volume iii spring 2009

VOLUME III SPRING 2009

TM

Published by Fulbright & Jaworski L.L.P.

Attorney Advertising

TM

Edited by Joel H. Moser Published by Fulbright & Jaworski L.L.P.

Editor: Joel H. Moser Publisher: Fulbright & Jaworski L.L.P. Editorial Office: 666 Fifth Avenue, New York, NY 10103 Tel: +1 212 318 3000 Website: www.fulbright.com/globalinfrastructure To request additional copies of Global Infrastructure, call Lori Horsley at +1 212 318 3262 or email [email protected]. Copyright © 2009 Fulbright & Jaworski L.L.P. All rights reserved. GLOBAL INFRASTRUCTURE and Connect Arrow Logo and FULBRIGHT & JAWORSKI L.L.P.® are trademarks of Fulbright & Jaworski L.L.P. FULBRIGHT & JAWORSKI L.L.P.® is registered with the United States Patent and Trademark Office. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means whether graphic, electronic, mechanical or means including photocopying, recording, or information storage and retrieval systems without the written permission of the publisher. The information and opinions in this publication are not intended to be a comprehensive study, not to provide legal advice, and should not be treated as a substitute for legal advice concerning particular situations. Legal advice should always be sought before taking any action based on the information provided. The publisher bears no responsibility for any errors or omissions contained herein.

Table of Contents

Editor’s Note

i

Islamic Project Finance: An Introduction to Principles and Structures by Michael J.T. McMillen 1. Introduction

1

2. Project Finance

2

2.1. 2.2. 2.3. 2.4.

The Emergence of Project Finance Techniques Definition and Essential Characteristics Western Interest-Based Underpinnings Current Infrastructure Needs: The Theatre for Project Financings

3. Sharīʻah-Compliant Financings

7

3.1. The Sharīʻah; Interpretation; Premises for Islamic Finance 3.2. The Development of Modern Islamic Finance 3.3. Sukūk Issuances in the First Decade of Islamic Finance 4. Sharīʻah-Compliant Project Finance 4.1. 4.2. 4.3. 4.4. 4.5. 4.6. 4.7. 4.8. 4.9.

24

Bifurcated Ijāra Structures Bifurcated Istisna’a-Ijāra Structures The Single-Tranche Ijāra-Based Structure Istisna’a – Parallel Istisna’a Sukūk al-Ijāra Structures Ijāra Participation Structures Muḍāraba Structures Mushāraka Structures Quadratic Partnership Structures and Variants

5. AAOIFI Sukūk Clarification

46

6. Bahrain Financial Harbour Sukūk

50

7. Conclusion

51

Fulbright & Jaworski L.L.P. Global Infrastructure Group

110

Welcome One important lesson of the financial crisis has been that financial markets can change very quickly and that seemingly established practices and capital sources can vanish literally overnight. Despite the status of infrastructure as an uncorrelated asset class, most infrastructure investment relies upon leverage at one level or another to achieve financial objectives, and 2008 saw the credit markets shut down completely at times. Mindful of this lesson, we have decided to devote Volume III of Global Infrastructure entirely to a specific mechanism of project leverage of growing global significance: Sharīʻah-compliant or Islamic finance. The significant flow of petro-dollars has led to an accumulation of capital in places other than the traditional money centers of New York and London. Sovereign wealth funds and other financial institutions and investment funds have developed from this great wealth with a view toward putting much of this money to work in the world economy, and infrastructure investment has emerged as an asset class of great interest for many of those managing this capital. These institutions and funds, as well as sponsoring governments and project participants, have expressed a preference that a significant portion of those funds be invested in a Sharīʻah-compliant manner. Nevertheless, restrictions in the Qurʻān prohibit the payment or receipt of interest and thus, frequently, the loaning of money which is the basis of most fixed return leverage. Structures have been developed which provide pathways for incorporating leverage or gearing into infrastructure financing arrangements while adhering to the laws of Islām. Some of those structures incorporate conventional interest-bearing leverage by use of “bifurcated” structures; others avoid all impermissible leverage concepts.

i

GLOBAL INFRASTRUCTURE


My partner and colleague, Professor Michael McMillen, is a noted world authority on Islamic finance. He teaches Islamic finance at the University of Pennsylvania Law School and the Wharton Business School and at training forums worldwide sponsored by the World Bank, the International Finance Corporation, the United States Treasury Department and the Islamic Financial Services Board. As a young lawyer, Mike was stationed in the Middle East office of an international law firm when he was asked to sort out how a Sharīʻah-compliant mortgage and pledge (rahn) arrangement could be structured and how Sharīʻah-compliant investors could provide capital to projects. He spent days with leading clerics, Sharīʻah scholars and judges of Sharīʻah courts in the region, learning the principles and precepts of the Sharīʻah, many of them from an oral tradition dating back hundreds of years, as he explored the intricacies of modern commercial finance practices with these clerics, scholars and judges. Mike not only came to understand Sharīʻah rules, he became one of the architects of modern Islamic finance. Mike’s contribution to this journal is more a treatise than an article and this issue is designed to be a permanent desk (or hard drive) reference. This is, however, hardly a static field as Sharīʻah scholars and boards around the world frequently issue fatāwā on Islamic finance topics. In future editions of Global Infrastructure, we will bring updates to this treatise, along with our usual global and industry content. To be sure to be on the mailing list for future issues, you can email [email protected]. We hope you enjoy Mike’s work and, as always, we are interested in your feedback.

Joel H. Moser, Editor

VOLUME III

SPRING 2009


ii

Islamic Project Finance: An Introduction to Principles and Structures (continued)

Islamic Project Finance:

An Introduction to Principles and Structures Michael J.T. McMillen1

1. Introduction Let us pause for a moment to envision and evaluate time, place and progression as they relate to financing of the development, construction and operation of large capital-intensive projects. Immediately, reflexively, various “project finance” alternatives spring to mind. These alternatives seem “tried and true”: familiar, understood, developed, refined, and relatively predictable as financing methodologies and constructs applicable across most types of projects at almost any location in the world. Given their many structural iterations, we presume them to be well suited for use in connection with most oil and gas, electricity, petrochemical, mining, industrial, entertainment, real estate, civic and infrastructure projects that are being undertaken at the present time, for example in the Middle East. Michael J.T. McMillen Fulbright & Jaworski L.L.P. Michael J.T. McMillen is a Partner of Fulbright & Jaworski L.L.P. whose practice concentrates on Islamic finance, project finance and structured finance. He is a current Co-Chair, and was the first Chair, of the Islamic Finance Committee (formerly the Islamic Law Forum), a division of the International Law Section of the American Bar Association. He also teaches Islamic Finance at the University of Pennsylvania Law School, the Wharton School of Business and other law, business and professional schools.

Citing the example of Middle Eastern projects brings to mind (not reflexively, and not immediately to the fore) a quite different set of alternatives: those generally characterized as within the ambit of “Islamic finance”. Awareness of the availability of Islamic finance techniques is pervasive throughout the Middle East, Malaysia, Indonesia, Africa, and other jurisdictions within the Organization of the Islamic Conference (the “OIC”). Awareness is nascent, rudimentary, and vague among nonMuslim Western2 project participants. Use of these techniques is growing in all areas of finance; it is growing more slowly in the area of large international project financings than in, say, real estate financings or private equity financings. But it is becoming a mandatory financing consideration for projects within the Middle East and other OIC jurisdictions. The ability of project participants to secure participatory roles in projects in these

jurisdictions is increasingly impacted, sometimes sub silentio, by the willingness of the participants to utilize Islamic finance concepts and structures. The trend in that direction will continue and it will likely intensify. We posit that it is imperative for Western project participants to achieve an understanding of, and a level of comfort with, the relevant Islamic finance concepts and structures in order to remain competitive. Project finance and Islamic finance are both relatively recent developments. Both emerged at the same time, commencing in the 1970s, although quite independently. Each evolved from a confluence of factors: some of the causative factors were shared and overlapping; others were unique to either project finance or Islamic finance. The development of project finance and Islamic finance took somewhat different paths from the mid-1970s to the present. But these paths are now converging. A number of factors are driving the convergence. One group of factors relates to capital accumulations that are occurring in oil and gas producing regions within the OIC, particularly the Middle East. Governments, financial institutions and individuals are all experiencing these accumulations. Historically large portions of that capital are being invested in industrial, real estate, civic and, particularly, infrastructure projects. Concurrently, many countries desire to diversify their capital or industrial base and encourage greater involvement by Western private financial institutions, particularly in large, capital-intensive projects (a desire that is shared by the central banks and fiscal authorities of Western countries with large negative balance of payment accounts). Another, quite independent, set of factors relates to the development of the field

VOLUME III

SPRING 2009



of Islamic finance, or financing in accordance with the principles and precepts of Islamic sharīʻah (the “Sharīʻah”). After centuries of dormancy, Islamic finance has entered a period of “transformation and innovation”3 and is growing rapidly not only in OIC jurisdictions but also in North America, Europe and Asia. This convergence of project finance and Islamic finance means that Sharīʻah-compliant financing structures will be of immediate and long-term import to both Muslim and non-Muslim participants, in both OIC and Western jurisdictions, and with respect to the complete range of projects (including industrial, real estate, civic and infrastructure projects). This article first surveys the history, evolution and characteristics of project finance. It also presents some information on the current state of infrastructure demands in emerging market jurisdictions (where Sharīʻah-compliant techniques are most likely to be used with frequency in the near future). Next, the article briefly considers some fundamentals of the nature of Sharīʻah-compliant finance. Thereafter, it addresses different types of Sharīʻah-compliant project finance structures. These structures are of two general types: (a) those that employ conventional interest-based loans and financing elements to some degree; and (b) those that do not make use of any form of conventional interest-based financing. Different structural alternatives within each of these categories are discussed. In connection with consideration of these structures, the article addresses sukūk (Islamic “bonds” and securitizations), with a particular focus on the recent issuance of a clarification of sukūk requirements by a prominent Sharīʻah supervisory board (that of the Accounting and Auditing Organization for Islamic Financial Institutions, “AAOIFI”).


