Project Finance From the Islamic Perspective Research Paper

Abstract

As Islamic project finance expands in influence and capacity, it works frequently with traditional economic systems, regimes, transnational projects and global institutions. The rising Islamic project finance and the global system of project financing are transforming one another while revolutionizing the global economy. This mutualism between systems cannot be seen as easy customization of increased Islamic practice by structures dictated by the western world, but an upgraded chain of joint control and mental adjustment, which could materialize into a worldwide process of shared understanding and teamwork. In the past decade, there was a record explosion of private project funding, more so, in the infrastructure expansion, which opened up prospects for Islamic banks and related establishments. The expansion was subsequent to improved government objectives and a compelling desire for infrastructural ventures. There is a need to clearly understand the value of solvency while trying to incorporate Islamic finance into the mainstream economic realm. The probability of making capital resources from Islamic nations is massive, bringing into context the high demand for infrastructure requirements in the Middle East and North Africa. This report seeks to consolidate the main components concerning the way forward for Islamic project finance in Saudi Arabia in particular.

Introduction

The most frequently used descriptions of project financing lay emphasis on the performance capacity in an economic unit or project, the needs and choices of the debt contributors in funding the building and running of such units, while the effects of equity participants are determined by the debt configuration. Generally, project financing can be defined as the funding of an economic entity, whereby lending firms primarily examine cash flows from the running of the economic unit for reimbursement of the project loan, cash flows and the other resources consisting of the economic component as collateral for the credit. This is an “off-balance sheet” system of financing derived from the advantages of the facilitator of the given project. Project financing methods are evolving as basic means for sponsoring a wide berth of economic division world over.

The function of these methodologies has been modified within most industrial groupings while laying emphasis on most forms of property. For instance, they are employed in fiscal facilitation of power generation, transmission and allotment assets, for upstream, midstream and downstream properties in the organic fuel industries, for petrochemical, paper and geological ventures. Overall, they are used for a broad range of infrastructure plans including transport networks and manufacturing plants. These methods have been utilized in purchasing tankers and transport vessels, aircraft and practically all forms of mechanized, computer and telecommunications apparatus. One key exemption surrounding project financing systems in a good number of countries is that fairly little execution has been reinforced on these techniques in transactions, to ensure they are compatible with principles of Islamic Shari’ah. This applies to Islamic authorities such as the Middle East, North Africa and Asia. A noteworthy restrictive aspect indicates the divergence of certain Islamic ideologies with the elementary debt control guidelines of Western project funding, specifically the Islamic Shari’ah exclusion on the retention or levying of interest relevant aspects of the policy of Riba.

For critical contributors in any funding of large industrial ventures, infrastructure and construction, the same level projects involve (a) one or more equity sponsors who are usually the guarantor of the venture and (b) the access to debt financing or an Islamic acceptable alternative to the debt portion of the funding. The resolve by a bank or investors to undertake roles in a given plan depends on project economics with a special emphasis on resource-strapped ventures, project financing, and the security commitment offered while securing funding. Project guarantors and their partners attach a harsh distaste to attaching sureties on a project loan or related financial undertakings, only to incur legal responsibility accruing from the project.

Companies are required to replicate the security of liability or merge project balances due to the parent company accounting records, which are guided by established accounting principles. Therefore, in adding to cautious levy and rights structuring, project financiers together with parent companies are obliged to present investors with a satisfactory guarantee package. In order to execute liability restrictions and non-integration, sponsors and their parent companies require the security for the venture to be strictly limited to assets covered by the project and the cash flows from businesses related to the project.

Relationship between traditional Project Finance and Islamic Finance

Undeniably, there exist substantial variations between Islamic finance and conservative finance methods from an originating perspective, design, statutes and economic atmosphere. When put to practice, there are several predominant points of association in the project financing sector. From time to time, we can deduce a deep semblance between project financing and standard Islamic financing methods in past eras. These matching elements may not be correlated, but they are a result of the character and theoretical source of project finance. With Muslim businesspeople in the Ottoman kingdom funding their overseas missions with the profit distribution mechanism of Mudaraba, the authorities in England, by the thirteenth century, were engaged with Italian financiers, Frescobaldi, through a production compensation loan, and a quasi-equity capacity used as a structure to fund the silver mines in Devon. Italian bankers capitalized on the mines for two years; a period in which they had recouped their loans from mining.

