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Financial leasing

التأجير التامويلي - financial leasing

Providing the project’s liquidity is the most important goal to the investor, and the investor may not have the necessary financial resources to provide the project requirements of equipment and facilities, so he has to borrow to provide liquidity for the project.

But there is another solution that is easier and has much fewer risks than borrowing, and the best solution, whether for nascent investments or for existing investments, represents the desire to expand and modernize their systems and production lines, and the solution is to resort to financial leasing.

What is a finance lease?

Financial leasing is an investor’s access to financing in kind for his project, i.e. an investor wanting to manufacture – for example – In the glass industry, can determine the devices and equipment that he wishes to use in his factory and ask one of the financial leasing company to buy those devices in its name and then lease them to the investor for a certain period for an agreed fare.

And the investor – at the end of the lease period – has the option to buy those leased assets (devices and equipment) from the financing company and the rent previously paid throughout the lease period shall be calculated from the value of the price, meaning that the paid rent shall be taken into account when determining the price of the leased assets, this is the common way of financial leasing.

However, there is another way that provides the investor with cash by selling one of the project’s equipment to the financial leasing company, and at the same time the investor rents the same equipment from the financial leasing company, so the investor gets the price of selling the equipment in cash and at the same time pays for renting the same equipment, So that the beneficiary of the equipment remains while the investor retains his right to repurchase the equipment at the end of the lease period.

And the financial leasing does not stop at financing movable assets (machinery and equipment), but the financial leasing activity extends to include industrial and commercial establishments designated for investment in productive or service activities.

What is the difference between a lease and a financial lease?

The financial leasing activity in Egypt is regulated by Law No. 176 of 2018, which defines financial leasing as a financing activity under which the lessor (the financial leasing company or the bank licensed to practice the financial leasing activity) is granted the right to acquire and use a leased asset (equipment, machinery and real estate) to the lessee (the investor), for a specific period against leasing payments (rent installments), and the lessee (investor) has the right to choose to purchase all or part of the leased asset on time and by the specified price in the contract.

What are the characteristics of financial leasing?

One of the most important characteristics of financial leasing that distinguishes it from other financing activities is that the investor (lessee) is the one who determines the specifications of the equipment and machinery he needs and can determine the company or companies that specialized in selling these machines.

And the financial leasing company can authorize the investor (desire to finance) to negotiate the specifications of equipment and machinery with the supplier (the seller of the financial leasing company) as well as authorizing the lessee to receive the equipment “subject to financing” from the seller to ensure the required specifications.

The basic elements of the financial leasing contract

The financial leasing contract achieves an advantage for both the financing company and the investor, as the financed equipment is owned by the financial leasing company throughout the contract period, and at the same time the investor (lessee) has the option to purchase such equipment at the end of the contract period whenever he wishes to do so.

What are the conditions that must be met in order to consider a lease as a financing contract?

One of the important cases that financial leasing can be used in, is the case in which the investor wants to bring more advanced devices to face a new competitor who uses modern technology, but the investor does not have sufficient cash to buy these more advanced devices or buy modern production lines.

So he can resort to one of the companies licensed to practice the activity of financial leasing and provide specifications for it and propose suppliers for those devices so that the financing company buys modern devices and production lines and leases them to the investor in exchange for a reasonable fee, and it is considered less expensive than if the investor purchased those assets at his expense.

What are the guarantees in a financial lease?

One of the most important guarantees in the financial leasing process that it is subject to the supervision of the Financial Regulatory Authority (FRA), which issued financial leasing contracts model, and there is even an official record to register financial leasing contracts with all the contract elements starting from the parties and the place of leasing (machinery or equipment and other leased assets) and the lessee’s option to purchase assets at the end of the lease period, the value of installments (rent) and other data.

What are the types of assets covered by the financial lease?

The lessee’s (investor’s) option to purchase the assets subject to the financial lease contract at the end of the lease period is the main feature that differentiates the financial lease contract from the traditional and operational lease contracts, in which the lessee does not have the option to purchase the assets – the subject of the contract – at the end of their periods.

The law protects the assets that are the subject of the financial leasing contract against manipulation and against their squandering as they are owned by the financial leasing company, as it punishes the lessee with a penalty of imprisonment and a fine of not less than half the value of the leased asset and not more than its value, or one of these two penalties.

In the event of disposing of the leased asset without obtaining the written consent of the lessor (the financial leasing company) or refraining from returning the leased asset to the lessor despite his notice of delivery for termination of the contract or for any other reason.

In addition to Judgment on the lessee obliging him to pay the value of the disposed asset to the lessor, as well as punishing – in the law – anyone who deliberately changes the features of the leased asset or its descriptions recorded in the relevant register, or obliterates the data proving the lessor’s capacity in relation to this asset with a penalty of imprisonment and a fine of not less than ten thousand pounds and not more than half the value of the leased asset, or one of these two penalties.

Arbitration agreement and disputes in financial leasing contracts

It is worth mentioning that financial leasing contracts include an arbitration agreement to subject all disputes that arise in them to arbitration, in order not to disclose the industrial agreements and secrets contained in these contracts in the corridors of the courts, as well as due to the nature of the activities that resort to financial leasing, where the speed factor in settling industrial and investment disputes is of great importance to the parties to the financial leasing contract for the continued performance of investment assets for their purpose in the production process.

The Financial Regulatory Authority (FRA), which is responsible for controlling financial leasing activities, issued a decision to establish the Federation of Companies Operating in Financial Leasing Activity, whose objectives include developing financial leasing activity, raising awareness of it, holding training courses and communicating with international and regional associations to exchange experiences in financial leasing activity.