2. Project Finance 2.1. The Emergence of Project Finance Techniques Prior to 1969, governments of less developed countries financed infrastructure and other major projects largely by resorting to international development banks of different types. Commencing in 1969, these governments began accessing the Eurocurrency markets. In the ensuing years, Eurocurrency borrowings increased dramatically as these governments sought to expand their industrial bases and develop necessary infrastructure.4 Typical loans to these governments were balance-of-payment or budget-based loans. These loans were made by commercial banks to government treasuries or non-state development banks to meet budgetary shortfalls or to provide for foreign currency needs. Disposition of the loan proceeds was left totally to the discretion of the government or development bank. Commercial bank lenders had little or no control over those dispositions. Credit analysis by commercial banks focused on macroeconomic and political factors rather than project-specific credit and underwriting criteria. Repayment of those loans was dependent upon both (a) general economic conditions and considerations and (b) the management abilities and trustworthiness of the borrower government or development bank. Obviously, this type of lending arrangement entailed considerable risk for the commercial bank lenders. To address some of these risks, the commercial bank lenders restricted the eligible borrower base to the wealthiest and most stable countries. The result was a concentration of loans to Mexico, Brazil and a small number of other nations.5 But these lending patterns did not address the growing borrower demand across the entire spectrum of countries resulting from oil-related deficits,



a global recession, declining terms of trade for some nations, and growing pressures to expand industrial and infrastructure development.

lender’s assessment of the feasibility of the project, with particular consideration being given to economic, political and legal factors.

Commercial bankers started to search for alternative financing techniques that would allow them to (i) focus their credit analysis and risk assessments on discrete economic activities and entities (i.e., customary completion, operations, business and profitability risks of a specific, identified project), (ii) allow lenders to have control over the activities of the borrower entities, particularly in respect of planning, management and operations (the control was obtained pursuant to the negotiated terms of the relevant loan agreement with the government or development bank), and (iii) have a specific source for repayment of the loans (a specific project cash flow or a specific government entity or export credit agency, rather than a general governmental source). The techniques that were developed were the predecessors of what is today known as “project finance”.

At about the same time, trends in the extraction and exploitation of natural resources changed dramatically throughout the world. Traditional sources of natural resources began to experience depletion: oil prices increased dramatically, and the prices of minerals and other natural resources also increased markedly. Improvements in extraction and exploitation technologies lowered the per-unit costs of production and made extraction of lowgrade deposits commercially viable for the first time. However, the sizes of these projects also increased dramatically and the locations of the projects added new complexities. For example, the geographic locations of many of these projects rendered access difficult and entailed a dearth of skilled indigenous labor. In any case, both size and location factors increased the costs of locating and extracting the natural resources.

In the early stages (prior to 1975), “true” project finance loans were made to governments to cover some portion of the costs of discrete, identified projects or to cover a portion of the costs of imported capital goods (with the bulk of the costs being financed by government export credit agencies), and repayment of these loans was dependent upon the success or failure of the specific project. The commercial banks also made loans in respect of specific identified projects that were guaranteed in some manner, such as by a government or export credit agency. These latter loans were termed “pseudo” project finance loans because recourse was not limited to the specific project or projects under consideration. Both types of lending arrangements have survived as project financing techniques, and implementing structures have evolved. The blend of lending arrangements in any given transaction will depend upon the

Major energy and mineral companies, which had developed or had access to the new technologies, expressed a desire to provide extraction and exploitation services. Governments were willing to allow these private companies to participate in natural resource projects, but also imposed requirements that these companies undertake “mid-stream” and “down-stream” diversification projects in addition to the “up-stream” extraction projects, thereby further increasing size and cost considerations. The private companies were unable to undertake these massive transactions on their own, particularly because exposure size, and the notably enhanced political, economic and operational risks associated with these projects, had a pronounced detrimental effect on the credit ratings of these companies. Additionally, local host country factors precluded or dissuaded these private companies from undertaking many of these projects. For example, host country foreign

VOLUME III

SPRING 2009



investment restrictions precluded the private companies from controlling the operations of the projects, which resulted in an unwillingness of these companies to infuse the necessary capital. And the limitations of small, unsophisticated host country capital markets made it difficult to obtain the local participation and local capital that was mandated by host country laws and regulations.

from operation of that economic unit for repayment of the project debt and to those cash flows and the other assets comprising the economic unit as collateral security for the loans.6 Often, it is an “off balance sheet” method of financing from the vantage of the operator and sponsors of the project, thereby minimizing the direct credit risk to the operator and sponsor companies.

2.2. Definition and Essential Characteristics

The lender’s cost of funds for a given project is reflected in the interest rate it charges for a particular project financing. That rate will depend upon the lender’s assessment of the allocation of each of the risks attendant upon that particular project and that particular financing: risk (and its treatment) is the essence of every aspect of a project financing. Frequently, no matter what the ultimate risk allocation, the interest rate cost for a project financing is higher than the rate of a recourse corporate borrowing. The extent of this interest rate cost differential depends upon the specifics of the risk analysis and risk allocations. Project financing techniques and structures have evolved such that the risks of a given project are carefully analyzed and packaged into “bundles” that are distributed among the various project participants according to the ability of each to control, and thus bear, a particular set of risks. The risk analysis entails both risk splitting and risk allocation so as to reduce overall risk.7 Through the use of project finance techniques and structures, some risks are reduced, and most are allocated to the parties most capable of managing those risks.

The solution to many of the foregoing issues was the development of financing techniques that shifted repayment and financing risk away from the operators and sponsors and their general corporate credit. These techniques could not be purely non-recourse as that would shift all risks to the banks, which was unacceptable to the banks. These techniques also had to be responsive to the political, cultural and legal requirements of a wide range of host countries. Further, they had to be sensitive to the size, complexity and cost parameters of these projects as well as the involvement of many and varied participant entities, each performing a unique function in the design, engineering, development, financing, construction and ongoing operation of the project. The body of principles and structures that has evolved to address the panoply of issues and risk/ reward and responsibility allocations relating to the financing of the development, construction and operation of these projects is generally subsumed within the concept of “project finance”. Common conventional definitions of “project finance” are focused on the productive capabilities of an economic unit (i.e., the project) and the needs and preferences of the debt participants in financing the development, construction and operation of such units, with the impact on the equity participants being implied by (and a direct consequence of) the debt structure. In general terms, a “project financing” is the financing of an economic unit in which the lenders look initially to the cash flows


Project financing techniques have been applied to, and have become the primary financing techniques and structures for, a broad range of economic units throughout the world. Examples include: power generation, transmission and distribution assets; upstream, midstream and downstream assets in the oil and gas industries: desalination plants; petrochemical, paper, mining, manufacturing and other industrial projects; airports, bridges, toll



2.3. Western Interest-Based Underpinnings

performance deficiencies, increased financing costs, and political interference), operating risk considerations (including operating cost overruns, feedstock or raw materials availability, off-taker performance, transportation methods and costs, foreign exchange availability and convertibility, project performance deficiencies, political interference, and long-term market movements), and, of course, financing risks.9

The range of project financing techniques and structures is broad. All of these techniques and structures have some common elements, however. Those common elements pertain to risk identification, analysis, allocation and management. And risk identification, analysis, allocation and management is structured, in a project financing, to achieve fairness and equity as among the project participants (in accordance with their respective abilities to control and manage particular risks), and do so with the greatest degree of transparency, predictability, certainty and stability. Transactional participants in a project financing engage in extensive efforts to identify, analyze, allocate and manage risk. Among the different types of analysis, for example, are (a) a risk analysis to identify and allocate all construction, operation, ownership and financing risks, (b) an economic analysis focusing on realizable rates of return for equity investors, which will include extensive feasibility studies, (c) a financial analysis, to assess cash flows and debt service adequacy, which will also be addressed in the feasibility study, and (d) a legal analysis, to ascertain project and financing viability under existing applicable legal frameworks and to identify necessary accommodations. The foregoing will cover environmental risks (such as product market risks, political and country risks, risks associated with the existing legal and regulatory structure, and the necessity or desirability of recourse to international courts or arbitral bodies), construction risks (including those pertaining to cost overruns, delays in completion,

However, transparency, predictability, certainty and stability, and the appropriateness of risk allocations, are matters of individual perception based upon the past experience of the individual transactional participants and are also matters of systemic context. Overwhelmingly, existing project financing techniques have been developed in Western interest-based (ribā-based) economic and legal systems (such as the United States, Europe and Japan).10 The reasons for this include (a) the dominance of the Western interest-based economic system over the last few centuries, (b) the predominance of United States and European financial institutions, lawyers, accountants and project participants in the development and refinement of the most widely used project financing techniques, (c) the refinement and exportation of Anglo-American law, (d) the relative infancy of modern Islamic finance, (e) the lack of familiarity with the operation of legal systems in the Middle East and other OIC jurisdictions, and (f) the general lack of knowledge of, and familiarity with, the Sharīʻah. Those perceptions are also influenced by the existence of “standardized” practices and structures, including “standardized” contracts, applicable to at least some of the activities that comprise a project financing.11 Those standardized practices, structures and contracts have evolved, have become “standardized”, because of the economic efficiencies that they facilitate, particularly with respect to risk allocation, risk coverage, and minimization of transactional costs. Of course, most of those standardized practices,

roads, rail systems, rail cars, vessels, aircraft and other transportation projects; telecommunications systems and satellites; public and private real estate projects; stadiums and other entertainment projects; computer systems and equipment; civic projects; and a complete range of infrastructure projects.8

VOLUME III

SPRING 2009



structures and contracts were developed in, and have evolved within, a Western interest- based paradigm. The consequence of this Western orientation is that the risk allocations and implementing techniques and structures take little, if any, cognizance of variances that are necessary to achieve compliance with the Sharīʻah. They take no cognizance of the conflict of certain Islamic principles with the fundamental debt-leverage principle of Western project financing, namely Sharīʻah prohibitions on the payment or receipt of interest, other aspects of the doctrines of ribā, gharar and maysīr, and the fundamental risk-sharing basis and principles of Islamic finance.12 Increasingly, however, it is necessary to implement techniques and structures that are sensitive to risk allocations and systemic and institutional constraints of both Sharīʻah-compliant participants and participants that are not constrained by the Sharīʻah. Western participants in both conventional and Sharīʻah-compliant transactions will proceed from, and be focused on, structures, methodologies and documents that proceed from a Western interest-based perspective. Muslim participants will proceed from a different set of principles and precepts: those embodied in the Sharīʻah. The necessity of accommodating both sets of participants arises as a result of the increasing internationalization of transactions, which involve participants from a wide range of diverse jurisdictions, each with different legal, regulatory, institutional, tax, accounting, underwriting, “accepted practice” and other constraints. It also arises as a result of increasing investment in projects throughout the world by Muslims seeking opportunities to invest a growing amount of investible wealth that has arisen from


