Leasing has long been a useful route for businesses to build up assets in other markets but due to a variety of factors hasn’t yet established itself in the GCC. The UAE’s commitment to revamping even its most recent laws on lending to businesses could help hundreds of fleet owners to expand without risking further debt and borrowing.
The recent Dubai Lease Conference looked at the new regulatory landscapes introduced by the UAE Ministry of Finance with the redrafting of the country’s Finance Leasing and Secured Movables Financing laws.
After a brief introduction, experts were soon discussing how the country can get its laws to match international standards and what that means for SMEs in particular.
Dr Hussam Sameer Al Talhuni, senior advisor of the Ministry of Finance has been heavily involved with the changes to the Finance Leasing Law and says he has been helping to build on the significant steps taken by the newest leasing regulation brought in 2018.
“That law created a standard of modern framework for leasing operations in the UAE, however, experts have raised concerns about them and that it did not meet the required standards of international practice. I agree with that. I think there are many aspects that should be improved. In the law, particularly issues that concern relationships between the relevant parties, the lessee, the lessor and the supplier, which have not been dealt with effectively,” he says.”
“There are other various aspects related to leasehold rights and issues concerning leasing company regulation, which have not been structured fully in line with International standards. After the law was issued in 2018, I advised the Minister of Finance to change it and take advantage of applicable modern rules, particularly the new secure transaction law enacted in 2020.”
Taking his advice, the minister of finance secured approval from the UAE cabinet to start working on a new draft law started with the aim of developing the leasing sector and improving access to finance.
“The good news that I can share with you today is that we have finished processing the new draft and a new version has been discussed in depth with the selected group of experts, including my colleagues Patrick Ger Regan at Invigors EMEA and Michael Savva from Watson Farley and Williams, plus others.”
Once implemented, the new law is expected to enable manufacturers and their distributors to offer greater choice to their customers as well as open up their services to new clients. That is partly enabled by a revised approach to what can actually be leased in the UAE. Currently the law limits leased assets to those that are used in the craft or trade of the business that is hiring the vehicle or equipment but that definition will now allow hire companies to offer their products, ie the long-term hire of vehicles, for personal use: “The draft law, on the other hand, takes into consideration extending that scope to include consumer personal transactions.”
The law should also help strip down the reams of paperwork that have been needed in the past: speeding up process and allowing a little more ‘give’ in the market.
“The draft law relies more on our freedom of contract principle, where parties are free to determine the extent of their rights and obligations of each of the parties and the type of these contract,” says Dr Al Talhuni.
Unfortunately, businesses are not always successful and not always able to fulfil the terms of their contract. In the past, this has caused issues where financed vehicles and equipment have not been able to be reclaimed by a bank, leaving that asset in limbo. Unable to be sold back or sold on, firms can’t liquidise a valuable asset to raise cash when they need it and instead have to watch it deteriorate and lose value.
Dr Al Talhuni says that bolting onto the 2020 secure transaction law, which enabled the selling of an asset to settle a debt, means that there will be a mechanism to protect the leasing company from, say, a customer going bankrupt. It will also ensure that a leased asset doesn’t fall straight into the hands of an administrator should a business become insolvent.
Less risk to them means more opportunities for customers in the market to get access to leased equipment and vehicles.
“The current law does not provide efficient enforcement and reposition procedures in case of a leasees default or bankruptcy. Whereas, the draft law has taken to consideration the use of effective enforcement procedures already addressed in the secure transaction law. So there is a link of course, between the two laws in this respect and they use the same central mechanism of registration,” he explains.
Work on the new law continues and there are currently talks to shift the taxation status from goods to services and which repayments could be exempted from tax. Finally, the draft law also allows for a broader definition of a leasing company which does not need a license from the Central Bank of the UAE. Essentially, freeing up the market for more competition and choice.
“We weren’t convinced that there was a real need from an oversight point of view for every lessor entity internationally to be governed by the UAE central bank,” explains aviation and shipping veteran Michael Savva, partner, Watson Farley and Williams, who was part of the team invited to consult on the law. “It would require for example, Japanese and Chinese lessors to set up business here in order to obtain a central bank license. There is no way that was ever going to happen.”
Savva says that one of his first questions was who it should it be designed for.
“One of the key things that was discussed as part of this working group was what is actually the scope of this law. (Early on) I asked is this supposed to be aimed at big-ticket leasing or primarily the SME market? And the view taken, and we hope that that is reflected in the law, is that actually this is very much intended for the SME market,” says Savva. “The considerations for international cross-border, big-ticket asset finance are very different to leasing in the SME space domestically.
