Leasing in Jordan: Waiting for the spark

This page is based on my assessment of the leasing scenario in Jordan based on my visit there. I spent 3 days in Jordan conducting a leasing workshop there.

Jordan, without doubt, is a beautiful country, not an economic power to count on. Most Asians would know of it either because of the massive publicity King Hussein's recent demise gave it, or because Amman is a necessary hop to find a cheap travel connection to JFK and London using Royal Jordanian airways.

Jordan is one of the few countries in the World where leasing or modern financial instruments have not been initiated as yet. Though the beginning was made way back in 1981 with the International Finance Corporation promoting, as in most other developing countries, the first leasing company, that company is seen nowhere today. Thereafter, Orix of Japan appears to have conducted some study on the feasibility of leasing in Jordan, but found some weird problems, and dropped the idea.

Currently, the scene is that Arab Bank has already promoted and put in place a company called Arab National Leasing, and there are a couple of car renting companies too. The interest of so many banks in the leasing workshop we organised, however, was a definitive indication of the interest Jordanian banks and entrepreneurs have, and there is no doubt that leasing is a force of future in Jordan, but for some funny irritants here and there.

A leasing law for Jordan

Jordan has been talking about a leasing law for some years in the past. The Trade and Industry Minister who inaugurated our workshop also talked about it, and every single participant talked about it. They virtually pleaded for it. They made it seem like leasing in Jordan would never take off if the leasing law was not in place.

Why? Some inherent understanding that (a) tax laws would not permit lessor-depreciation or lessee-expensing of lease rentals; (b) repossession of leased assets would not be permitted; and (c) it would not be possible to follow the international accounting standards while at the same time claim taxation benefits.

There is no dispute really that the proposed law, whenever enacted, would be healthy. Financial lease transactions are inherently dichotomous- they look like something, but tend towards something else. There is a controversy between the form and substance of financial leases. This could easily lead to legal disputes - taxation laws may not recognise the form, or the Courts may not recognise the lessor's ownership based on form, etc.

But it would be unfortunate if the very existence of leasing industry were to be based on the enactment of the leasing law. Laws rarely lead the world of commerce: commerce moves first, and law follows. I do not think the advent of leasing in USA or Canada or Australia was based on a congenial legal environment - of course, as it progresses, the law takes shape.

There is nothing so awfully wrong about the laws in Jordan that would altogether preclude the very existence of any leasing activity.

General property laws:

Though Jordanians are far more dynamic in their outlook, most Jordanian laws are still in Arabic, and I was handicapped because I was not able to lay hands on some of the most basic laws required for my study. However, the local host helped by putting me in a mediated touch with a local solicitor, who recited from some clause of the Criminal Procedure law (some law 16 of 1960) which suggested that if anyone took the law in his hands, he would be subjected to criminal prosecution. That is, use of force to enforce the law is not left to the discretion of the citizens - they must do so only through the law enforcing agencies.

Apparently, this clause cannot come in the way of recapture of leased assets by the lessor. Again, I have not been able to read the above legal clause in its context, but what it possibly might have meant is a general legal maxim that the law enforcing agencies should be trusted for resolving claims on assets, and direct assertion by parties would lead to a chaos. However, it cannot be denied that every person has an inherent and basic right to protect his title in his property. After termination of the lease agreement, it is the lessee who has unauthorised possession of the leased asset - the lessor trying to restore the same is doing no different from what a person owning and possessing an asset would do, if such asset is forcibly taken away by someone.

However, even if we accept the position as it is made out to be, it is not the lessor is completely helpless.

One, repossession is anyway an extra-ordinary remedy and is not resorted to day in and day out. No doubt, a lessor who can wield the threat of repossession is a safer creditor than the one who cannot. However, as Steven Gilyeart in his article on Repossession of assets [click here to go to the articles page] tells us, there are quite many countries that do not allow self-help repossessions; where repossessions have to move with judicial interference.

Two, and more importantly, Jordan has legal provisions relating to arbitration. The arbitrator as an out-of-the-court referee may give an award permitting repossession, which can act as an alternative to the judicial intervention.

Taxation law:

During our workshop and the off-stage chat during the breaks some grave confusion about taxation law in Jordan was apparent. In fact, in the Orix-led study also, taxation-related confusion seems to have played a major role.

The taxation provision that might have caused some unrest is a provision relating to depreciation [text of Jordanian income tax law can be found at the site http://www.nic.gov.jo] accordingly to which a legal owner of an asset is its tax-owner, but also a person who has the possession of an asset with the intent of acquiring ownership either soon or in future is also treated as the owner. The intention of this provision is to cover either transactions in properties where title has not been conveyed as yet but possession has been taken over, or cases where a transfer of title is promised but not completed. Leases containing option to buy would be covered under this clause - that is, in a typical hire-purchase transaction where the lessee has possession of the goods and a promise for transfer of title to him, the lessee may be treated as owner for tax purposes, but plain leases are unlikely to be brought under this provision.

Thus, the biggest apparent difficulty under Jordanian tax laws is easily resolved: if the lease promises a transfer of title to the lessee, the lessor would not be treated as the owner for tax purposes; the lessee would be. In such a case, the lessor would not depreciate the asset - the lessee would; the lessee would not claim the lease rentals as an expense. However, plain leases would not have any such difficulty.

The other issue in taxation was whether lessors are allowed to claim accelerated depreciation. The tax department official present during the workshop confirmed that accelerated depreciation, at double the straight line rates, could be claimed under the law.

If that is the case, there is ample incentive for lessors to get into leasing. The straightline depreciation rates are around 15% - 20% for most leasable assets. If these rates are doubled, lessors may easily escape taxes for a first few years until the growth rate flattens.

Matter of classification:

Another issue that was being hotly debated during the workshop was the classification of leasing companies - as financial companies versus service companies. Financial institutions have a higher tax rate, at 35%. Service companies have a 25% tax rate. Apparently, the central bank does not allow access to public deposits even to financial companies, but needless to say, the right place for leasing companies to be is financial institutions. It was not clear as to what are the benefits of being a financial company - perhaps permitted levels of leveraging, or permitted extent of foreign shareholding, etc. But irrespective of the consequence, there is no doubt that the proper classification for a leasing entity is as a financial institution.

Site search

Click here to do a keyword search
of this site