the increased revenues to oil and/or gas producing nations, such as those of the Middle East. In short, Sharīʻah-compliant project financings will become more prevalent throughout the world and will require the use of structures, methodologies and documents that allow both Muslim and nonMuslim parties to operate within a sphere of transparency, predictability, certainty and stability that is acceptable to both types of parties. 2.4. Current Infrastructure Needs: The Theatre for Project Financings Before proceeding to a consideration of Islamic financing and Islamic financing techniques that might (will) be used in infrastructure financing, it would serve us well to sketch a contextual picture. What are current infrastructure needs, particularly in emerging markets where Sharīʻah-compliant techniques are most likely to be used first and most frequently? Infrastructure needs are massive throughout the world.13 It is estimated that there will be approximately US$21.7 trillion of infrastructure projects in the next decade in emerging market economies (which include many OIC jurisdictions).14 A range of factors underlies, and will continue to drive, the demand for infrastructure projects in these economies. Two of the leading factors are increasing population growth and increasing urbanization in emerging market economies, each of which strains existing infrastructure resources, particularly electricity, water, transportation and similar services.15 At the same time, emerging market economies, especially oil producing economies in the Middle East, are experiencing strong economic performances and significant capital capabilities. As a market accommodation, and concurrently with the growth of urban centers in emerging markets, the number and variety



of private sector infrastructure developers, sponsors and owners are increasing, and these players continue to advance in sophistication and as competitors with developed market firms. Simultaneously, privatization efforts are expanding in emerging markets, which increases the scarcity premium on longer duration assets and results in a larger allocation of infrastructure investment to emerging markets. Competition for infrastructure assets is also resulting from the growth of infrastructure investment funds and infrastructure investment pools. Demand for infrastructure investment financing has absorbed a large share of available capital in some markets, even to the extent of reducing available financing for other types of projects.16 Looking at individual countries in the Middle East, it is estimated that Saudi Arabia has over US$500 billion in infrastructure projects scheduled for the period up to 2014, which may not include the US$129 billion of capital projects that Saudi Aramco has scheduled for upgrading its oil and gas infrastructure between 2010 and 2014 or the recently announced US$6.9 billion that Saudi Electric Company has announced for four power plants in 2009.17 Estimates for infrastructure projects in the United Arab Emirates in the period 20072012 are more than US$300 billion.18 Estimates for Kuwaiti projects during that same period are in the range of US$215 billion.19 And Qatari project estimates for that period are approximately US$130 billion.20 Clearly, the volume of infrastructure finance demand in the Middle East (and consider the remainder of the OIC) is massive. And this demand is occurring during the peak growth period of Islamic finance. Thus, it is no surprise that governments, and local entities in these predominantly Muslim jurisdictions, are turning with greater frequency to Sharīʻah-compliant financing techniques for

transactions within their jurisdictions. At the same time, both the absolute amount and the growth of excess investible capital from OIC jurisdictions is dramatic. The preference is to invest this capital in a Sharīʻah-compliant manner, whereever the location of the investment. As a result, Sharīʻah-compliant infrastructure investments are increasingly common in non-Muslim jurisdictions such as the United States, Europe and China. That trend will certainly accelerate as Middle Eastern (and other) jurisdictions derive an ever-larger share of their income from investments (rather than oil and gas).21 3. Sharīʻah-Compliant Financing 3.1. The Sharīʻah; Its Interpretation; Premises of Islamic Finance Islamic finance is concerned with the conduct of commercial and financial activities in accordance with the Sharīʻah. The word “Sharīʻah”, in its early usages, referred to the path by which camels were taken to water, the source and essential sustaining element of life. In later, and current, times it refers to “the way” or “the path” by which a Muslim is to conduct his or her life, in every aspect of life. Thus, the Sharīʻah is comprised of, and embodies, religion, rational theology (kalām), general philosophy (falāsifa), ethics (akhlāq), morality, spirituality, humanitarianism, theories of government (siyāsa), and behavioral, civic and political admonitions22 as well as those that are more customarily recognized as legal requirements: it is “the ‘Whole Duty of Man’[;] Moral and pastoral theology and ethics; high spiritual aspiration and the detailed ritualistic and formal observance which to some minds is a vehicle for such aspiration and to others a substitute for it; all aspects of law; public and private hygiene; and even courtesy and good manners… .”23 It is in part divine revelation, in part human example, and in part human understanding and ratiocination.24

VOLUME III

SPRING 2009



And it is, in part, “law” (both jurisprudentially and practically) as that term may be understood more broadly and conventionally.25 Islamic law is the epitome of the Islamic spirit, the most typical manifestation of the Islamic way of life, the kernel of Islam itself. For the majority of Muslims, the law has always been and still is of much greater practical importance than the dogma. Even today the law remains a decisive element in the struggle which is being fought in Islam between traditionalism and modernism under the impact of Western ideas.26 As “law”, the Sharīʻah is, jurisprudentially, the perfect, immutable, divine law as revealed in the text of the Qurʻān and the sunna. Fiqh (“understanding”, from faqaha, “to understand”) is the sum of human comprehension of that divine law and is given effect in the practical rules of the Sharīʻah as determined by the Sharīʻah scholars. The primary methodology used in this determinative effort is ijtihād (literally, “endeavor”, “striving”, “exerting” or “self-effort”), or legal reasoning, particularly the making of deductions in circumstances where no express text or rule, or consensus (ijmāʻ) is available (sometimes referred to as “independent reasoning”). The reasoning process uses, as the primary sources, the “roots of the law” (uṣūl alfiqh) to derive branches (furū) and fruit (thamara), or operative legal rules. The primary sources of law, in Islamic orthodoxy, are (a) the Qurʻān (the divine word of Allāh), (b) the sunna (the practices and examples, the dicta and decisions, the “traditions”, of the Prophet Mohammed), (c) ijmāʻ (consensus, most particularly, in current practice in Islamic finance, the consensus of the community of scholars or the “assembled learned” or “assembly of the learned” (ʻulamā’)), and (d) qiyās (analogocial deductions and reasoning). Ḥadīth are the textual


records of the Prophet’s sunna, as determined by skilled juristic scholars. 27 As a body of divine law that has developed over 1,400 years, it is conceptually comprehensive and, as a matter of principles, well-developed, although, like the common law, it is elucidated on a case-bycase basis in reference to specific and ripe factual situations from which principles and precepts may be inferred. With a few exceptions, such as the Majelle, it is not collected as a compilation of principles and precepts, unlike statutory legislation in common law jurisdictions or civil law jurisdictions. In the modern commercial and financial context, it is somewhat undeveloped in its application to modern transactions as a result of the centuries-long dominance of conventional interest- based finance. The Sharīʻah, being applicable to all aspects of human endeavor and existence, by definition is applicable to commercial and financial matters. Being comprehensive, it constitutes a “code” of conduct that is applicable to all aspects of all commercial and financial matters. Thus, it will (and does) address sales (bayʻ), leasing (Ijāra), options, guarantees and suretyships (kafāla), transfer of obligations (hawāla), mortgages and pledges (rahn), deposits for safekeeping (emanet), agency (wakāla), loans, gifts (hība), joint ownership and joint ventures (sharikāt, mushāraka and muḍāraba), and virtually every other aspect of law as anyone familiar with the common law or the civil law will know the law.28 And like any other advanced body of law, application of the principles and precepts is detailed and complex and subject to variations in interpretation, particularly as among the different madhahib (schools of Islamic jurisprudence).29 The different madhahib reflect not on the breadth and complexity of the Sharīʻah, and thus the difficulty of comprehension of nuance for the lay person, but also the fact that compliance is a matter of individual conscience. The four main Sunnī schools,



and those having the greatest impact on modern Islamic finance, are referred to as Hanafī, Hanbalī, Mālikī and Shāfiʻī. Each madhhab (meaning “path” or “road to go”) is a body of juristic opinions and a related methodology of how to use text, tradition and reason to understand pure Sharīʻah. Historically, the different madhahib frequently interpreted and applied the Sharīʻah differently to different factual or structural situations, and there have been variations even within individual schools, trends that are exacerbated by the case-by-case method of elucidation. Thus, scholars that have specialized in the study of the Sharīʻah play a prominent role in the interpretation and application of the Sharīʻah, particularly in the field of Islamic finance. These scholars are the primary means by which the general principles and precepts of the Sharīʻah are applied as specific “legal” injunctions. Islamic banks and financial institutions, some higher net worth families and individuals, and sponsors and managers of Sharīʻah-compliant funds, investment products and assets have retained one or more Sharīʻah scholars, comprising a Sharīʻah board, to assist in making the relevant determinations. The boards oversee the complete range of investment and asset management practices, and the principles, methodology and operational activities, of the entity or individual that has retained that particular board. This oversight will extend to every element of these activities, including transactional structures and documentation. Each board will certify, pursuant to fatāwā (legal opinions; fatwā is the singular), Sharīʻah compliance of a given fund, structure or instrument, usually on a confidential basis on behalf of the retaining party or entity. As a result, Islamic finance tends to develop in a rather disjointed fashion, without formal coordination across markets or madhahib.

Efforts at harmonization are individual (coordination and discussion among scholars on an informal basis) and institutional. At the institutional level, harmonization efforts are exemplified by the existence and prestige of Sharīʻah boards of institutions such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Fiqh Academy (Majma‘ Al-Fiqh Al-Islami ) of the OIC ( Munazammat Al-Mu’tmar Al-Islami ), the Islamic Jurisprudence Institute ( Al-Majma‘ Al-Fihi Al-Islami) of the Islamic League ( Rabitat Al-‘Alam Al-Islami ), the Islamic Development Bank, Bank Negara Malaysia, and Suruhanjaya Sekuriti, Securities Commission, of Malaysia, among others. Most determinations of these boards are advisory, although the determinations of the boards of AAOIFI, Bank Negara Malaysia, and Suruhanjaya Sekuriti are compulsory in certain circumstances. The precise role of a Sharīʻah board varies from entity to entity; it is a function of the unique relationship between the individual Sharīʻah board and its related retaining entity. As a general matter it can be said that a Sharīʻah board will perform a number of different roles, including, typically, the following: (a) participation in product development and structuring activities; (b) review and approval of financial instruments and products; (c) review and approval of the fund or entity structure and its objectives, criteria and guidelines, and issuance of a fatwā in respect thereof; (d) review and approval of disclosure and offering documents, and issuance of a fatwā in respect thereof; (e) review, approval and oversight of investment and business operational structures and methodology, and issuance of a fatwā in respect thereof; (f) on-going review, oversight and approval of transactional or operational variances or applications to unique or changing circumstances; and (g) annual audits of the operations of the fund or entity and issuance of an annual certification of Sharīʻah compliance.

