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Unlocking Islamic project finance

Western lawyers and financiers have laboured hard and long to achieve Middle Eastern financings which comply with Islamic law. A recent legal innovation may hold the key.

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.

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