Additionally, political, financial and civil interactions between the Muslim world and the West, historically, have witnessed the replication of financial systems between the two factions. One can refer to reformist tendencies within the Islamic doctrine in regards to the finance docket in an attempt to meet modern economic needs, whilst regarding the code of behavior in Islamic law. Intangible equivalents within Islamic finance are crucial aspects of Islamic economics, which are tightly pegged on proscription and back-ups.

The arrangement of Islamic finance rotates around the prevention of any interest or any ex ante proceed accumulated on any loan/debt (Riba). Gharar is also forbidden; it engages risk, insecurity, lack of sufficient value-pertinent records (jahl) and assumptions. Kimar and maysir, which refer to betting and games of chance, are also forbidden. Businesses that rely on haram principles are not permitted in Islam. Besides critical prohibitions, Sharia has voiced a set of guidelines that offer a basic support system for overall economic practices and commercial pacts. There are guidelines of Profit and Loss Sharing PLS and asset-backed construction and dealings. Furthermore, Islam shares with the Western societies’ common behavioral values such as justice, fair dealing, documentation and transparency, paying liabilities, mutual cooperation and free marketing.

It is important to note that Islam is not an isolated case in banning usury. In the last 1400 years, Judaism and Christianity are known to rise against usury. They advocated for the restriction of any type of interest. Gradually, with the progression of commercial activities, the practice was assimilated into a trade. The most important aspect involved here is coming to terms with the rationale behind the proscription of interest, primarily to understand why major faiths opposed interest. The reliable examination has illustrated that Sharia, for instance, banned all forms of interest remittal to promote hard work, initiate productive efforts and avoid injustices, productive efforts, seek equitable flow of resources, therefore, ensuring wealth was evenly distributed.

In the Talmudic law, interest was banned within close members of the tribe or the supporters of a familiar faith. The concept of interest was deemed as a practice going against the principles of social integrity. Interest is seen as a contributor towards a disparity of gains between parties. On one hand, the borrower is pushed by a requirement and pressing situations to opt for a loan with interest, but on the other hand, the lender capitalizes on the interest without a lot of effort or looming threats. From a Christian perspective, St Thomas Aquinas denounced usury due to its tendency that ‘it leads to inequality which is contrary to justice’. Exclusion of usury in biblical contexts referred to the lowly with emphasis tagged on moral essence to ‘lend freely to poor hoping for nothing thereby’, but justice.

The Economic and Funding atmosphere in Saudi Arabia

Foreign venture in Saudi Arabia from the time Saudi Chevron financed the SCECO power project

The economic and financing situation in Saudi Arabia prior to, and during the consummation of the funding of the Saudi Chevron petrochemical project, the SCECO power project concerned a focus on the expansion of the industrial foundation in the empire. There was an inclination toward accessing a wider financing base, with larger involvement of Saudi Arabian investors as well as outside investors, globalization of the financing procedure, and the use of project financing methods rather than individual and corporate guarantees. Concurrently, the government and local trades were considering and trying to implement techniques of reducing the duty of government in the availing of finances.

In the primary stages, industrial expansion proceeded quickly in the petrochemicals industry, mainly where an associate of Saudi Arabian Basic Industries.

Corporation (“SABIC”) were engaged. Among the initial petrochemical projects, which obtained financing was diversification by Saudi Yanbu Petrochemical Company (Yanpet), a joint investment between SABIC and Mobil Yanbu Petrochemical Company, Saudi Petrochemical Company (Sadaf), United Jubail Fertilizer Company, a joint investment among SABIC and five SABIC companies, Al-Jubail Petrochemical Company (Kemya), and Eastern Petrochemical Company (Sharq). Notably, 1998 also saw the first global lending business in the electricity sector, when Saudi Consolidated Electric Company in the Eastern Province implemented a “dedicated receivables” funding for its Ghazlan II power project near Yanbu.

Financings by these and other companies include some degree of the resort to project supporters or their associates. They also included some element of collateral security for the promoters of such projects. However, these schemes did not fall within the “restricted recourse project funding” idea that is being taken into account in this paper. None of those schemes took part in the use of the rahn – adl collateral security and sharikat mahassa – murabaha or istisna’a -ijara arrangements discussed in this paper.

These initial projects demonstrate the broader participation of Saudi Arabian investors, with each taking into account significant or entirely Saudi Arabian an equity, and some involving collective stock companies that may finally seek stock exchange programs. Overseas investors, such as Chevron, were permitted to take part in company rights in Saudi Arabia, and there has been a major advance in the support of foreign investment in Saudi Arabia since the Saudi Chevron funding. In addition, Saudi Chevron and other SABIC projects, such as Yanpet, engage a combination of local, regional and worldwide creditors.