VOLUME III

SPRING 2009



As noted above, the underlying principles of project finance have been developed in the West and are firmly based upon Western interest-based principles of finance and the related risk-reward structure. In this paradigm, money is viewed not only as a medium of exchange and a measured store of value, but as a commodity in and of itself; an asset that can itself earn money. A central element of the conventional model is interest, the accretive earnings on money with the passage of time, or additional amounts in excess of the principal (i.e., ribā). That risk-reward structure, including the centrality of interest, finds further voice in contractual and legal terms with respect to financial realization on investments and collateral, including matters of payment preference. Islamic finance is premised quite differently, as is the Sharīʻah when considered as a body of law: the risk reward conception is fundamentally different.30 These differences are of more than academic interest to the finance practitioner; they must be addressed in all multi-jurisdictional Islamic finance transactions. Core premises in Islām look more to risk-sharing as a justification for the fundamental requirements of profit and loss sharing. Thus, trading (sales) and partnership or joint venture arrangements are more appropriate risk-reward paradigms. Rewards without commensurate risk, and preferential rewards, are not permitted. Ribā is impermissible under the Sharīʻah; it is both a reward without commensurate risk sharing and a preferential reward to one party (a debt provider). The interest-based debtor-creditor paradigm is rejected, although debtor-creditor constructs are acceptable (if arising as a result of Sharīʻahcompliant arrangements). For the most part, predetermined fixed returns are not permissible. Guarantees or assurances of return of capital and return on capital are not permissible. Further, the use of money as a commodity is not acceptable under the Sharīʻah. Money is not an asset that can itself earn money. It is a measured store of value and

10


a medium of exchange. Every financial transaction must involve a tangible asset (leaving aside certain exceptions, such as intellectual property). Application of these principles precludes the sale and purchase (at least at a premium or discount) and tradability of pure financial instruments that do not represent interests in tangible assets, such as mortgage loans (which also include ribā elements), debts (including receivables, which frequently include ribā elements) that have been divorced from underlying assets, and derivatives.31 The methodology and historical tradition of Islamic jurisprudence are also factors that are without counterpart in conventional finance. They include a system of “nominate contracts” that form the base, and provide structural constraints, for the development of Sharīʻah-compliant products and instruments.32 The nominate contracts are defined contracts or structures (such as different ijāra structures, the Istisna’a (also ‘istisna’), the muḍāraba, different sharikāt/mushāraka structures, the salam and different sales structures, etc.), and they are defined with relative rigidity. While it is no longer imperative to adhere to the precise historical form of the relevant nominate contract as a selfcontained transactional structure (it now being permissible to combine different nominate contracts as “building blocks” in composite structures),33 the historical forms continue to work as significant constraints on the nature and structure of Sharīʻahcompliant structures, contracts and instruments. 3.2. The Development of Modern Islamic Finance Since the 1970s, but particularly since the mid1990s, there has been a renewed interest in Islamic finance.34 The number and types of Sharīʻah-compliant investments has expanded exponentially, as has the dollar volume of compliant investments. The expansion continues to the present and is expected to accelerate over the foreseeable future.



Before the mid-1990s (and certainly before the 1970s), there were relatively few Islamic banks and financial institutions. There were relatively few Sharīʻah scholars with knowledge and practical experience in financial and commercial transactions. The focus was primarily on the deposit side of Islamic banking. Discourse took place primarily in the Arabic language, and the dominant Sharīʻah-compliant financing structures were based strictly upon the nominate contracts and financing structures that were developed in the earliest years of Islām. Commencing in the 1970s, and increasingly from the mid-1990s to the present, there were a number of profound changes in the field of Islamic finance, virtually all of which are still ongoing. Among them are the following: (a) renewed focus on Islamic banking and finance, including investment activities both within and outside OIC jurisdictions, initially as a result of increased oil and gas wealth but now much more broadly motivated (although now again strongly supported by increased oil and gas wealth); (b) a movement of focus away from the deposit side of Islamic banking to the investment side and the larger realm of Islamic finance; (c) a significant number of Islamic and conventional multinational banks, investment banks and financial institutions, as well as Western asset managers, lawyers, accountants and other professionals, entered and are entering the field of Islamic finance (with mixed results, as the AAOIFI Sukūk Clarification indicates); (d) Sharīʻah scholars gained and continue to gain significant practical experience in an expanding range of financial and commercial transactions of increasing complexity;

VOLUME III

(e) a significant increase in discourse on Islamic finance in the English language; (f) a group of Sharīʻah scholars made a decision and undertook concerted efforts to move toward consensus (ijmāʻ‘), which had the effect of reducing (although not eliminating) differences between madhahib; (g) the shortage of Sharīʻah scholars ensured that some of the key individuals in the movement toward consensus sat on multiple boards, thus moving the entire industry toward greater harmony, uniformity and consensus (that shortage is frequently criticized for other reasons); (h) a transformative move away from the historical rigidity in the use of static nominate contract and early Sharīʻahcompliant structures towards the use of nominate contracts and accepted structures as building blocks that may be constituted and constructed creatively in new combinations; (i) significant internationalization and globalization, necessitating that (i) Sharīʻah compliance be achieved in harmony with various secular legal systems and (ii) transactional documentation be both Sharīʻah compliant and enforceable in those secular legal systems (many of which take no cognizance of the Sharīʻah); (j) the creation of AAOIFI and the activities of AAOIFI in generating uniform standards for accounting for Islamic financial institutions and transactions; (k) the creation of IFSB and the undertakings of the IFSB in the development of uniform

SPRING 2009


11


standards for capital adequacy, prudential banking standards, and corporate governance and its efforts toward the development of an effective legal framework for Islamic finance and the development of Islamic capital markets; (l) a number of Sharīʻah boards, such as those of AAOIFI and the Islamic Development Bank (among others), gained sufficient respect and prestige to allow their fatāwā to have some degree (albeit often advisory in nature) of precedential value across the industry; (m) a broad range of other coordinative entities were established, with particular focus, to date, on Islamic banking and finance; and (n) recognition and institutionalization of some degree of “permissible variance” or “permissible impurity” in the transactional Sharīʻah-compliant implementation of products and structures and implementation of “cleansing” and “purification” concepts with respect to non-compliant elements of a transaction. The last point is worthy of more particular explication before examining the development and growth of Islamic finance, especially because of its profound effects on the development of modern Islamic finance. A monumental fatwā was rendered to the Dow Jones Islamic Indexes℠ (“DJIMI”) in 1998 (amended in 2003) by the Sharīʻah supervisory board of DJIMI (the “DJIMI Fatwā”), and this fatwā is the most notable exemplification of this process of institutionalization of both (a) “permissible impurity” or “permissible variance” and (b) “cleansing” and “purification”.35

12


The DJIMI Fatwā established a series of tests to determine whether a Sharīʻah-compliant investor could make an investment in an equity security of a company that was not totally in compliance with the Sharīʻah. Of course, most companies in the world were not, and still are not, in compliance with the Sharīʻah (some are engaged in prohibited businesses or activities; most either pay interest on indebtedness or receive interest from deposits or investments). These tests acknowledged and sanctioned, on a conditional basis, a degree of variance from (or impurity relative to) the strict application of Sharīʻah principles and precepts. Recognition of permissible variance, at least as a temporary matter, was intertwined with the development of various “cleansing” or “purification” mechanisms. The purification principles were, and are, operative upon and after the occurrence of a transaction, activity or development that is impermissible under the Sharīʻah and are designed to allow the occurrence of the transaction, but address the impure consequences of that occurrence. Thus, for example, if some interest were obtained in violation of ribā proscriptions, that interest could be donated to charity to cleanse or purify the transaction. The DJIMI Fatwā opened the equity capital markets to Sharīʻah-compliant investors, despite the lack of purity in compliance; it was an important initial step in the development of the equity side of the Islamic capital markets. And it also had profound effects on private equity investment, mergers, acquisitions and related areas as scholars began to develop rules for direct equity investment in entities that were not purely Sharīʻah compliant. And it has had profound effects on Sharīʻah-compliant real estate investing and project financing.



Generally stated, the DJIMI Fatwā established two sets of tests to determine whether such an investment would be permissible. The first test has two branches: (i) whether the subject security itself is impermissible (because it constitutes a fixed income instrument, such as preferred stock); and (ii) whether the “core” business activities of the subject entity are impermissible (because they entail dealings in pork or alcohol for human consumption, interest-based financial services, gambling (including non-mutual insurance), pornography, prostitution, or other impermissible activities. If those threshold tests do not preclude investment, the focus turns to whether the entity has an impermissible degree of ribā as determined pursuant to a series of financial tests based upon balance sheet information (such as total debt to market capitalization of the subject entity). Note that some degree of impermissibility is permitted: an entity may have a degree of interest income or expense, for example. However, the DJIMI Fatwā further notes that the impermissible impurity must be “cleansed” or “purified”, if that is possible (e.g., by donating it to charity). In other transactions and in other contexts, the principles addressed in the DJIMI Fatwā have evolved considerably since first being set forth. Consider, for example, the financial tests: The financial tests of the DJIMI Fatwā are based upon the information that was available in the markets at the time it was considered and issued (i.e., from conception in 1993 to issuance in 1998), which was balance sheet information. Since then, operating statement information is widely available with respect to many business entities and some more recent tests focus directly on interest income

and expense (rather than estimating it by using total debt measurements). In such cases, and given historical information on the performance of “market capitalization” measurements, some of the more recent tests use a gross revenue denominator when considering actual interest income and expense. Detailed rules have also evolved with respect to differences in situations where the investment by a Sharīʻah-compliant investor is controlling as opposed to non-controlling. Other examples are discussed later in this section. Applying the “permissible variance” principles, some such situations have been determined by Sharīʻah scholars to be permissible on a caseby-case basis after careful examination of all relevant facts. Prior to the late 1990s, in accordance with the preferences of transactional participants and the state of development of Sharīʻah principles as applied to commerce and finance, most Sharīʻahcompliant investments focused on a limited number of areas, especially real estate and private equity. This focus minimized the Sharīʻah issues that had to be addressed by investors and Sharīʻah scholars, particularly in jurisdictions that took no cognizance, economically or legally, of the Sharīʻah. Investments were on a property-by-property or entity-by-entity basis. As experience was acquired—and it was acquired rapidly—investments became increasingly complex in legal structure and in terms of the Sharīʻah considerations that had to be addressed, in most instances for the first time. Commencing in the late 1990s and early years of the 21st century, tax efficient fund structures became the dominant form. Western interest-based banks and, later investment banks, began moving into the Islamic

VOLUME III

SPRING 2009


13


finance field around 2004 (a few were involved earlier, but those were exceptions). These entities have considerable experience with conventional investment fund structures and securitization structures, and they have begun to focus on opportunities in these fields.

