Equipment Leasing Boom on the Horizon
By James A. Cracco, CEO, First Leasing Bank

The equipment leasing industry in Bahrain shares many characteristics with the equipment leasing industry in the GCC and even in the larger MENA region. Bahrain, like the GCC, has the potential for future exponential growth as regional economies become more industrialized, the public and private sector seek alternative sources of capital and the regulatory framework is enhanced. It is fitting that equipment leasing is once again taking root in the region where leasing began (the earliest recorded leasing took place in the ancient Sumerian Empire, in modern day Iraq).

Until recently, equipment leasing was practiced in Bahrain and the GCC on a small scale, mainly through a few traditional banks that provided finance leases as secondary products. In fact, the local business and government communities frequently identify “leasing” with consumer automobile leasing and real estate investing rather than with the global $600 billion equipment leasing industry that finances one-fifth of the world’s annual capital asset investment. Worldwide, equipment leasing is active in virtually all economic sectors and equipment types. Indeed, the global equipment leasing market is served by a variety of lease originators. These lessors include captive leasing companies, which are industrial companies that have set up leasing arms to finance their own in house produced equipment as well as an expanded version of the captive leasing company which finances not only their own products but will also finance equipment from other manufacturers. Some banks have also chosen to make leasing a core business, even to the extent of sometimes setting up a separate subsidiary which often competes—usually effectively—with the parent bank. Banks play an important role in equipment leasing all over the world. That said, the banks usually avoid operating leases and move in and out of the equipment leasing market as they continually redefine and reassess their core competencies. Last, but not least, there are many independent leasing companies, some of which specialize in certain assets or specific lease structures; others have chosen to be “general equipment lessors.” One hallmark of the global leasing industry is that there is no “short list” of global leaders. The industry remains highly fragmented. Part of the reason for the number of equipment lessors is the sheer size of the market plus the seemingly infinite number of asset/equipment classes—literally everything from department store shelving to satellites. Given that leasing is (or should be) asset based financing, the lessor must invest a great deal of time and care in understanding the assets’ life cycle, the asset product roadmap, and the used equipment market.

Despite the worldwide impact of equipment leasing, the Bahrain and GCC markets have remained relatively untapped. The low levels of equipment leasing are partly because the GCC has been remarkably liquid as it focused on the oil economy. Bahrain, of course, created a world class regional financial services and banking center but neither are asset intensive. At the same time, the private non-oil sector was dominated by family-run businesses with financing not being a major issue. Like family owned businesses in many parts of the world, an “own your own assets” mindset made leasing a very strange option. The expansion of family led businesses into new enterprises and the conversion of closely held companies to stock companies is changing the business model and the fundamentals of managing a company’s capital and capital assets. More ambitious expansion plans are encouraging companies to look at ways to use their resources as efficiently as possible. Just as equipment leasing has become part of the economies of the world’s most industrialized countries, Bahrain and the GCC are recognizing that equipment leasing offers efficiencies that can contribute substantially to economic growth. As the economies of the region continue to diversify and evolve, the private sector is looking for more profitable ways to employ their capital. Companies are starting to realize that they do not necessarily have to own an asset in order to utilize the asset.

There are essentially two forms of leasing, finance and operating. Finance leases are those in which the lessee pays installments on a piece of equipment with the plan to eventually own the asset. This type of leasing is better known and has existed in Bahrain and the GCC, albeit in a limited way. Operating leases, on the other hand, in which clients only pay for the time the asset is used and return the equipment to lessor at the end of the lease term, were virtually unknown before First Leasing Bank began offering them to the market. Both of these types of leases have strong potential for further growth in the region.

Bahrain has clearly led the GCC in creating a world standard comprehensive banking regulatory environment. Banks are classified and regulated either as Commercial Banks or Wholesale Banks. The Central Bank of Bahrain (CBB) maintains the same classification for Islamic and Conventional institutions which are governed under separate regulatory arms. The CBB is currently writing the rule book for financial services which will include equipment leasing.

In part due to the availability of regulations, First Leasing Bank is organized as a Wholesale Bank. Likewise, more recently formed equipment leasing entities and most existing consumer leasing organizations are formed as banks. The forthcoming leasing regulations will prove pivotal in the development of the business to business equipment leasing industry in Bahrain as well as their ability to compete effectively in the international arena. Generally speaking on a global basis, independent equipment leasing companies are not subject to the heavy bank and/or consumer regulatory environment, thus allowing captive and independent lessors to be more nimble and offer a lower cost product.

Because Bahrain and the GCC is still a market in formation, finance leases are likely to dominate for the next one or two years. Operating leases are just now appearing on the scene and will take some time to assume their normal 25% to 50% market share. The optimistic prediction for leasing is also supported by the strong broader outlook for the regional economy. The GCC’s economic boom looks set to last as do high oil prices. This indicates that the Bahrain and the larger region will continue on its path of inward investment, industrialization, and economic diversification. All of those asset intensive activities promise a healthy and exciting future for equipment leasing.