The wellbeing and liquidity of local and regional banks was an important factor in industrial and communications funds in Saudi Arabia then. Local banks recorded income in each of the years preceding the funding of the Saudi Chevron petrochemical and SCECO power projects. Those banks encountered considerable liquidity and little loan-to-asset ratios. Income was concerned more on investment profits than interest, and loan increase had been low. This inspired banks to inflate lending to all economic areas. To extend risks and raise the borrowing base, banks wanted to join regional and international lending groups, mainly for big projects like Saudi Chevron, Ghazlan II and Yanpet.

Governmental assessments were ongoing concerning the restructuring of the electricity sector, with primary concern being given to funding the Shoaiba project as an autonomous power project by means of a build-own-operate (BOO) structure. Privatization of the telecommunications zone, Saudi Arabian Airlines, and port operations, upkeep and administration were enthusiastically taken into account and the privatization of the telecommunications zone continued. A public proposal of SABIC shares was also being considered at the time. Concerning capital markets advancement, in April 1998, the Saudi Arabian Monetary Agency (“SAMA”) gave a new binding outline of the Investment Business Regulations; which control, among other things, the allocation of securities and the administration of mutual finances.

Trade association was also a regularly considered subject, together with its impacts on brokerage, insurance and commercial banking transactions as well as export/import business arena. Each of these advancements, and others, worked to increase the capital markets, allowing greater availability of foreign exchange and empowering the economy over the longer term. The aim was to free up the Saudi Arabian capital, permitting it to spread over a broader risk base within the economy. It was believed that this would in turn have the impact of reduced pressure on the government and distribution of risks to those ready and most able to tolerate them. It was expected that an inflated foreign equity venture would lead to further technology conveyed into the industrial and infrastructure zones. As concluded financings show, the time frame for execution of personal projects was reduced as businessmen sought to evade additional costs of impediments and other inadequacies in executing their projects. Privatization, where determined suitable, would permit governmental risk distribution with the private zone, cost drop and governmental administration of the pace and intensity of movement of roles to the private zone.

The Saudi Arabian Legal Environment: General Considerations

The basic and principal body of law in The Kingdom of Saudi Arabia is the Shari’ah as interpreted by the Hanbali school of Islamic jurisprudence. The basis of the Shari’ah are the Quran, the sunna, ijma and the qiyas. Certain issues are handled statutes, by Royal Decrees concerning the issue. Where such a statutory branch of law has been publicized, such law is eventually subject to, and may not clash with, the stipulation of the Shari’ah. Unlike other Middle Eastern states, Saudi Arabia lacks the statutory body of law concerning collateral security, mortgages and pledges, recording of security interests or connected matters. There is also no comprehensive statutory system concerning sale (istisna’a) or lease (ijara) transactions.

There are acts on joint ventures and other types of trade organizations and foreign ventures in Saudi Arabia. However, concerns set in Section 4 limit the predictability of those laws in certain situations. Thus, financial supporters and lawyers must follow the Shari’ah law in structuring and applying legal principles relating to collateral security issues, sales dealings and leases. Financiers and legal practitioners must also apply the Shari’ah law in executing prevailing provisions of law. These aspects, together with those discussed below, rendering it hard to provide perfect advice as to how collateral security and funding arrangements like those executed in the Saudi Chevron, SCECO and Maconda Park dealings can be enforced or be interpreted by adjudicative bodies in Saudi Arabia.

In addition to the principles of law applicable in Saudi Arabia, previous decisions of Saudi Arabian courts and other judicial authorities are not considered to set up binding case laws for the verdict of later cases, and the principle of stare decisis is not accepted in Saudi Arabia. Also, Royal Decrees, ministerial pronouncements and resolutions, departmental circulars and other governmental decisions which are enforceable, the decisions of the various courts and adjudicatory authorities of Saudi Arabia, are not generally or coherently collected in a central place and are not essentially available to the public.

Structural and Documentary Shari’ah Issues

Istisna’a-Ijara

An Istisna’a-Ijara structure includes an Istisna’a contract that is related to the building phase of a plan, and an Ijara agreement basically caters to the operations stage. An Istisna’a is an agreement for sale, binding one party to make a detailed asset according to the approved design and deliver the asset by established time for an arranged price. If a conventional Istisna’a contractual pact was applied to project financing, the sponsor will engage openly with the contractors hired to build the project’s assets. To exempt Islamic lenders from exploitation to building risks, credit and productivity risks associated with contractors, most project findings apply a matching structure where the borrower enlists with an Istisna’a contract to obtain the assembling, delivery and building appropriate plants and apparatus from the producer.