“The previous law included, very prescriptive provisions as to what a lease contract needed to include. And in a lot of cases, they were not provisions that we would expect to see in a standard lease. Certainly, in the leases that we review. One of the key critical ones that we had a big problem with was the fact that both lessors and lessees were to be given a mandatory 60-day grace period for any default. Now, while a lessee default is subject to negotiation as to what level of grace period is required or acceptable to the parties, having it mandated in a law that a lessee is automatically granted two months leave even force a payment default would, in our view, just not be acceptable to the lessor market.
“Thankfully, as Dr Al Talhuni said, the new draft law leaves a lot for the parties to agree on and so the vast majority of the provisions of the law contain carve outs to say that the parties may agree otherwise,” he says.
A third member of the working group developing the law is Patrick Ger Regan, Business Partner, Invigors EMEA Ltd (UAE) and founder of Sama Group. He brought a ground-level view of what was needed from an operational point of view in the market. Looking back to his first experiences in the UAE a decade ago, he recalls his reaction when he realised leasing wasn’t available to firms.
“I was very surprised,” he exclaims. “While I was financing equipment in the UAE you realise that the concept of financing using a ‘mortgage’ or ‘asset pledge’ with a loan to secure assets created a block of non-flexibility in funding opportunities for SMEs. It created this situation where enforceability, accountability, flexible funding, recovery, and models of asset ownership were impossible for institutions to assume risk.
It forced a lot of distributors and manufacturers to look at the way they did business, forcing many to self-finance their clients with payment plans and on book finance solutions, many found it difficult to secure vendor finance partnerships with financial institutions. partnerships that we see too good effect across Europe and the US.”
To Regan, the market was stuck in a situation where recovery of an asset was so difficult in an event of default, with no valued routes to dispose or remarket the asset, many institutions were risk adverse when it came to asset-based lending, the Secured Transactions Law now will have a big impact to support this process.
“I’ve worked within a number of non-banks in the region in the equipment finance space, managing deals from a credit & risk management perspective was seriously impeded by the fact that we just did not have leasing that allowed that flexibility of ownership to a lessor and end user who would gain the benefits of asset ownership at the end of the lease term.
“We’ve since enacted the secure transactions law which opens the door to defined security rights to funders for assets secured, but does not cover RTA-registered assets, yellow plant, trucks and transportation which are still underwritten via a mortgage with a loan. This leasing law will allow end users to look at their fleet and project requirements and then decide on how best to invest in their fleet, with lessors holding the residual value and asset security risks the rewards can be managed.’’
In the past, many distributors have been forced to find ways of independently supporting their customers, often by turning to self-funding: “By doing this, they take on many financial and liquidity risks to encourage customers to purchase or at least get access to the new equipment. This should not be the case and as a group we hope in time to support these industries with new lease funders. We are sure many global lessors will see the UAE as an investment opportunity.
“These changes to regulation are going to have a huge impact, we have witnessed significant blocks and financing challenges in the past 10 years for SMEs, many Non-Banks have ceased lending due to liquidity challenges’’ but overall, Regan insists: “There’s an absolute need for OEMS and distributors to have flexible funding solutions and this leasing law will ensure that, my goal over the 12 months, while we worked on the redrafting of the law, was to establish operating structures and to learn from OEMs and distributors what they wanted to see within the law, how their captives may operate within the UAE, the role of supervision and operational parameters.” Regan now believes that, “We have in the law all the credentials, including recovery and repossession methodology to ensure its success.’’
Ultimately, it is hoped that by bringing the leasing law up to international standards, it will free a raft of companies to offer leasing of their vehicles and equipment – and possibly help to not only minimise risk by making it easier to recover assets but also spur an economic recovery in the market.
“The bigger picture here is that, and the reason why this law was redrafted, is to ensure that these laws when enacted will support government initiatives on the ease of doing business and the ease of obtaining credit – both of which can speed the UAE to achieving its industrial strategy. This leasing law has the opportunity to attract FDI, but needs to contain pertinent features: there needs to be a supervisionary framework for operational practice, registration and recognition of the rights of lessor and lessee. But most importantly, there needs to be a clearly defined enforcement and repossession process for when things go wrong, and I think it’s probably the latter that’s been mostly missing within existing lending activity.”