Sharīʻah-compliant real estate funds emerged in the mid-to-late 1990s, and the number of such funds multiplied markedly after the dot.com slide. Initially, they invested in United States residential real estate projects, beginning with multi-family housing and moving on to single-family developments, gated communities, golf course communities and other projects.36 Commencing in late 2002 and early 2003, real estate funds in the United States began investing in single tenant, credit tenant leased, commercial office and warehouse properties with remaining lease terms longer than the expected hold periods. These investments were ijāra-based (lease-based) acquisition financing investments rather than construction investments, and thus of longer tenor. These funds were designed to move into the strong United States commercial real estate markets during a growth period and in a manner that minimized the Sharīʻah issues with respect to prohibited business activities by tenants (only a single tenant and its lease need be reviewed and re-leasing issues were avoided).37 Sharīʻah-compliant commercial real estate funds began to focus on Europe in late 2003 and 2004. At the same time, in both the United States and Europe, investment began in multi-tenant properties and a wide range of other properties (hotels, outpatient treatment centers, hospitals, etc.). The movement to Europe was based upon

14


the economics of European real estate investments and the increasing competition with conventional investors in the United States. The movement toward multi-tenant properties was driven by (i) increased familiarity of fund managers and fund investors with the Sharīʻah compliance issues, (ii) the shrinking pool of single tenant properties, (iii) recognition and implementation of “permissible variance” and “cleansing – purification” concepts as a result of the issuance of 1998 DJIMI Fatwā,38 and (iv) increased experience and sophistication of Sharīʻah scholars in addressing complex multi-tenant issues. The last two points are especially important. Illustrative of their import is their impact on Sharīʻahcompliant real estate investing. For example, the permissible variance standards began to be implemented in tenant industry analysis in three areas: (a) a non-compliant activity at the property being acquired by a Sharīʻah-compliant investor; (b) a permissible business activity conducted by the tenant where that tenant, as a larger entity, also conducts non-compliant business activities at other locations; and (c) non-compliant occupational tenant leases.39 With respect to non-compliant activities at the property, consider that many large office buildings and complexes have tenants that engage in prohibited business activities, such as automatic teller machines (“ATMs”), retail branch banks, grocery stores that sell pork and wine and beer, or restaurants that serve alcohol. In the purest case, the entire building or complex would be an impermissible investment. However, the Sharīʻah scholars have taken a pragmatic view and



addressed these matters on a case-by-case basis with close examination of the precise facts, and with acute awareness that, in so doing, they are defining the parameters of “permissible variance” exceptions in these areas. While generalizations are difficult, and of uneven application, some of the factors that may be relevant in such an inquiry include: the nature of the non-compliant business; the square footage of the non-compliant rental unit and its relative relationship to the square footage of the entirety of the property; the amount of rent and its relationship to the total rent for the property; whether the service is an essential or elective service; if an elective service, its relative importance to the property; the tenant population and the surrounding community; whether the business serves a commercial client base; and the availability of equivalent or complimentary services in the immediate and broader vicinity. Generally, occupational tenant leases to noncompliant businesses may be permissible upon initial acquisition of a property, but Sharīʻah Boards frequently require that these leases not be renewed upon expiration if that option is elective; a tenant in a compliant business will be required after the initial lease expires. With respect to permissible business activities by the tenant at the property where the tenant, as a larger entity, also conducts non-compliant business activities at other locations, the scholars have again been pragmatic. The focus has been on the precise business activity conducted at the property. In some cases, the focus has also entailed inquiry as to the “core” business activity of the tenant as a larger entity (rather than each and every business activity of the tenant), an inquiry

that flows directly from the DJIMI Fatwā. Given the “conglomerate” or “multi-business” configurations of many companies, this pragmatic and case-by-case approach comports well with business realities. The nature of occupational tenant leases has also been the subject of close scrutiny by Sharīʻah scholars. Most of the occupational tenant leases in effect at the time of the acquisition of a commercial property by a Sharīʻah-compliant fund or investor are not entirely Sharīʻah compliant. Usually, this is because of the existence of default or late payment interest provisions. In other cases, the noncompliance relates to requirements that the tenant perform structural maintenance (as a result of the prevalence of “triple-net leasing” concepts in nonMuslim jurisdictions). In still other cases, the lease may require the occupational tenant to maintain property insurance, a correlative of the structural maintenance requirements. There are a range of other reasons for non-compliance. Here again, there has been application of the permissible variance and purification principles. Thus, for example, the Sharīʻah-compliant investor can purify the default or late payment interest element by donating any such interest to charity (and thereby preserving the incentive for timely payment). Given broader market practices and standardization, it is virtually impossible to change some of the other offensive provisions (such as structural maintenance and property insurance obligations). Generally, the non-compliant lease will be permitted at the inception of the acquisition transaction, although there may be a requirement that a reasonable attempt be made to bring that lease into compliance if that can be accomplished

VOLUME III

SPRING 2009


15


at a reasonable cost and without disruption of the tenant relationship. And, upon elective or permissive renewal of the occupational tenant lease, that occupational tenant lease will have to be made Sharīʻah compliant. Clearly, resolution of those issues has had a profound effect on opening the real estate funds and markets to Sharīʻah-compliant investments in multi-tenant properties. Some of the most important developments, from the vantage of project finance, relate to the development of sukūk (commonly, if somewhat inaccurately, referred to as “Islamic bonds”, and, somewhat more accurately, referred to as “Islamic asset or business securitizations”). Early real estate and private equity transactions were financed privately by commercial banks. As pooled investment vehicles were created (usually off-shore investment funds) and transactional volume expanded dramatically, cross-collateralized private commercial loans were utilized. None of these transactions (or the related investment funds) was financed through the debt or equity capital markets. Conventional Western capital markets were unavailable, largely because of the lack of familiarity with Sharīʻah-compliant financing techniques. There were no Islamic capital markets, debt or equity. Constraints were such that Sharīʻah-compliant investors could not even invest in the equity securities of entities listed on the major stock exchanges of the world, with some rare exceptions.40 Sharīʻah-compliant capital market participation was not practical or possible prior to the late 1990s.

Sharīʻah-compliant access to the equity capital markets began in approximately 1999.41 Sharīʻahcompliant access to the debt markets occurred

16


later, commencing in the period of 2001 to 2003 with seminal sukūk offerings.42 The early sukūk issuances, and all but a few of the sukūk issuances to the date of this writing, are bond structures (rather than securitization structures), and the overwhelming percentage of the issuances involve sovereign credits (although the volume of corporate bondtype issuances is increasing rapidly). At the same time, another monumental fatwā was issued, by the Sharīʻah board of AAOIFI, the preeminent accounting and auditing authority for the Islamic finance industry. That fatwā approved Sharīʻah Standard No. (17), Investment Sukuk (the “AAOIFI Sukūk Standard”),43 standards for sukūk, including both “bond” and securitization structures.44 Realizing the potential for sukūk as a backbone element of an Islamic capital market, the Islamic Financial Services Board (“IFSB”) began to focus on capital markets and the legal infrastructure issues.45 In 2006, with initial reports made in 2007, the IFSB focused on the development of an effective legal framework for Islamic finance, with special emphasis on those elements of the legal infrastructure that relate to sukūk issuances.46 Issuances of bond structure sukūk have accelerated since 2003.47 With this acceleration, and as more sophisticated issuances were attempted, it became clear that the legal infrastructure of many jurisdictions within the OIC was an impediment to the growth of the capital markets. Lawyers were unable to opine on critical legal matters. And, as a result, international rating agencies were unwilling to rate issuances that did not involve, ultimately, a sovereign credit. While the volume of bond structure sukūk issuances (including corporate issuances) increased until 2008, securitization sukūk have not been issued (with only



the rarest of exceptions). This has been attributable to a range of factors, including critical legal issues, the inability to obtain satisfactory legal opinions, and the resulting inability to obtain ratings from major rating agencies.48 But the winds of change are starting to be felt. In 2006, a rated sukūk based upon oil and gas royalties in the Gulf of Mexico was issued.49 Because the transactional and contractual structure was governed by United States law, many of the legal issues that precluded the issuance of asset-backed securitization sukūk were avoided. Unfortunately, at the time of this writing, for reasons unrelated to the Sharīʻah structure, that transaction is now in bankruptcy. The Islamic finance industry began to glimpse the future of securitization sukūk. And in July 2007, a rated real estate securitization (an sukūk al-Ijāra constituting a residential mortgage-backed security (“RMBS”)) was issued with respect to properties in Dubai, United Arab Emirates.50 3.3. Sukūk Issuances in the First Decade of Islamic Finance As background, it is worth considering some statistics relating to sukūk issuances over the last decade.51 Information is imperfect. However, industry sources report that from January 1997 to November 7, 2008, approximately US$87,955.22 million of sukūk have been issued pursuant to 596 offerings.52 Of those issuances, approximately 35% are characterized as “sovereign” issuances and approximately 65% are characterized as “corporate” issuances.53 Two countries predominate in sukūk issuances in this period: Malaysia with 267 issuances and a total volume of US$37,696.72 million (44.80% of the total issuances and 44.86% of the total volume) and Bahrain with 150 issuances (or 25.17% of the total issuances, but less than 7.00% of the total volume).54 By volume, issuances from the United Arab Emirates were second (US$26,977.48 million, or 30.67%). Mayalsia and the United Arab Emirates accounted for 73.53% of volume. Saudi Arabia was third by volume, with US$8,224.62 million, or 9.35%. Gambia was third by number of issuances, with 36 or 6.04%.55 Table 1 presents a summary of issuances by volume and number of offerings, categorized by the industry or undertaking to which the sukūk proceeds are put.