In comparison with the Istisna’a pact, the borrower agrees to a construction contract with the production contractor put together a bypass, though of the stipulations and settings in an Istisna’a contract. Islamic financiers make segmented payments to the borrower, similar to traditional deals under any conservative finance capacity during the assembly phase of a project. Research from renowned scholars indicates that there is an option that lets one use a forward lease deal, known as an Ijara Mawsufah Fi Al Thimma. Here, advance rental dues are settled by the borrower during the phase of Istisna’a. These advance rental payments are characteristically sized to cater to the Islamic financier’s investments costs, jointly with a profit margin. Certain period payments equal to forwarding rental payments are settled by Islamic financiers, to the borrower. The application of forwarding lease measures is often tolerable by scholars on the presumption that the borrower never gains from the lease of the property. In case of default on such rental payments, this must be re-paid to the borrower.

In an attempt to do away with improper outcomes derived from the Islamic financier’s point of view, if the Istisna’a is concluded before the completion of a project, the obligation to repay for liquidated damage for lack of delivery of assets is at par with the aggregate rental payments paid by the borrower. Any holding papers to the relevant assets typically move to the Islamic financiers upon transfer of identity. If the borrower fails to deliver the assets, the solution available to the Islamic bankers shares the same ideals as any other conventional methods used by mainstream commercial banks. Equally, Islamic banking firms enjoy the prerogatives that financiers are entitled to speed up the repayment terms for the borrower and to wind down the Istisna’a.

As protocol demands, the borrower is bound to return to the Islamic sponsors, the cumulative of stage payments received before the enforcement and further pay the liquidated damages as indicated. The Ijara contract normally comes into effect once the project is finalized. Simply put, an Ijara denotes a charter contract whereby a lessor buys assets and rents to a lessee for a given duration of time at an agreed rental rate. The leased property should bear a usufruct, or an officially authorized right to generate and gains from the asset. For an Ijara to attain Sharia compliance it must qualify in the transparency of terms, which must be approved and upfront terms agreed before implementation. The lessor in an Ijara must preserve legal and useful ownership of the property and must account for the liability and for risks related to possession of the asset. This demonstrates the linkage within an Islamic lender to gain profit and risk chances. The following diagram shows the basic composition of an ordinary Istisna’a/ijara.

1. Construction phase (Istisna’a) — this is where the borrower obtains building rights of a project property and moves property title to Islamic financiers. As a deliberation, Islamic banks make programmed payments or loan advancement to the borrower.
2. Operations phase (Ijara) — Islamic sponsors’ charters out project assets to the borrower, who in turn delivers lease payments.

Istisna’a-Ijara is a composition of two contracts. The first contract Istisna’a is applied in the construction phase while Ijera is applied in the operation phase of a project. Sale is an example of an Istisna’a contract where one party produces a specific asset on agreed conditions and derivers at a given time and price. Traditionally, an Istisna’a contract was applied to the project financing where the direct contract was made between the contractors and financiers. A parallel structure is employed in most project financing by Islamic lenders. The borrower accepts to secure the manufacture, delivery and contraction of equipment from the manufacturer under an Istisna’a contract. This keeps Islamic lenders away from exposure to dangers associated with construction, credit and performance of service providers. In an Istsna’a contract, the borrower understands the terms and conditions of the contract after entering into a construction contract with the contractor. Payments to the borrowers by Islamic financiers are made through a phase parallel to the construction phase of the project under a conventional finance facility.

Ijara Mawsufah Fi Al Thimma is a forward lease arrangement permitted by a number of scholars to allow the borrower to make advance rental payment during Istisna’a. Nonetheless, there is a provision that affects the rental payments regularly and states that certain phase payments equal to advance rental payments are paid to the borrowers by the Islamic financiers. But, basically, the payments are sized to cover Islamic financier’s funding expenses and profit margin. The scholars permit forward lease arrangements on condition that the borrower benefits on the lease of the assets under the Ijara for non–delivery.

If an Istisna’a is concluded before the project ends, the borrower is required to pay damages for failing to deliver assets equivalent to the total rental payments. This is advocated by Islamic financiers to get rid of unexpected results of the project. Normally, when the title of assets is transferred through construction or EPC Islamic financiers familiarize themselves with it. Islamic financiers are to face extra or fewer remedies as conventional banks do when the borrower fails to deriver assets. In this case, the Islamic financiers are permitted to terminate the Istisna’a and speed up the repayment responsibility of the borrower.

