New capital brought in by Bahrain-based First Leasing Bank (FLB) is enabling it to build its portfolio and diversify its assets base.

The company recently completed a private placement, bringing in $89 million and taking the paid-up capital to $100 million. First Leasing Bank also increased its authorised capital from $100 million to $300 million.
“We have a whole new list of shareholders led by Ithmaar Bank,” said James Cracco, First Leasing Bank CEO. “We’ve had several other developments including a new board of directors led by our newly named chairman, Khalid M Kanoo. From an operational perspective, we continue to build our portfolio— our philosophy has been and continues to revolve around building a healthy portfolio.”
Cracco stressed the company’s commitment to equipment leasing including finance and operating leases. “Last year was the year of growing our portfolio and diversifying our assets. We have assets ranging from carton manufacturing equipment to stevedore cranes, plastic film manufacturing equipment and all kinds of printing, processing and construction equipment.
 “We are targeting a portfolio growth of around $100 million for 2007 and we’re committed to doing business in the GCC region,” he said. First Leasing’s current main markets are Bahrain and Kuwait, but, thanks to the injection of new capital, it expects this year to expand into Qatar and Oman, operating singly or through a partner. FLB will also open an office in the UAE this year. The company has also moved to new and larger premises in the neighborhood and has doubled the number of employees to 18 with plans to recruit heavily over the next two years.
“The move is a testimony to the commitment of our employees who worked hard and are very close to our customer base,” said Cracco. It is very gratifying for us to see that closeness. With the exception of two of us, none had any prior experience in equipment leasing because it is a new industry in the GCC. Fortunately, we have very bright people and they have worked hard and learned well. “In a booming economy characterised by a robust job market, we have not lost a single employee from the original group. That is a testimony to customers and employees as well as the attraction of this new enterprise.”
FLB cites the close rapport with customers and its quality of services as reasons that prompted a number of customers to come back for additional business. 
 “These customers said they were comfortable with how we do business and the speed of the business. We move very quickly once we have all the information from the potential customer.  We look at the asset quality of the equipment, the financials, get references in some cases and then make our decision. Our goal is to complete the transaction within days,” said Cracco.
“We have our own credit staff and asset-management people.  Relative to the equipment, we factor in all the asset management information so we gain an understanding of how well the proposed equipment will perform in a particular application including weather conditions and amount of use.”
The company typically deals with new equipment including providing Letters of Credit but, under a mechanism called sale-leaseback, FLB also often buys relatively recently acquired equipment from a customer and leases it back, thus allowing the customer to invest the proceeds in another project.
“We have several cases over the last two years where we bought one- or two-year-old high-quality used equipment from a customer and then leased the equipment back to them so their company could open another production line or expand the physical plant.”
FLB uses a variety of sharia compliant instruments to lease equipment with the most common two being the finance lease and the operating lease. A finance lease is an arrangement in which the customer acquires an asset by paying in installments over a certain period of time. Because the title to the asset passes to the customer at the end of the lease, the customer shows the asset and liability on their balance sheet and takes depreciation. A finance lease is also known as a capital lease or ijara wa iqtina.
Another major leasing arrangement is the operating lease or ijara. In an operating lease, the customer acquires the use of equipment for a tenor that is less than the equipment’s useful life—really a long term rental. FLB does not recover the total asset value during the lease but will recover the residual value by either selling or releasing the asset in the second-hand market once the original customer is done with the equipment. The result is that the customer has a lot lower cost because he is only paying for, say, 50 per cent of the economic value of the equipment. The operating lease also has the significant advantage that the asset does not appear on the customer’s balance sheet and thus helps his financial ratios. This improved financial health often lowers the customer’s cost of working capital debt from traditional banks.
 Many Gulf companies are seeing the advantages of equipment leasing but, considering the wave of industrial development now riding the Gulf States, leasing has, as Cracco puts it, only “scratched the surface.” The potential for equipment leasing in the GCC region has been conservatively estimated at $11 billion per year; the world market for equipment leasing is roughly $600 billion.
 And, while only a developing market, there is competition from some traditional banks - both conventional and Islamic. “The difference is that traditional banks tend to look at leasing purely as a financial transaction while we look at leasing  as also an asset-based transaction,” says Cracco                                                                                                                                                                                                                                                                                                          “We’re not only interested in the financial statements but also in the current and future value of the equipment. Typically traditional banks want a down payment and to sell a whole range of services including investment accounts, current accounts and so on, whereas FLB’s interest is purely leasing. Because we concentrate 100 per cent on leasing, our approach is different, better and faster.”
That said, Cracco also believes that increased competition is good for the industry. “Competition makes people more efficient and makes for a better product for the customer and the lessor.”
 First Leasing Bank is confident that it will continue to lead the way. “We look at the environment for FLB from two perspectives,” says Cracco. “The first is the economic growth that is going on in the Gulf. Virtually all the Gulf is looking at diversification of the economy. While everyone is aware of the construction and real estate sectors, an equally key part is the ‘quiet economy’ and that is people building new factories and new businesses.
“The second key factor is the Gulf’s increased liquidity and capital market multiplier effect. The capital markets are becoming more sophisticated and providing more alternatives. Equipment leasing is unique because it marries both sides of the economic equation—industrial growth and more efficient alternative capital markets.”