VOLUME III

SPRING 2009


17


Table 1 Industry

Volume (US$ - millions)

% of Total Volume

Number of Offerings

% of Total Offerings

Average Issuance (US$ - millions)

Financial Services

21,712.92

24.7%

69

11.6%

314.68

Real Estate

19,368.73

22.0%

67

11.2%

289.09

Transport

12,004.63

13.6%

40

6.7%

300.12

Power & Utilities

9,054.77

10.3%

22

3.7%

411.58

Oil & Gas

6,338.12

7.2%

20

3.4%

316.91

Government

7,340.65

8.3%

197

33.1%

37.26

Construction

4,254.04

4.8%

34

5.7%

125.12

Services

2,088.67

2.4%

7

1.2%

298.38

Telecoms & IT

1,836.32

2.1%

28

4.7%

65.58

Industrial Manufacturing

1,090.30

1.2%

21

3.5%

51.92

Conglomerates

1,014.88

1.2%

7

1.2%

144.98

Agriculture & Food

767.55

0.9%

52

8.7%

14.76

Consumer Goods

347.64

0.4%

11

1.8%

31.60

Mining & Metals

306.65

0.3%

4

0.7%

76.66

Basic Materials

169.10

0.2%

7

1.2%

24.16

Healthcare

128.08

0.1%

3

0.5%

42.69

Automotive

127.51

0.1%

6

1.0%

21.25

4.69

0.0%

1

0.2%

4.69

100

596

100

Travel & Tourism Total

87,955.25

A few observations stand out in reviewing Table 1. First, government issuances, and sovereign credit support, comprised almost a quarter of all issuances, but only 8.3% of the total volume of issuances. The average issuance size of the government issuances was also relatively small, at US$37.26 million. Financial services issuances comprised more than a quarter of all issuances by volume, and approximately

18




11% of the total number of issuances over the decade. The average issuance size of a financial services issuance was relatively high, at US$314.68 million. Over one-half of the volume of all issuances, and 40% of the total number of all issuances, were in four industrial segments: financial services; real estate; transport; and power and utilities. The foregoing observations are consistent with the generally perceived patterns of infrastructure and real estate development in the Middle East and Malaysia. As a rough approximation, infrastructure issuances were 60-68% by volume (depending upon the classification of government issuances). The fact that just over 8.7% of the issuances were in the agriculture and food sector, but that they comprised less than 1% of the total volume of issuances, is noteworthy as a possible indication of a concerted developmental effort in small agricultural projects. This observation is supported by the average issuance size of US$14.76 million for issuances in this category. What is not determinable from the foregoing table is of equal, if not greater, interest. First, the degree of government ownership of issuing entities, or sovereign support for issuances, in the other categories set forth in Table 1 is not known, and is worthy of greater study. From a practitioner’s general view of the markets and some of the offering documentation, the degree of cross-ownership is likely significant and it can be surmised that the extent of sovereign credit support in the sukūk markets is likely significantly greater than is indicated by assuming that sovereign support is associated only with government issuances. This observation is supported by the information noted in the first paragraph of this section – that approximately 35% issuances are characterized as “sovereign”. Second, the degree of overlap between and among categories is not apparent. For example, it is likely that a significant number of issuances in the real estate, transport and power and utilities categories (and others) are also “construction” issuances. Thus, it is difficult to determine the purposes of issuances in most instances from the data in Table 1. Table 2 presents a summary of the frequency of usage of the different types of Sharīʻah-compliant structures for the 596 sukūk issuances in the last decade.

Table 2 Structural Type

Volume (US$ - millions)

% of Total Volume

Number of Offerings

% of Total Offerings

Average Issuance (US$ - millions)

Ijāra

29,567.07

33.7%

225

37.8%

131.41

Mushāraka

27,339.01

31.2%

78

13.1%

350.50

Muḍāraba

10,305.37

11.8%

33

5.5%

312.28

Murābaha

8,065.00

9.2%

112

18.8%

72.01

Istisna’a

5,022.20

5.7%

16

2.7%

313.89

Al-Istithmar

4,332.87

4.9%

4

0.7%

1,083.22

Al Salaam

2,337.73

2.7%

126

21.2%

18.55

650.00

0.7%

1

0.2%

650.00

Other

VOLUME III

SPRING 2009


19

Responsibilities

Responsibilities

Islamic Project Finance: An Introduction to Principles and Structures (continued) Distribution

Distribution

Tax

Tax

As expected, sukūk al-ijāra comprise a large portion of all issuances, both in terms of number of issuances (37.8%, the largest percentage of any structure) and volume (33.7%, the largest volume). In light of the AAOIFI Sukūk Clarification,56 and the reasons for its promulgation, it is interesting to note that the second most frequently used structure, in terms of volume, is the sukūk al-mushāraka (31.2%), with a number of issuances equal to 13.1% of the total, and that the sukūk al-murābaha is also a frequently used structure, FIGURE 17: SHARĪÀH AGREEMENTS comprisingFIGURE 18.8% ofĪ ÀHthe total issuances and 9.2% Entirely of theSharīàh total Compliant volume (and a relatively small average 13: SHAR AGREEMENTS ` Entirely Shar ī ah Compliant issuance amount, prompting supposition that the murābaha structure is frequently used for short-term financings such as working capital or commercial paper equivalents). Together, these two structures comprise 40.3% of the total volume and 31.9% of the total number of issuances.57 Further, there has Management Management Management Istisna ’a Istisna’a only been a single issuance that qualifies as a Sharīʻah-compliant assetManagement securitization, and that issuance Istisna ’a Istisna’a over the decade. accounts for only 0.2% of the total volume of Sukūk issuances Tenor is a critical issue in effective use of sukūk for the Sale development of Islamic capital markets, and a Tax primary concern of practitioners. Tables 3 and 4 focus on the tenors of theSaledifferent structural types. Tax Sale

Sale

Tax

Tax

Only 3.69% of issuances have a tenor of 20 years or more. However, this tenor category represents 19.8% of volume. Considering long-term to be ten years or longer, the figures are 16.44% of number and 38.1%% of volume. This does not bode well in a time, such as the present, of pressing infrastructure development, and related long-term financing needs (Morgan Stanley estimates $21.7 trillion in infrastructure projects through 2014). The mushāraka-muḍāraba-murābaha triad predominates in the long-term category (63.64% in 20+ years; 52.04% in 10+ years). Ijāra structures are a distant second (13.64% in 20+ years; 31.63% in 10+ years). Further distant is the istisna’a (9.09% by number and 6.60% by volume in 20+ years; 13.27% by number and 13.58% by volume of 10+ years). FIGURE 1: TENOR AND SHARĪÀH STRUCTURE BY NUMBER OF ISSUANCES 180 160 140 120 100 80 60 40 20 0 3 Months Al Sa l a a m

20

6 Months Al -Is tithma r

1-4 Yea rs Ija ra h

5 Yea rs Is tis na a

6-9 Yea rs Moda ra ba h

FIGURE 2: TENOR AND SHARĪÀH STRUCTURE BY DOLLAR VOLUME GLOBAL INFRASTRUCTURE VOLUME III SPRING 2009 Millions (US$)

30,000

10-19 Yea rs Mura ba ha

20 Yrs or more Mus ha ra ka

40 20 Islamic Project Finance: An Introduction to Principles and Structures (continued) 0 3 Months

6 Months

Al Sa l a a m

1-4 Yea rs

Al -Is tithma r

Ija ra h





FIGURE 2: TENOR AND SHARĪÀH STRUCTURE BY DOLLAR VOLUME Millions (US$)

30,000 25,000

20,000 15,000 10,000

5,000 0 3 Months Al Sa l a a m

6 Months

Al -Is tithma r

Ija ra h

1-4 Yea rs Is tis na a

5 Yea rs Moda ra ba h

6-9 Yea rs

10-19 Yea rs

Mura ba ha

20 Yrs or more

Mus ha ra ka

Other

Medium term financings are the most common. Five-year tenors comprise 18.79% by number and 31.2% by volume of all issuances and 45.13% are in the 5-9 year category. They comprise 53.42% by number and 58.48% by volume of financings of 1 to 9 years, and 47.82% by number and 59.2% by volume FIGURE 3: ANNUAL ISSUANCES IN TENOR CATEGORIES BY NUMBER OF ISSUANCES of financings of 5-19 years. A medium term definition of 1-19 years results in 55.03% by number and 250 75.9% by volume. Medium200term murābaha structures are of particular interest. By number, these structures are 28.71% in 1-9 year tenors, 31.60% in 5-9 year tenors, and 50.96% in 6-9 year tenors. Volumes show a different150pattern: 8.70% in 1-9 year tenors; 9.71% in 5-9 year tenors; and 35.91% in 6-9 year tenors. Significant medium term murābaha issuance may be indicative of its use as revolving and/or working capital facilities. We suspect that many of these may involve metals and may not be saleable in the 100 secondary markets. By comparison, ijāra structures are found in every tenor group and are strongest in the medium-term categories. Defining that term as from one to ten years, the ijāra constitutes 45.19% by number 50 and 44.99% by volume. If the definition is one to 19 years, the ijāra is 43.81% by number and 33.82% by volume. 0 The mushāraka -muḍāraba-murābaha triad is a large segment of both the long-term and medium-term 2001 2003 2004 2005 2006 2007 2008 markets. It is Pre 48.68% by2001 number2002 and 60.9% by volume of the 10-19 year class, and 51.52% by number and 3 Months 6 Months 1-4 Years 5 Years 6-9 Years 10-19 Years 20 Years & greater 56.6% by volume of the 10-year and longer group. It comprises 70.88% by number and 54.5% by volume of the 1-19 year class, and 78.98% by number and 52.3% by volume in the 1-10 year category. One supposition is that the salutary goal of financing longer term infrastructure projects may have been one of the pressures driving the trend toward conversion these structures to more bond-type characteristics.

FIGURE 4: ANNUAL ISSUANCES IN TENOR CATEGORIES BY DOLLAR VOLUME Million (US$) 35,000 30,000 25,000

VOLUME III

SPRING 2009


21


Another supposition is that the conversion to bond-type structures facilitated the sale of these types of structures in the broader conventional markets.

Salam structures predominate in short-term issuances, and, overwhelmingly, they were issued from Bahrain and Gambia. They constitute 71.26% by number and 62.9% by volume of tenors less than one year, with the ijāra constituting 38.71% by number and 37.1% by volume in that period. The predominance of salam structures in the 3-month category is even more pronounced (91.18% by number; 77.20% by volume). The following table and figures give an indication of shifting trends, by tenor, since 2001. Table 3 and Figure 3 present annual increases in tenor by number of issuances and Figure 4 by Dollar volume. Table 3: Annual Issuances In Tenor Categories By Number of Issuances

Offerings

Pre2001

2001

2002

2003

2004

2005

2006

2007

2008

3 Months

0

0

0

0

0

0

3

13

119

6 Months

0

0

0

0

0

4

12

11

12

1-4 Years

0

1

2

2

3

5

7

9

14

5 Years

0

1

3

7

12

24

10

31

24

6-9 Years

1

5

5

8

17

46

25

25

25

10-19 Years

4

2

2

1

5

4

14

20

24

20 Yrs & more

1

0

0

0

1

6

8

6

Total

6

9

12

18

84

77

117

224

22


37


10,000 10,000

Islamic Project Finance: An Introduction to Principles and Structures (continued) 5,000 5,000 00 Months 33 Months Al Sa Sallaaaam m Al

Months 66 Months

Al-Is -Istithma tithmarr Al

1-4 Yea Years rs 1-4

Ijara rahh Ija

Years rs 55 Yea

Istis tisna naaa Is


Modara raba bahh Moda


Muraba baha ha Mura

20 Yrs Yrs or or more more 20

Musha hara raka ka Mus

Other Other

2007 2007

2008 2008

FIGURE 3: 3: ANNUAL ANNUAL ISSUANCES ISSUANCES IN IN TENOR TENOR CATEGORIES CATEGORIES BY BY NUMBER NUMBER OF OF ISSUANCES ISSUANCES FIGURE 250 250