It is the obligation of the borrower to repay the total phase payments received prior to enforcements and damages explained above to the Islamic financiers. In the instant the project is completed, the Ijara contract comes into effect. In other words, an Ijara is a lease contract where the lessor purchases assets and rents to the lessee at specified cost and time. The asset on the lease must have lawful rights on how to benefit from it. Nevertheless, for an Ijara to comply with Shaira, there must be agreed with terms prior to execution which must be detailed and transparent. Thus, there must be a relationship between the assumed risk and the ability of Islamic lenders to get profit as the lessor must bear the responsibility of risks and retain lawful and favorable ownership of the asset.⁴

Wakala-Ijara

One substitute, but an almost comparable arrangement in project financings within Islamic dealings is the Wakala-Ijara Mawsufah Fi Al Dhimmah model, also known as Wakala-Ijar. This model was operational in the context of the Marafiq and Shuaibah IWPPs in Saudi Arabia. Under this plan, the borrowers are engaged as employees, by the Islamic lending agency or Wakil in agreement to terms of an agency, which signs the contract also known as a Wakala agreement. The Wakala agreement seeks to achieve the same roles as in an Istisna’a agreement in the previous contract. Although being an agency accord, the contractual liaison between the Islamic bank and the borrower herein is different in that the borrower acquires the design, production, building, testing, approval and delivery of the property. This is shown in the Wakala contract, which is the agent for Islamic lenders.

The Istisna’a-Ijara and Wakala-Ijara models are, however, similar. They integrate an Ijara agreement within the operations stage and a service bureau agreement pursuant to the borrower obligations in relation to the preservation of the properties and securing insurance. The paperwork involved in a Wakala-Ijara arrangement does not factor in detached procurement and sale contract. Nevertheless, the same privileges and requirements of the parties regarding the transfer of property as agreed in the terms are usually laid down in the documents.

Challenges

One major question arises as to what ranks as the main problems facing the incorporation of Islamic finance in the project finance segment. One considerable difficulty emerges as a result of Islamic lenders having had to contend with conservative lenders in regards to price and tenure. Prior to the advent of the economic recession around 2008, the cost of project financings was on a downward trend, therefore, in such situations, project finance was not a viable alternative for Islamic banks. Pricing combined with the duration of tenure, pushed traditional lenders to be able to subscribe to longer tenure time frames, making it tricky for Islamic financial institutions to compete.

Islamic financial firms have an inclination to lay emphasis on retail banking and depend on deposits as a foundation of liquidity compared to long-term financial markets capitalized by ordinary banks. Another hindrance for Islamic finance firms is found within the risks related to project financing. A great deal of investment and effort has been channeled to the growth of Islamic finance models such as the Istisna’a-Ijara structure in order to reduce risks faced by Islamic lenders. Still, most underlying risks put the involvement in these transactions highly-priced for many Islamic bankers. Being the legal holders of project properties, Islamic financiers are more vulnerable to third-party burdens, together with environmental risks.

Other requirements forced upon the Islamic banks as holders of project assets comprise tasks relating to insurance, operation and preservation of the property. Under a characteristic Istisna’a-Ijara structure, these responsibilities are, in general, undertaken by the borrower as a proxy to Islamic lenders bound by a service agency contract. The borrower acts as the service agent, who is liable for any accruing risk posited on Islamic bankers as a result of failure to observe these commitments.

Nevertheless, despite the substantial attempt thrown at designing structures that shift risks to the borrower, Islamic banks are still exposed to considerable responsibility and hazards as holders of property. Lenders will remain liable for capital development needed. Although obtaining insurance is usually passed on to the borrower, Islamic financiers, as holders within the properties, still have to contend with the accessibility of insurance and its responsibility in regard to project insurance guidelines. Borrower protection cushions borrowers from insurance losses, though it offers little value in the event of serious incidents where the institution may suffer from major third-party burdens.

Additionally, the risks associated with the apprehension of any project lender, including technology and market hazards always result in a massive undertaking that is burdensome for many Islamic financial firms. These also push the banks to opt for market rates that are way below the competitive level, which are associated with ordinary baking rates. A third barrier is found within the aspects derived from Islamic financial experts who posit the appropriateness of some of the models running under the tenets of Sharia. Financial consultants, legal representatives, Islamic financial firms and their Sharia’ boards have invested in various resources on how to develop Islamic project finance to consolidate Islamic finance with traditional finance models. This has culminated in the emergence of an inefficient and bureaucratic model that is generally yet to attain conventional financing standards.

