Bankers and lawyers familiar with Shari’a law know that Islamic principles prevent the practice of usury – lending money in return for interest. Over the years methods have been developed which overcome this hurdle to doing business in Islamic jurisdictions, such as stipulating that the provider of the Wnance does so as a participant in the proWts of the business rather than as a recipient of interest. The transaction can be structured so that the economic outcome is the same.
This is Wne for bilateral and syndicated loans but becomes increasingly diYcult to apply to project Wnancings where questions of security and the protection of the Wnancier’s interest become more subtle. Now, however, lawyers in Saudi Arabia believe they have developed an appropriate structure.
Under Shari’a law (and, indeed, under the law of civil jurisdictions such as France) there is no concept of the trustee. But in project Wnancings under New York or English law, the trustee is a crucial party, holding the security on behalf of the project lenders.
Shari’a law does, however, have something called the adl. The adl is a trusted and honourable person selected by both the borrower and the lender, a sort of trustee-arbitrator. It is the concept of the adl which lawyers at White & Case/Hassan Mahassni in Saudi Arabia have identiWed as the key to making project Wnance comply with Islamic law. “We Wrst used this structure last year in the Wrst limited-recourse Wnancing in Saudi Arabia,” explains White & Case partner Michael McMillen, “in the Wnancing of the Jubail petrochemical plant for Saudi Chevron Petrochemical Company.” This is a joint venture between Chevron and the Saudi Industrial Venture Capital Group.
The signiWcance, believes McMillen, is that there is a growing demand for these Wnancing techniques in order to attract international capital investment into Middle Eastern projects which would previously have been Wnanced entirely locally. The Saudi Chevron project was Wnanced by a cross-section of international, regional and local banks.
The adl structure may be used as the basis for the privatization of the Abu Dhabi water and electricity industry. And McMillen sees its application being extended to smaller types of transactions as well as forming part of larger, international Wnancings in the Middle East, Africa and south-east Asia. “I can see it being used to develop residential mortgage business which would encourage residential home purchasing [hitherto limited to individuals with the funds to buy a house outright] which would act as a signiWcant stimulus to the Saudi economy,” says McMillen.
Lawyers at White & Case/Hassan Mahassni approached the Saudi Chevron project by looking at all of the diVerent categories of assets that comprise a project and examining the relevant Shari’a precepts for granting a rahn (mortgage or pledge) in each category of collateral (marhoun). Various categories of marhoun emerged as being susceptible to separate consideration, ranging from real-estate interests (the site) and immovable property (the project itself) to movable personal property (vehicles, computers and desks), cash, bank accounts, contracts and accounts receivable to intellectual property, technology licences and permits. “The question was: how does a borrower create a valid and perfected rahn or assignment to the lenders of each type of collateral?” says McMillen. After detailed research, including consultation with outside Shari’a experts as well as judges (and investigating the literature of diVerent schools of Islamic jurisprudence) the idea of using the adl emerged.
Among the numerous issues that had to be resolved, two points stand out. One is that an ordinary rahn is revocable by the borrower – not a situation a lender would relish. By contrast, the adl is more in the nature of an agreement between the borrower and lender which sets out their respective rights as well as the responsibilities of the adl. It is a joint grant which cannot be revoked without the consent of them both. The adl also has certain Wduciary responsibilities towards both parties. This means that a lender used to calling the shots may Wnd that the terms of the adl structure require him to be more circumspect in the exercise of his rights. The advantage is that the adl structure provides considerable stability, certainty and fairness to a transaction.
Second, there is the question of possession. Under Shari’a law, the rahn is possessory; for a security interest to be valid and perfected against third-party creditors, the mortgagee must have possession of the marhoun. If the mortgagee ceases to have possession, he ranks alongside other ordinary creditors. The degree of necessary possession is not deWned but most Saudi Arabian jurists take it to mean physical possession of the marhoun by the mortgagee.
Under English law, security is perfected by giving notice to third-party creditors, achieved in the case of corporate debtors by registration of the charge at Companies House. But in Saudi Arabia the recording or registration of mortgages is not generally undertaken (public notaries are unwilling to do so in case the underlying loan breaches Shari’a law).
It follows that the notice function which registration provides should be achievable by other means – much as ownership plates on aircraft are used by lessors to protect their security interest in asset Wnance transactions. In the context of a project, examples include publication of the existence of the rahn, fences around the marhoun, signs and security guards that are under the direction of the adl.
The documentation for the Saudi Chevron transaction was necessarily complex. It developed as knowledge of the diVerent possible categories of marhoun increased, so it made sense to have a separate document for each one. That extensive documentation has now been collapsed into a fraction of what was used in the Saudi Chevron deal.
McMillen is optimistic that the adl will assist the development of genuine capital markets in the region. A particular idea which he would like to see pursued is the use of the Saudi Share Registration Company (the equivalent of Companies House but owned jointly by all but one of the Saudi banks) as a de facto charges registry. Given the SSRC’s ownership structure, posting notice there of a security is eVectively giving notice to the bulk of local banks. This would be rather like the practice which has grown up in the UK of “registering” at Companies House charges against overseas companies.
