Economy, Business And Markets

Leasing Industry in Perspective

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Leasing Industry  in Perspective
Leasing Industry  in Perspective

The Association of Leasing Companies officially started work in March as the sole body representing the industry, following the merger of the former Iran Center for Leasing Companies and the Association of Leasing Companies.

The new organization has been formed with the support of the Central Bank of Iran and Iran Chamber of Commerce, Industry and Trade, as a part of CBI plans for better managing the financial markets. CBI as the regulator of the leasing industry has so far issued licenses for 35 firms while 600-1,000 unauthorized leasing institutions are said to be active in the industry.

Having two representing bodies, with different and often conflicting interests, was seen as a major nuisance by the lessors to get their act together and help win  CBI support to help them solve their litany of problems, including regaining the lost public trust and reducing their toxic assets.

The industry’s boom in the last decade, mainly caused by lessors’ entry into the auto and truck business, was tarnished by numerous fraud cases and high interest rates imposed on the lessee, resulting in the overall and ingrained negative feeling about the sector and those working for it.

  New Methods

The now-dissolved Center for Iranian Leasing Companies, had prepared a proposal to get a permit for launching the so-called ‘’operating leasing’’ in an attempt to reduce lessors’ piles of toxic assets.

Operation leasing, as the most common type of contracts in the industry, is more flexible in terms. They serve both parties where  maintenance, insurance, registration and other services are covered by the leasing company and the lessee is not forced to purchase the leased item at the end of the contract period.

According to current rules, however, leasing companies can only offer ‘rent-to-buy’ and ‘installment sale’ contracts.

In a recent Interview with MNA, Hadi Esfahani, a member of the defunct Center for Iranian Leasing Companies, said current contracts are not efficient, and added that the “leasing industry has more potential and capability than it demonstrates.”

Even though rent-to-buy contracts usually contain strict protection measures against delays in repayment, high lending rates, heavy fines for late payments and the prolonged recession in various sectors have left lessors with substantial bad debts.

Esfahani emphasized that operational leasing will help reduce the stressed assets since “ownership of goods is not a must in such contracts.  He made no mention, however, of the leasing companies’ customers as the main victims of unfair leasing contracts.

  Lacking Fairness

This highlights the fact that as lessors keep on promoting their business in and via the mass media, focusing on what the leasing industry can and will do for economic growth, they visibly fail to mention how leasing is actually ruining people’s finances and their lives.

Contrary to the commonly-held perception, high interest rates are not the major snag of leasing contracts. In fact, lessors are not clear, honest and transparent in their dealings, which they must be, and this does the most harm to the sector.

There is a fundamental difference between “lending” and “leasing”; leasing basically is tantamount to helping businesses improve their  finances and pay for current expenditures. It is not acceptable to confiscate working equipment when they cannot pay back on time when times are bad. Stringent terms as well as compound interest and contract cancelation fees are the main causes of huge bed debt in the industry.

But lessors should not be the only ones to blame as the Central Bank of Iran, as the industry’s regulator, has been sending mixed signals. Every now and then, the CBI invites lessors to hold talks over regulating the leasing industry, with no plausible outcome so far.

However, CBI approval alone is not sufficient for re-gaining leasing industry’s besmirched reputation in recent years. CBI supervision over the industry is only limited to deciding on interest rates, but it could do more to encourage them to enhance their operations by offering new lessee-friendly methods and at the same time keep an eye on their performance.

As for now, Islamic leasing seems to be a suitable option. The Shariah-based financing method can help the sector gain back its past credibility as it is basically helps in ensuring the interest of both the lessor and lessee.