Enforcement of Agreements in Saudi Arabia

The Concern for choices of the forum is decisive in each financing and every authority worldwide. A variety of enforcement units comprise varied divisions of expertise and special understanding of the particular subject. Every enforcement entity consists of an unrelated range of solutions it may employ, for instance, in governments such as Saudi Arabia. Privileges to petition against each enforcement entity vary since there are equally differing rules of engagement relevant to each enforcement entity. With these differences in dockets and processes, the conflict resolution period will, therefore, vary between assorted enforcement entities. There exists a number of special courts, agencies and boards (jointly, “Enforcement Entities”), which may affect control on a dispute involving banks in Saudi Arabia. Three amongst these enforcement entities put extra weight in the perspective of the funding behind the Saudi Chevron Project and SCECO Power Project: the Banking Disputes Settlement Committee (the “SAMA Committee”) of the Saudi Arabian Monetary Agency (”SAMA”); the Office of the Settlement of Negotiable Instruments Disputes, also referred to as Negotiable Instruments Offices (the “NIO”), which fall under the control of the commerce ministry, and the Board of Grievances (Qiwan Al-Mazal’im) under The Board of Grievances Law (the “Board of Grievances”).

The SAMA Committee holds authority over affairs and disagreements involving banks and their clients defined as “settling” rows between banks and customers ‘in accordance with the agreements concluded between them’. The NIO has the last verdict on proceedings, subject and rows relating to negotiable instruments, which may include promissory notes used in the transactions, together with the background surrounding such disputes. The NIO has authority greater than that of the SAMA Committee. The Board of Grievances has control over business disputes (by suggestion, rather than banking disputes and negotiable instruments disputes, which consists of the implementation of foreign opinion and liquidation concerns.

The control of different enforcement entities from particular perspectives is vague and perhaps extends beyond context. Several queries have emerged on the fate of the actual Enforcement Entity that has the influence in a number of issues affecting the financing of banks in all dealings examined in this paper. However, even when the Board of Grievances has power in regards to enforcing overseas verdicts and compensation, the SAMA Committee holds control over all issues related to banks with the exception once again directed to those with negotiable instruments. One question remains whether the SAMA Committee is supposed to declare control in regards to a foreign award.

Examination of Underlying Documentation under the Shari’ah law

Creditors concerned in conflicts awaiting resolution through the SAMA Committee or the NIO are assigned special rewards over creditors who directly deal with their complaints with the Board of Grievances. The SAMA Committee is in assumption indebted to use the Shari’ah and its principles, not forgetting the proscription of interest and banking dispute. Practically, the SAMA Committee has illustrated a willingness to compel an unmanageable defaulter to meet the terms of the contract, thus creating gratitude. However, regardless of whether the contract needs disbursement of cash in usury form, the character of interest becomes alternate from the standards of Saudi Arabian laws.

The SAMA Committee need not concern its affair with presented documents, but probes whether these arrangements are in agreement with Saudi Arabian law. Therefore, it brings all involved parties to respect the contract even where it seems to clash with the tenets of the Shari’ah. Notably, the assessment by the SAMA Committee consists of legal analysis and a responsibility review. Accountants within the SAMA Committee undertake autonomous decisions drawn from their calculations of the probable amount of interest owed in relation to a particular conflict. Interest is owed up to the date of origination of the process with the SAMA Committee. In this paper, the author deduced his understanding from Saudi Arabian lawyers and legal experts who show that most processes brought to the SAMA Committee for resolution take from six months before they are settled.

As illustrated above, large-scale manufacturing projects, communication networks, construction and other ventures continue to grow from a global context. They are constantly engaging the legal standards of two or more key components of legal and financial undertakings comprising of the obligatory implementation of a foreign, arbitral recompense or court verdicts opposed to the project company or its holdings in the host country. The authorizing courts, which has control over petitions seeking imposition of foreign rulings is the Board of Grievances. There exists a controversial power issue onto where the external conclusion or arbitral grant is acquired by a bank due to the influence of the SAMA Committee over bank disagreements.