200 200

150 150

100 100

50 50

00 Pre 2001 2001 Pre

2001 2001 Months 33 Months

2002 2002 Months 66 Months

2003 2003 1-4 Years Years 1-4

2004 2004

Years 55 Years

6-9 Years Years 6-9

2005 2005 10-19 Years Years 10-19

2006 2006

20 Years Years & & greater greater 20

FIGURE 4: 4: ANNUAL ANNUAL ISSUANCES ISSUANCES IN IN TENOR TENOR CATEGORIES CATEGORIES BY BY DOLLAR DOLLAR VOLUME VOLUME FIGURE Million (US$) (US$) Million 35,000 35,000 30,000 30,000 25,000 25,000 20,000 20,000 15,000 15,000 10,000 10,000 5,000 5,000 00 Pre 2001 2001 Pre

2001 2001

2002 2002

Months 33 Months

Months 66 Months

2003 2003 1-4 Years Years 1-4

2004 2004 Years 55 Years

6-9 Years Years 6-9

VOLUME III

2005 2005 10-19 Years Years 10-19

2006 2006

2007 2007

2008 2008

20 Yrs Yrs & & more more 20

SPRING 2009


23


Clearly, there is a strong trend in recent years toward shorter-term issuances. We surmise that this is filling short-term “commercial paper type”, needs. In contrast, the medium-term categories are shrinking somewhat from year to year and the longterm categories that developed in 2006 are stable in subsequent years, a trend that will be welcomed by the infrastructure finance industry. When the data is viewed from this condensed perspective, the predominance of a limited number of structures is even more apparent: the mushāraka and murābaha structures comprise 46.07% of the volume of sukūk issuances over the decade and 35.70% of the total number of issuances in that period. The relatively small average issuance amount of sukūk al-murābaha issuances is also noteworthy. Only 19% of the volume, and 9% of the total number of issuances, fall outside the mushāraka-murābaha-ijāra triad. And, as noted above, significantly less than 1% of the issuances, by Dollar volume and number of issuances, were asset securitizations, which reinforces the observation that bond structures are overwhelming predominant. It is against the foregoing background that the AAOIFI Sukūk Clarification was promulgated in 2008. What is clear from the foregoing data is that sukūk issuance structures are increasing and they provide strong opportunities for integration into Islamic project financings, and it is to those structures, and thereafter the AAOIFI Sukūk Clarification.58 4. Sharīʻah-Compliant Project Finance For both analytical and practical purposes, the primary distinguishing characteristic of Sharīʻahcompliant project financing structures is whether or not they involve a conventional interest-bearing debt component. Transactions have used both types of structures, and this article will consider examples of both types of structures.

24


Although there is a trend (if only of vociferated sentiment) away from structures that incorporate conventional interest-bearing debt into a Sharīʻahcompliant transaction, these structures are still common (and still predominate). They are likely to remain in widespread use for the foreseeable future, if only because of the involvement of Western banks in providing financing. The most common transactions using interest-bearing debt are (a) those involving a single Sharīʻah-compliant tranche in an otherwise conventional financing,59 and (b) those in which conventional debt is provided to a separate special purpose entity (“SPE”) that is related to the Sharīʻah-compliant investors solely through Sharīʻah-compliant contractual arrangements. Each involves a “bifurcated” structure, although the nature of the bifurcation is a bit different in each case. What both of these structures do have in common is that, customarily, they are both built around the use of some variant of an istisna’a (construction) contract structure or an ijāra (lease) structure or both (an istisna’aijāra) for all or a portion of the overall project. Thus, it is useful to understand the basics of ijāra and istisna’a structures before proceeding to analysis of the single tranche or conventional debt structures. As will be apparent as one progresses through this discussion, each of the structures that incorporate conventional interest-bearing debt is rather easily converted to a purely Sharīʻah-compliant structure if a sukūk issuance is substituted for the conventional debt. After considering some istisna’a and ijāra based structures, this article examines a few generic examples of the most common joint venture structures that are purely Sharīʻah compliant: structures based upon the mushāraka and the muḍāraba; and, in section 6, a quadratic partnership structure. To date, the most frequently used Sharīʻah-compliant joint venture structure



has been the mushāraka. Its use is predominantly in the Middle East and Southeast Asia and most transactions using this structure do not involve Western financial institutions.60 Participation by a Western interest-based participant will require that participant to consider risk allocation from the perspective of the Sharīʻah-compliant participant.

Frequently, it is the core structural element of the financing, but is supplemented with other Sharīʻah-compliant elements, such as an istisna’a arrangement and a murābaha working capital arrangement. Subsequent to the completion of construction of a project, it is the primary (usually the sole) repayment mechanism for the financing.

4.1. Bifurcated Ijāra Structures Elemental to many of the Sharīʻah-compliant ` Compliant – Non -compliant īah project Conventional finance structures is theSharijāra , or SharīʻahInvestors compliant lease, Bank financing structure. An ijāra61 is a Other lease Loan Agreementof an object or services involving the Loan Documents transfer of the usufruct or manfa’a (the use of Lease (Ijāra) Understanding to Purchase an object orFunding the services of a person) for a rent Project Understanding to Sell Company Company Contractor Agreement consideration.62 TheManaging nature of the manfa’a must be precisely defined, the rentalSalesconsideration must be Agreements Occupational Tenant Leases for a fixed value, whether payableOffOff-takers in a lump sum -takers / Tenants or installments,63 and the term of the ijāra must be precisely determined. Both the rent and the term must be clearly ascertained and designated in the ijāra.64 However, the rent may escalate or diminish FIGURE 2: GENERIC COLLATERAL SECURITY STRUCTURE: IJ Ā RA - BASED during the rental term so long as the amounts of FINANCING such escalation and/or decrease are specified and known to both parties.65 The lessor is responsible Mortgage, Assignment of Project Company Security Agreements for structural maintenance of the assets and Deed of Trust, Security Agreements correlative obligations (such as property insurance) Security Agreement and these obligations may not be passed to the Funding Project lessee pursuant to Other the ijāra .66 TheCompany lessor is entitled Security Agreements Company to rent as long as the lessee has the enjoyment of Off -take Agreements the leased assets as specified in/ the ijāra.67 Occupational Tenant Leases Off - takers /

Figure 5 sets forth a diagram ofTenants a generic basic ijāra financing structure (without collateral security elements).68 This structure is used in a wide range of transactions, including, notably, financings of real estate projects, petrochemical projects, electricity FIGURE 3: GENERIC ISTISNA ’ A - IJ Ā RA projects and other infrastructure projects.69 It is STRUCTURE widely used not only in OIC jurisdictions, but also in Bank North American and European transactions, and is Loan Agreement Other Loan Documents thus familiar to (at least some) Western financiers. Lease (Ijāra) Construction Arranger

Istisna’a

Funding Company

Understanding to Purchase Understanding to Sell

Project Company

Managing Contractor Agreement Construction Contract General Contractor

FIGURE 5: GENERIC IJĀRA FINANCING STRUCTURE Shar īàh Compliant

Bank

Investors

Loan Agreement Other Loan Documents Funding Company

Lease (Ijāra) Understanding to Purchase Understanding to Sell Managing Contractor Agreement

Project Company

Sales AgreementsOccupational Tenant Leases Off-takers/ Tenants

As noted above, this is a bifurcated structure. FIGURE 6: GENERIC COLLATERAL Arrangements between the Bank and the Funding SECURITY STRUCTURE: IJĀRA-BASED FINANCING Company (to the left side of the diagonal line in Figure 5) are conventional financing arrangements, Bank including interest-bearing loans. Arrangements Mortgage, Deed of Trust, Assignment of Project Company Security Agreements Security Agreements between the Funding Company and the Project Company, between the Security Investors Agreement and the Project Project Funding Company, and between the and Company Company Other SecurityProject Agreements Company the Off-takers or Tenants (to the right side of such Off-take Agreements/ The reasons diagonal line) are Sharīʻah-compliant. Occupational Tenant Leases for the widespread acceptance of this structure by Off-takers/ Western financiers is apparent: those Tenants financiers make conventional loans, as they would in any construction (or acquisition or other equivalent) financing; the relevant credit, underwriting and FIGURE 7: are GENERIC ISTISNA’A -the IJĀRAsame STRUCTURE risk criteria essentially as in any conventional financing, as is the analyses of those elements; Bank there are no changes to financial Loanconventions; Agreement reporting and there are no changes to Other Loan Documents the financier’s back office operations. Lease (Ijāra) Construction Istisna’a Arranger

Sales Agreements / Occupational Tenant Leases Off -takers / Tenants

Conventional - Non-compliant

Funding Company

Construction Contract General Contractor

VOLUME III

SPRING 2009

Understanding to Purchase Understanding to Sell Managing Contractor Agreement

Project Company

Sales Agreements/ Occupational Tenant Leases Off-takers/ Tenants


25


The Sharīʻah-compliant Investors infuse funds into the Project Company.70 The infusion is often by way of capital contributions and loans. The capital contributions may be in cash71 and/or in kind, and the in kind contributions may take the form of land, land rights, contractual rights, operating assets or other assets. In many transactions, the developer may also be an investor in the Project Company. In those transactions, the developer often contributes the land for the project as a capital contribution, realizing any appreciation on land values in so doing. Sometimes, the land may be leased to the Funding Company and then subleased back to the Project Company. This generic example does not illustrate the method of ownership of the Project Company by the Sharīʻah-compliant investors (which will be true in all cases) or such a contributing developer. The precise method by which the Sharīʻah-compliant investors infuse their investment funds into the Project Company will depend upon applicable tax characterizations and the appropriate tax minimization strategies. The infused funds, together with funds made available by the Bank pursuant to the Loan Agreement, are used by the Funding Company to pay for the acquisition or construction of the project. The Funding Company is usually a special purpose entity established expressly for the project financing transaction. Frequently, it is owned by a corporate service company; much less frequently, it is owned by investors other than the Sharīʻah-compliant Investors. This article assumes ownership by a corporate service company. In such a circumstance, the Funding Company may be (although it need not be) characterized as a “disregarded entity” for income tax purposes, particularly in jurisdictions such as the United States of America. In that case, it is relatively easy for the Project Company to be treated as the “owner” of the project for income tax

