Researcher: Assistant Lecturer Alaa Mohsen Mutlaq Al-Daami
Financial Leasing as an Alternative Path for Investment Companies to Overcome Credit Stagnation and Stimulate Investment in Iraq
Financial leasing represents an alternative pathway for investment companies to overcome credit stagnation and act as a “new breathing space” for the Iraqi economy. In light of the economic challenges facing Iraq, there is a growing need to develop innovative financing tools capable of supporting economic activity and compensating for the limitations of traditional bank financing. The banking system suffers from several structural constraints, including weak credit provision to the private sector, high levels of risk, and a preference for investing in low-risk instruments such as government bonds rather than financing productive projects. In this context, financial leasing emerges as an effective tool that can help alleviate these constraints and enhance economic dynamism.
Financial leasing is defined as a contractual arrangement that allows institutions to use productive assets (such as machinery and equipment) in exchange for periodic payments, with the possibility of acquiring ownership at the end of the contract. This type of financing is considered an important alternative to bank loans and mortgages, especially in environments characterized by credit tightening or inefficiencies in the financial system. In Iraq, where companies—particularly small and medium enterprises (SMEs)—face significant difficulties in accessing finance, financial leasing can play a pivotal role in bridging the financing gap and preserving capital.
The importance of financial leasing lies in the fact that it does not require traditional collateral with the same rigidity imposed by banks, as the leased asset itself serves as collateral. This reduces barriers for investors and encourages business expansion. Moreover, leasing improves cash flow management, allowing firms to utilize assets without paying their full cost upfront, thereby enhancing their capacity for investment and growth.
Accordingly, financial leasing plays a crucial role in alleviating banking constraints in Iraq through several mechanisms:
- It serves as an alternative to physical collateral: Approximately 95% of the population in Iraq is excluded from borrowing due to stringent collateral requirements. In financial leasing, the asset itself acts as the primary guarantee, facilitating access to financing without complex real estate mortgages.
- It helps bypass procedural complexities: Leasing provides greater flexibility and faster access to assets compared to long-term bank loans, reducing delays that hinder project implementation.
- It improves liquidity management: Firms can preserve their cash for operational activities instead of tying it up in capital asset purchases.
- It offers tax advantages: Lease payments are treated as operating expenses, helping reduce the overall tax burden, especially under IFRS 16 standards.
- It preserves capital from stagnation and allows its use in expanding and developing investment projects.
On the other hand, the expansion of financial leasing stimulates demand for capital assets, thereby boosting industrial and commercial production. Easier access to modern equipment and technology enhances productivity, efficiency, and overall competitiveness of the economy. It also contributes to job creation, both directly and indirectly, by supporting productive projects.
At the macroeconomic level, financial leasing contributes to diversifying sources of financing and reducing reliance on the banking sector. It also diversifies the types of collateral beyond traditional mortgages, thereby enhancing financial stability. Instead of concentrating risks within the banking system, risks are distributed across various financial institutions, reducing the likelihood of financial crises. Additionally, leasing can support financial inclusion by providing financing solutions to segments that lack access to traditional banking services.
Therefore, activating the role of financial leasing in Iraq requires several measures, including developing relevant legislation, offering tax incentives to institutions adopting leasing, and raising awareness among entrepreneurs and investors about its importance. It is also important to strengthen cooperation between banks and leasing companies to ensure complementarity and expand available financing.
The government can also play a catalytic role by utilizing financial leasing to finance certain public projects, particularly in infrastructure and services. This would reduce pressure on the public budget and improve spending efficiency, while also creating a broader market for leasing and encouraging private sector participation.
In conclusion, financial leasing represents a comprehensive vision and a real driver toward sustainable economic growth. It is a strategic tool that can effectively alleviate banking constraints and stimulate economic activity in Iraq. However, realizing its full potential requires coordinated efforts from the government, financial institutions, and the private sector to build a supportive and sustainable environment for this type of financing.
Difference Between Financial Leasing and Installment Sale
Financial leasing (Leasing) is defined as a contract whereby a financing entity (the lessor) purchases an asset based on the client’s request and leases it to them for a specified period in exchange for periodic payments, with the possibility of transferring ownership at the end of the contract under certain conditions. It is classified as a non-traditional financing tool, as ownership legally remains with the lessor throughout the contract period.
In contrast, an installment sale is a traditional sales contract in which ownership of the asset is transferred to the buyer immediately upon signing the contract, in return for payment of the price in agreed installments. This type of sale often includes a retention-of-title clause as security until full payment is made.
From a legal perspective, financial leasing is essentially a lease contract with financing elements, whereas installment sale is a complete sale contract. This distinction affects the rights and obligations of the parties. In financial leasing, the lessor typically bears ownership-related risks (unless otherwise specified), while the lessee is responsible for operational and maintenance costs. In installment sales, the buyer assumes risks upon receiving the asset, even before completing payment.
From an accounting standpoint, financial leasing was traditionally treated as off-balance-sheet financing, although modern standards such as IFRS 16 require most leases to be recognized on the balance sheet. In contrast, in installment sales, the asset is recorded as part of the buyer’s assets, with the financial obligation recorded as debt. This difference impacts financial indicators such as leverage ratios and return on assets.
In terms of cost, financial leasing may offer more flexible payment terms but can be more expensive in the long run due to the lessor’s profit margin and risk coverage. Installment sales may be relatively less costly if financing terms are favorable, but they impose an immediate financial obligation on the buyer.
Regarding flexibility, financial leasing allows for asset replacement or upgrading at the end of the contract, making it suitable for rapidly depreciating assets such as technology. Installment sales, on the other hand, provide immediate ownership, making them more suitable for long-term assets like real estate or vehicles.
In terms of risk, financial leasing reduces the burden of asset obsolescence risk on the lessee but may impose strict contractual terms, such as penalties for early termination. Installment sales expose the buyer to greater risks, particularly in cases of payment default.
In conclusion, the choice between financial leasing and installment sale depends on the user’s needs, financial capacity, and the type of asset involved. Financial leasing is suitable for temporary use with flexibility and reduced risk, whereas installment sales are preferable for long-term ownership and stability.
References
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2. Brigham , Eugene, and Ehrhardt, Michael,(2005) “Financial Management Theory & Practice” 12 nd ed, Mike Roche publisher.
3. Brigham , Eugene, and Gapenski, Louis (2003) “Financial Management Theory & Practice”.
4.Bea Hie, V, et(2001), ” Leasing Accounting Reform and Economic Consequence: The Views of Prapares and Users, University of Sterling, http://w.w.w.gogle.com/
5. FASB,SAFAS27,(1979)” Classification of Renewals or Extensions of Existing Sales – Type or Direct Financing Leases” Can Amendment of FASB Statement No 13, http://w.w.w.fasb.org/
6. FASB,SFA 13,(1976) “Accounting for Leasing”, http://w.w.w.fasb.org./
