribute more than 180.000

88% of the total new leases in the market. 160.000

As noted, however, out of the 18 registered 140.000

lessors, only 6 are actively providing leasing Comulative Leasing Portfolio Outstanding

services (2 commercial banks, 2 Islamic banks

120.000
Comulative Leasing Portfolio Outstanding excluding Real Estate Leases

and 2 leasing companies). The remaining 100.000

JD 000s

firms which are registered and licensed to 80.000

lease are, in fact, conducting other kinds of

activities or providing other financial services.
60.000

According to interviews conducted during 40.000

the survey, these firms remain reluctant to 20.000

enter the leasing market due to legislative

uncertainties and contradictions.
0

2000 2001 2002 2003 2004 2005

Chart 4: Total Leasing Volume and Real Estate Leasing,

2000 - 2005

20

20 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

60

50

40
JD 000s

30

20

10

2000 2001 2002 2003 2004 2005 21

Chart 6: Average Lease Amount

A STUDY OF THE LEASING MARKET IN JORDAN 21

 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.

35%

30%

25%

20%

15%

10%

5%

USA ITALY PAKISTAN JORDAN

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.

31
Source: World Leasing Yearbook, Euromoney, 2006. The indicator for Jordan was calculated based on data provided by the Department of Statis-
tics of Jordan regarding capital formation.
22

22 IV. RECENT DEVELOPMENTS IN JORDAN’S LEASING MARKET

 10.000.000

Finance Leasing
9.000.000
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

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

23

A STUDY OF THE LEASING MARKET IN JORDAN 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

Commercial Banks
25.000
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

24 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

25

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.

26

26 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.

32
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-pruden-
tial regulations should be maintained to avoid unnecessary regulatory burdens. 27

A STUDY OF THE LEASING MARKET IN JORDAN 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

28 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.

29

A STUDY OF THE LEASING MARKET IN JORDAN 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.

30

30 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.

33
Islamic leasing requires the lessor to assume the basic responsibilities of ownership, such as maintenance and insurance. For more details see Sec-
tion VII.
31

A STUDY OF THE LEASING MARKET IN JORDAN 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 non-
performance 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

32 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 non-
judicial 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.

33

A STUDY OF THE LEASING MARKET IN JORDAN 33

 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.

35
For more details see also Section IV.
36
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
34 is Ijarah.
37
Source: “The Islamic Lease”, W.R Johnnie Johnson, Euromoney Leasing Yearbook, 2005.

34 VII. ISLAMIC LEASING

 Table 6: Conventional vs. Islamic Leases

Issue Conventional Ijarah38 Comments

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

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.

38
The term “Ijara” in this Section refers to “Ijarah Muntahia Bittamleek” unless the context indicates otherwise.
39
The Accounting and Auditing Organization for Islamic Financial Institutions.
40
The concept of gradual transfer of a title proportionally to the amount of payments is a known legal concept in some jurisdictions. It is primar-
ily 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 35
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.

A STUDY OF THE LEASING MARKET IN JORDAN 35

 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 42
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.

36 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.

44
While bank-affiliated leasing companies are subject to Central Bank provisioning guidelines related to loans, these provisions are not fully tax 37
deductible.

A STUDY OF THE LEASING MARKET IN JORDAN 37

 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.

38

38 IX. TAXATION OF LEASING

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.

45
Income Tax Law No. 57 of 1985 as amended and regulations issued with regards to income tax.
46
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.
39
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.

A STUDY OF THE LEASING MARKET IN JORDAN 39

 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.

49
General Sales Tax Law, Article 7, sub-paragraph “d”.
40

40 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.

50
Except for income tax exemptions.
51

52
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
41
total

A STUDY OF THE LEASING MARKET IN JORDAN 41

 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

42 53
Ideally, the definition of leasing transactions should take into account two key important factors. First, finance leases must be clearly differenti-
ated 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.

42 X. OPPORTUNITIES TO GROW THE LEASING SECTOR

 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.

54
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
43
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.

A STUDY OF THE LEASING MARKET IN JORDAN 43

 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
44
44 ANNEX
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
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.

45

A STUDY OF THE LEASING MARKET IN JORDAN 45

 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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46 ANNEX
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A STUDY OF THE LEASING MARKET IN JORDAN 47