For many years, raising finance to buy new equipment and vehicles in the UAE was a relatively simple process, but over the past decade that has become a much harder task with banks becoming resistant to lend money to fleet owners and contractors.
While distributors have been willing to step in with their own schemes based on the asset firms want to buy, many have learned the hard way that should their customer run into hard times, reclaiming the outstanding money owed on the truck or loader – or whatever was purchased – can be a lengthy and fraught process – especially when other lenders to a defaulting company need to claim back their share too.
It doesn’t seem that long ago that there was a time when few people had to worry about what happens when a business fails. In hindsight, the ability to make fast lending decisions for the businesses asking for financing was critical in helping the UAE turn into the regional powerhouse it has become. When the market hit its stride two decades ago, it seemed there were enough slices in the pie for everyone. Projects and contracts were driving purchasing decisions, with the acquired assets used until the end of their useful life.
Assuming they had the assets in their ranks or a forgiving line of credit with their lender, few companies had to worry about issues down the line, such as residual value or utilisation. The contracts kept coming, the work was always there.
20 years on from the start of the construction boom in the market, most of the big projects have been completed with those buildings full of new businesses and industries. To meet the needs of this huge variety of clients and jobs, fleet buyers and equipment owners today are having to balance being competitive with being financially sound. Unfortunately, and until recently, the lack of financing options has forced the market to square peg/round hole their fleets or hold back on purchasing modern and potentially more efficient and greener vehicles and equipment.
For the past-half-decade, a group of financing experts have been working with the UAE’s Ministry of Finance to tackle an obvious lack of leasing options in the market. It is an attempt to bring the laws that govern the use of capital to buy assets like vehicles and equipment in line with international standards and neighbouring markets such as Saudi Arabia and Eqypt. It is also an opportunity to bring fundamental and significant changes to how equipment and vehicle ownership works in the country.
While the aim is to ultimately streamline processes and ensure a smoother, more secure leasing environment, these reforms are set to have far-reaching implications for both the leasing industry and the broader economic landscape of the region, says Ger Regan, a seasoned executive from Altalease, and one of the architects of the law governing leasing finance which is now being implemented in the UAE.
“Consider a situation where a construction company leases several pieces of heavy machinery. Under the old laws, if the lessee defaulted, the process for the lessor to recover the machinery could be lengthy and fraught with legal hurdles, thereby delaying the lessor’s ability to re-lease or sell the equipment and recover losses. With the new laws, there are predefined steps and timelines that streamline this process, significantly reducing the time and cost involved in asset recovery.
“This change is not just about improving transaction efficiency; it’s also geared towards enhancing legal protections and clarifying the responsibilities and rights of all parties involved,” he says. “The UAE government has implemented a series of reforms aimed at modernising and enhancing the legal framework surrounding the leasing industry. These changes primarily focus on increasing transparency, protecting the rights of lessees and lessors, and establishing a more robust mechanism for asset recovery. The goal is to align our practices with international standards, which is critical for attracting foreign investment and supporting economic growth.”
He continues: “As we had no finance leasing capabilities, bank loans have been the only way for end-users to acquire assets. Banks traditionally assess clients by way of their strength of balance sheet and do not assume asset or residual value risk. This is challenging as customers with new projects that need assets may not have the financial capacity to borrow, they then turn to the distributor to support with them ‘on’ or ‘own book’ finance solution – where the distributor takes the risk on behalf of the client and provides them a long term credit period to pay. For distributors to stay competitive this funding mechanism is highly popular, but it comes with added credit and risk and funding challenges.”
“However, businesses that leverage leasing services stand to gain considerably from these reforms. For one, the increased clarity and transparency reduce the risks associated with leasing agreements. Businesses can engage in leasing arrangements with greater confidence, knowing that their rights are protected and that there are clear mechanisms in place for dispute resolution. Additionally, the reforms may drive down costs by fostering a more competitive and efficient leasing market.
“While the reforms are largely beneficial, they do present challenges, particularly in the short term. Businesses will need to adapt to the new regulatory environment, which may involve revising existing contracts, implementing more rigorous internal controls, and possibly facing tighter credit evaluations by lessors. The initial transition period could see some disruption as market participants adjust to the new norms.”
According to Regan, the impact on the broader economy is also expected to be overwhelmingly positive.
“By enhancing the legal framework for leasing, the UAE is better positioned to attract international businesses and investors, which is crucial for economic diversification. Moreover, a robust leasing sector enables other industries, such as construction, transportation, and manufacturing, to access the equipment and vehicles they need more efficiently, thus supporting overall economic activity and innovation.”
On the face of it, an option to lease seems like a cure-all solution to getting new vehicles and equipment into the market, although Regan recognises that the market must be both educated about the law changes and convinced that it suits their business models. He has already started this process by becoming a regular on the events circuit, including the Truck and Fleet Conference in February. An upcoming meeting organised by the Ministry of Finance is planned for June where distributors will be invited to learn more about the new opportunities they could tap into.