An example is where there could be one instance where an overseas bank can fight to impose, in Saudi Arabia, a verdict of a foreign court or arbitral jury. There is no tangible record that evidences the occurrence and enforcement of foreign rulings within Saudi Arabian courts. In reality, save for a little number of documented instances, which tally to 1989 cases surrounding court verdicts in associate states of the Arab League. Furthermore, the might not show any occasion, where the Board of Grievances has given final credit that enforces a decision from foreign courts or an overseas arbitral reward. There could be a specific mention of a solitary incidence where a bank required enforcement of a foreign judgment or reward, which the Board of Grievances allegedly rejects due to the involvement of a certain bank. Apparently, enforcement will be derived from the SAMA Committee in such circumstances.

At the same time, Saudi law hardly gives the Board of Grievances any authority to pass on verdicts in distinguishing foreign bank involvement in Saudi Arabia. Should the originating forms show their capacity to repost any recognition to the judgments in Saudi Arabian courts, then no element of the foreign ruling goes against Shari’ah. The only latest indications which we could be well versed in the case where the Board of Grievances fails to award verdict after showing that English courts would afford reciprocal treatment to a Saudi Arabian court verdict. For example, the Board of Grievances is said to have recently declined to exercise jurisdiction in the case of a foreign court judgment or arbitral award obtained by a bank.

In 1994 Saudi Arabia applied for an instrument of accession to the New York Convention on the Recognition and Enforcement of Arbitral Awards of 1958 (the “New York Convention”). The approval decree integrates the obligatory mutualism prerequisite with specifications that control actions seeking to impose foreign arbitral awards that remain a prerogative of the Board of Grievances. Currently, the board has not given protocol and procedure regulations for efforts aimed at implementing international settlement awards. We could agree from Saudi Arabian legal experts who have interacted with the Board of Grievances representatives that such laws may not be conceived even in future days. Thus, it is evident that an application to recognize foreign arbitral awards would be presented and thus carry on with systems laid out in regards to the approval of foreign judicial resolutions.

Exemplary Major Issues and Resolutions

The organizations built for the Saudi Chevron project engaged the grant of a rahn related to the marhoun to two adlan. A rahn is a financial advance associated with real estate segments, which guarantees banking on private property (marhoun) to honor certain protocols therein. The adlan denotes Onshore Security Agent and the Offshore Security Agent. Executing the structure employed tactics, which addressed several legal and economic aspects, is noted in this paper. The paper notes specific Saudi Arabian legal standards, which impact the administration and position of the property.

Emphasis is laid on the assurance of a rahn considering the resulting action by the owner of the security interest. Declarations on these aspects pushed the incorporation of the adlan into the collateral structure. Later, the paper highlights issues related to the nature of the rahn in respect to various classes of collateral.

Location of Assets; Governing Law

One basic structural resolution is indicated in the utilization of both an offshore and localized security manager. A security concern from the sale of benzene and cyclohexane derived from the venture was to be deposited in an English bank account affiliated with Offshore Security Agent. According to English laws, a security interest would be noted in that bank account. Cash remittance would be made to a native onshore bank account owned by Onshore Security Agent according to Saudi Arabian regulations. Equally, in respect to Saudi Arabian and Shari’ah ownership theory, other holdings such as original copies of contracts and negotiable instruments are also placed in England with the Offshore Security Agent with a security concern acquired according to English law.

Certainty: Powers of Attorney; Agency; the Adlan

The categorization of the specific grant of rights regarding collateral remains unclear under Saudi Arabian regulations. Various security measures may be illustrated as “powers of attorney” granted by SC-Project Company to the SC Banks, with the SC Banks and the Security Agents depicted as representatives of the SC-Project Company. A good number of judges in Saudi Arabia align themselves to the view that such powers of attorney and bureau provision can be withdrawn at will, by the two parties signed to Shari’ah and alternate Saudi Arabian law. Thus, the SC-Project Company may be positioned to annul the power of attorney and the agency pact making the security interest to be forwarded to banks at the will of the Company. Banks may draw their rights indirectly, through a security pact rather than openly as a signatory to a contract. Therefore, the Project Company may conclude the rights owed to Banks. Nevertheless, even under the creation of applicable Shari’ah precepts by law experts from Hanbali School of Islamic jurisprudence, the function of a rahn-adl structure presents a degree of inevitability to the contract.

Rahn Principles in Saudi Arabia

The premise on which the Saudi Chevron project stands is held by the Royal Commission for Jubail and Yanbu of The Kingdom of Saudi Arabia (the “Royal Commission”). The property is hired out to the SC-Project Company in accordance with a special land lease contract (the “SC Site Lease”). Conventionally, such leasehold significance by the SC-Project Company would be credited to the Onshore Security Agent according to a leasehold credit agreement to protect the responsibility of the SC-Project Company bound by SC Financing Agreements. In Saudi Arabian law, a mortgage of assets is regarded, equally with the handling of a guarantee of personal property. Real property can be turned into a mortgage and presented as collateral to secure credit. Personal possessions qualify as a focus to a pledge to secure capital. Any increase in the value of the marhoun, accumulation to assets and products derived from running a venture are instinctively subject to the rahn under Shariah principles used by scholars of Muslim jurisprudence. These tenets as used by other entities may be made subject to the rahn by some authoritative action or accord; similarly, translations and functions of these guidelines may change.

Many agreements have been developed to assign legal acknowledgment to the reality that the Istisna’a system functions as a financing pact under valid United States laws. Several descriptions have been established regarding relevant state law. These characterizations may differ from those appearing in the Construction (Istisna’a) Agreement or the Lease (Ijara). Alternatively, the Tax Matters Agreement demonstrates transparency in United States tax regulations and applicable state law, loan financing and related costs and expenses payable to the Owner in surplus of the Total Construction Cost. These are regarded as interest for United States tax and economies regulation functions, vital in calculating an apportioning tax paybacks and project expenses to the MP Project Company. Therefore, this allows payments to migrant Islamic investors, which are made without tax withholding in agreement with the appropriate portfolio interest necessities of United States tax requirements. Environmental issues are also catered for, with the Project Company burdened with risks in the event of exposure of the owner. Several permits and authorization documents are developed to cater to special matters which include Sharia principles. Payment requirement to the Owner under the (Istisna’a) contract may not be restricted to status, procedures or exclusion of the Lessee bound by the Lease (Ijara).

Conclusion

The overall use and function of an Islamic organization in regards to project financings are in its inaugural phases, similar to the state of a realistic Islamic economy also in its formative stages. The dealings illustrated in this paper and consecutive studies are trials to initiate the important foundation and examine the use of Islamic methodologies that must recognize the decisive safety, credit, financial, cultural and religious and official concern for the Islamic concerns. The methods and systems utilized will be redesigned to enhance workability, greater profitability and a smooth crossing point between a Western format of interest and an Islamic significant indisposed system. New structures continue to be developed, at an increasing pace, with the increasing western financial establishments foray into Islamic banking.

The Saudi Chevron arrangement has become the basis of project financing studies and related secure lending transactions in Saudi Arabia’s other Islamist jurisdictions. Lending deals from a wide berth are consolidating the ownership ideologies associated with a rahn of a marhoun. In the event of more collateral is needed to secure credit, most business categories and banks are turning to the functions of the rahn – adlan structure to support residential home finance in Saudi Arabia, which faces the challenges of a nonexistent collateral security scheme coupled with the unavailability of reliable security interests resulting in little financing for real estate purchasing. The rahn – Adlan structure has been applied in the securing of large equipment charters and fleet contracts. Suggestions have been made to enable the setting up of private security interest recordation scheme in Saudi Arabia.

The rapport between Islamic finance firms and their clients differs from the traditional creditor and debtor affiliation and rather engages in the exchange of economic risks and compensation. Islamic finance is basically asset-oriented. In accordance with Sharia tenets of risk sharing, Islamic lenders have to undertake risks related to the possession of assets. As illustrated, the achievements realized in funding an infrastructure project from project finance methods, rely on the commitment of partners involved to adequately fulfill their contractual commitments dictated by project finance agreements and certification. Lenders and other participants, in accordance with the risk index being projected and the gains accruing from the realization of the project, may accept the due diligence required to enhance the project’s success. The practicality of the Project Finance model relies on the stability and competence of its associated contracts. These documents must be designed and discussed in a dependable manner with the relevant legislation valid in the jurisdictions they are drawn.

Islamic finance has fruitfully incorporated into the legal structure of Common law economies who have promoted its viability with commercial economics. Moreover, the guidelines of Islamic finance also seem to be embedded in the legal limit of some western economies. In France, massive emphasis has been put to acclimatize to tax and regulatory tools required to comply with the rules of Islamic law, at the same time striving to uphold conventional French norms. This paper has put emphasis on the corresponding points between a project finance model and the Sharia-compliant economic structures. It paid attention to the likelihood of financing crucial ventures with a combination of structures and references drawn across both spheres while taking care of religious ideology and or financial wellbeing.

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