“End-users in the UAE traditionally want to own assets and this won’t change with finance leasing, it’s just a change of mindset needed combined with education and knowledge across the full spectrum of the finance and leasing industry,” he says, adding that: “This is a huge step, banks and lessors can now implement their self-help remedies contained in the laws, in the event of default of a loan or a lease both can be terminated (following the steps in the implementation regulations) the asset can be recovered and sold. But even the banking system needs to adapt to this process and this will take some time.”
Dwelling on the last point, he tells T&FME that he is confident that the reforms to leasing will encourage banks back into the conversation when it comes to funding new kit in the UAE.
“The biggest challenge for lenders is risk of default of the borrower and the inability to recover the asset swiftly enough to liquidate its residual value and clear the debt. Traditionally, court litigation processess have been painfully slow and arduous. However, until now, litigation was often the only way a bank could recover an asset as all loans were ‘with a mortgage’. Assets were then sold via public auction via a court appointed auction company, banks were unable to sell assets via third party auction companies.”
The new Financial Leasing Law, which repealed and replaced the previous version of the law that was published in 2018 (Federal Law No. 8 of 2018) (the “Old FLL”). Approved by the Supreme Council in November last year, it represents several years of work and effort by a team of expert, including Regan, to improve the original framework passed in 2018 which he says fell short of international standards.
“In 2018, the UAE Finance lease law was released but it was unworkable as it did not contain the key parameters and definitions for leasing to be practiced successfully in the UAE,” he explains. “Between 2020 and 2022 the new law was re-drafted by the Ministry of Finance along with the IFC World Bank, with Dr Hussam Al Talhuni acting as the Chief Legal Consultant in the Ministry and working alongside Al Murat Sultanov, Senior Director Operations at World Bank Group; Michael Savaa, Partner, Watson Farley Williams, and myself. This law combined with Federal Law 4 of 2020 on securing interests over movable assets and both now provide for a vested security right to a lessor or financier in that asset been leased or under a loan.”
He continues: “The ability to recover assets and sell them in an open market to mitigate risk and recover a non-perfoming loan (a debt that’s in default because the borrower hasn’t made scheduled payments) has now all been changed with both laws and with the registration of assets at the EIRC (Emirates Integrated Collateral Registry) that provides for a ‘secured right’ for a lessor or financier in the assets, a remedy that can act as a huge catalyst to change.”
With the law in place, Regan is currently working with the MoF and legal firms on the implementation phase of the new regulation including the development of the ecosystem of managing assets “from funding (credit and risk) to asset valuation and disposition methodology” and how to engage with external specialist firms.
“I really believe finance leasing can have a very positive impact as change brings opportunity to diversify and adapt. As a product we need to knowledge build and develop the leasing finance ecosystem within our financial institutions. This can only be done through continuous engagement, creation of working groups, learning from others. KSA and Egypt have developed their leasing economies over the last 5-10 years, and both are now thriving while adding alternative funding solutions for SMEs and Corporates to acquire assets.”
Regan also believes the UAE can catch up with other markets now the law is in place but it will need to address the limited number of companies currently active and able to provide financing for leasing. He hopes the new law will encourage both large distributors and manufacturers to open up to leasing as well as provide space for new players, such as his own firm Altalease,
“The UAE has limited active Non-Bank Financing Companies and only two leasing companies there is now the potential for new entrants and new lessors to set up in the UAE to capture a portion of the AED 25 billion market,” he says, adding that Altalease is currently raising capital so it can support the funding of leasing in the GCC. “I have been in the leasing and asset finance industry for 30 years, including 12 years in the UAE. I have seen the challenges and pitfalls but also the opportunity. Having worked with the MoF and IFC on the laws for five years I knew what was coming. Since the FLL was released in November 2023, Altalease has been set up to be the first tech-driven leasing company (and non-bank) to set up under the new implementation regulations – which we expect to see very soon.”
Regan seems both excited and relieved to be finally seeing the law being implemented.
“Its early days, but when you been working for five years to achieve a goal it’s extremely rewarding to be in the position we are now. I certainly feel proud and privileged to have been part of the journey so far. The future of asset acquisition and usage is very bright, although we now have to wait for implementation regulations (regulations on licensing of new leasing companies, criteria required to set up and governing body). In the meantime, I will continue to encourage knowledge building with all participants to make the law successful in application, legal and professional services, financiers, lessors, distributors & OEMS, accounting/tax and government bodies to engage and communicate.”
He concludes: “I would also recommend distributors and OEMs to reach out and speak to me on their current business finance practices and assess their operational readiness for finance leasing, Assess change now, look at how security is managed within credit and risk policies, see what can be digitised and changed. This is a time where new relationships can be built, and we can prepare for the future.”