26


purposes, thereby entitling it to depreciation and other tax benefits. In addition, any income or loss incurred by the Funding Company will be attributable to the Project Company. This, in turn, allows cash and income flows to be structured such that the Funding Company is a “net zero” income and loss entity. In European jurisdictions, and transactions in many OIC jurisdictions, it is significantly more difficult to treat the Funding Company as a disregarded entity because of the inability to treat the Funding Company as a disregarded entity; the Funding Company is then a taxable entity, which has significant ramifications for structuring cash and income flows for the transaction. To achieve tax efficiency, excess income (over and above an amount equal to periodic debt service) will have to be infused into the Funding Company to absorb any tax benefits and losses in the Funding Company. The cash component of that infusion will have to be returned to the Project Company owners (i.e., ultimately, the Sharīʻah-compliant Investors) in a tax-efficient jurisdiction. This has effects on the structure of the ownership of the Funding Company and entails the use of consulting, management and other agreements in the tax efficient jurisdiction. If the Funding Company is owned by investors with a true economic interest, structuring of rent flows, risk allocations, and a wide range of other matters is rather dramatically affected (and that circumstance is not discussed in this article).72 In any event, the Funding Company will hold title to the assets comprising the project. It is structured to be as bankruptcy remote as possible. As noted in the previous paragraph, it will be the borrower under a conventional interest-bearing loan with the Bank. The Funding Company will lease the project assets to the Project Company pursuant to the Lease (Ijāra).73 In jurisdictions in which the Funding



Company is a “disregarded entity” for income tax purposes, this basic rent payable by the Project Company to the Funding Company under the Lease (Ijāra)74 will be structured to be exactly equivalent to the debt service payable by the Funding Company to the Bank under the Loan Agreement (and related documents).75 Further, the transaction must be structured such that any default on the Lease (Ijāra) (and related documents, as hereinafter discussed) will constitute an event of default under the Loan Agreement (and related documents). That is relatively easy to achieve by inserting an event of default in the Loan Agreement (each a “Loan Event of Default”) to the effect that any default under the Lease (Ijāra) and related documents (a “Lease Event of Default”) will also constitute a Loan Event of Default. The obverse is more difficult to achieve because applicable Sharīʻah precepts preclude having one of the Lease Events of Default be the occurrence of a Loan Event of Default. The earliest structures achieved the desired result by mirroring, with precision, the representations, warranties, covenants and other provisions of the Loan Agreement in the Lease (Ijāra) and related documents.76 This was a tedious and costly process and other more expeditious methods of achieving this result have since been developed. The Understanding to Purchase is a Sharīʻahcompliant sale and purchase agreement that may be characterized (somewhat inaccurately), in general terms relevant to conventional concepts, as a “put option” that allows the Funding Company77 to cause the Project Company to purchase the assets comprising the project, in whole or in part, under certain defined circumstances. In a sale and purchase of the whole, the purchase price (or strike price) is equal to the amounts outstanding under the Loan Agreement from time to time (in a jurisdiction in which the Funding Company is a “disregarded entity” for income tax purposes). In a partial sale

and purchase, the purchase price (or strike price) will bear a defined relationship to the outstanding amounts under the Loan Agreement or otherwise be determined by a definable formula. The circumstances under which a sale and purchase is permitted and required will always include a Lease Event of Default (and, without direct reference or incorporation, and assuming careful structuring and drafting, a Loan Event of Default). There may also include other circumstances, which will functionally duplicate any other mandatory prepayment provisions in the Loan Agreement. For example, in an industrial project financing, financing terms are developed around an agreed financial model, and that model assumes operation of the project at defined levels. If the assumed performance standards are not met at completion of construction (say, the equipment does not perform to assumed standards), the financing will be adjusted (downsized) in accordance with performance testing and the adjustment may be effected pursuant to mandatory prepayments (usually, there will also be a readjustment of the debt service amortization schedule under the Loan Agreement, and thus a readjustment of the rent schedule under the Lease (Ijāra)).78 As another example, in a real estate condominium or single family home project, the sale of condominiums or individual homes will entail mandatory prepayments coincident with the early sales. Thus, a specified percentage of the sale proceeds may be applied to mandatory prepayments for the first block of sales, with the percentage of sale proceeds to be applied to prepayments decreasing with subsequent blocks of sales. In all projects, there will frequently be mandatory prepayments in connection with failures to maintain financial covenants (such as loan-tovalue/rent-to-value or interest/rent coverages) or decreases in collateral values.

VOLUME III

SPRING 2009


27


The purchase price under the Understanding to Purchase is initially paid by the Project Company to the Funding Company pursuant to the Understanding to Purchase; the Funding Company then uses those funds to make payment under the mandatory prepayment provisions of the Loan Agreement.79 The necessity of this Understanding arises because of a number of factors, most importantly the Sharīʻah principles and precepts that prohibit acceleration and payment of future rents under an Ijāra, even in default scenarios. The Understanding to Purchase provides a functional equivalent, procedurally and economically, in the lease context, of acceleration of the indebtedness under the Loan Agreement. The Understanding to Sell is a Sharīʻah-compliant sale and purchase agreement that may be characterized (somewhat inaccurately), in general terms relevant to conventional concepts, as a “call option” that allows the Project Company to cause the Funding Company to sell the assets comprising the project, in whole or in part, under certain defined circumstances. The Understanding to Sell is usually structured so as to provide the Project Company with the primary right to purchase the assets. In practice, it is rare for the Project Company to actually take title to the purchased assets unless the Project Company desires to repay the financing in full without incurring further financing for the project and desires to continue operating the project (although even in such a scenario, transfer, recordation and other taxes may render actual title transfer uneconomic). In other instances (such as a refinancing or a sale of the project to a third party), the rights of the Project Company to purchase are assigned in some manner to another entity or the third party so as to avoid multiple asset transfer, recordation and other taxes.

28


In the case of a sale and purchase of the entirety of the assets pursuant to the Understanding to Sell (in a jurisdiction in which the Funding Company is a “disregarded entity” for income tax purposes), the sale price (or strike price) is equal to the amounts outstanding under the Loan Agreement from time to time (although without reference to the Loan Agreement or amounts thereunder). In the case of a sale and purchase of less than all of the project assets, the sale price (or strike price) will again bear some defined or definable relationship to the outstanding amounts under the Loan Agreement (again, without reference to the Loan Agreement or amounts thereunder). Those defined circumstances always include each circumstance that is permissible as a voluntary prepayment right under the Loan Agreement. This functionally allows the Project Company to cause prepayment of the financing, in whole or in part, at the discretion of the Project Company. Depending upon the nature of the transaction, this mechanism would allow the Project Company to sell subsets of the assets comprising the project from time to time. Such a right is frequently embedded in condominium projects, single family home projects, and other projects involving discrete groupings of separately functional assets. The sale price is initially paid by the Project Company to the Funding Company pursuant to the Understanding to Sell; the Funding Company then uses those funds to make payment under the voluntary prepayment provisions of the Loan Agreement.80

Sharīʻah principles and precepts applicable to leasing preclude the lessor from passing structural maintenance obligations (and correlative obligations) to the lessee pursuant to the Lease (Ijāra), thereby precluding “triple-net” leasing that is so common in Western financial arrangements.81



To bring the Sharīʻah-compliant financing transaction existing Western ` Compliant Conventional – into Non -compliantharmony with Shar īah markets, a mechanism is invoked to shift the Bank Investors structural maintenance obligations (and correlative Loan Agreement Other Loan Documents obligations) to the Project Company (which is also Lease (Ijāra) the lessee). This occurs in the Managing Contractor Understanding to Purchase Funding Project Understanding to Sell Company Company Agreement. The Funding Company (which is also Managing Contractor Agreement the lessor) hires the Project Company to perform Sales Agreements Occupational Leases structural maintenance and toTenantundertake defined Off Off-takers -takers / correlative obligations. Tenants The Managing Contractor Agreement contains a second set of provisions that address the making of decisions and determinations andIJ Ā the direction of FIGURE 2: GENERIC COLLATERAL SECURITY STRUCTURE: RA - BASED FINANCING actions by the Funding Company. Basically, these provisions provide that any decision or determination to be made by the Funding Company (a) with Mortgage, Assignment of Project Company Security Agreements Deed of Trust, respect to the Lease (Ijāra) and the Understanding Security Agreements to Purchase will be made by the Bank,82 and (b) Security Agreement with respect to the Loan Agreement and related Funding Project Other Security Agreements Company Company documents will be made by the Project Company. The result is the removal of the Funding Company Off -take Agreements / Occupational Tenant Leasesnothing is quite so from decision making. Of course, Off - takers / simple as we would like. Frequently, the Bank is not Tenants willing to make these decisions and determinations on behalf of, or to direct actions by, a third party entity (the Funding Company). This reluctance may relate to liability concerns or internal institutional FIGURE 3: GENERIC for ISTISNASharīʻah ’ A - IJ Ā RA practices. Similarly, reasons, the STRUCTURE Project Company is unable to make decisions and Bank determinations and have responsibilities in respect Loan Agreement Other LoanAgreement Documents of the Loan and related conventional interest-bearing arrangements. Harmonization Lease (Ijāra) Understanding to Purchase Project Funding Istisna’a Constructionpositions of these with the principle stated in the Understanding to Sell Company Company Arranger Managing Contractor Agreement first two sentences of this paragraph entails some careful structuring and drafting, but is achieved in Construction Contract Sales Agreements / Occupational Tenant Leases the Managing Contractor Agreement. General Off -takers / Tenants

Contractor

Collateral security structures are “a”, if not “the”, most important element of project financings. Collateral security structures are closely tailored

FIGURE 4: GENERIC SINGLE TRANCHE (

FIGURE 5: GENERIC STRUCTURE to the specifics of IJĀRA the FINANCING project being financed. Shar īàh Complianttreat Thus, itConventional is not- Non-compliant possible to comprehensively all of the variations, and the discussion here will Bank Investors focus on general principles applicable to the types Loan Agreement Loan Documents of Other structures that are encountered in SharīʻahLease (Ijāra) compliant financings. Understanding Figure 6 sets forth a generic to Purchase Project Funding Company for an Company depiction of the collateral security Understanding to Sell structure Managing Contractor Agreement ijāra-based financing. It is apparent to experienced Sales Agreementsfinancial lawyers and participants that the bifurcated Occupational Tenant Leases collateral security structure is very similar to the Off-takers/ Tenants collateral security structure of a leveraged lease or synthetic lease transaction.

FIGURE 6: GENERIC COLLATERAL SECURITY STRUCTURE: IJĀRA-BASED FINANCING Bank Mortgage, Deed of Trust, Security Agreements Funding Company

Lease I(jāra) Understanding to Purchase Compliant

Understanding to Sell Managing Contractor Agreement

Other Security Agreements

Project Company

Off-takers/ Tenants

The Project Company will enter into a series of FIGURE 7: GENERIC ISTISNA’A - IJĀRA STRUCTURE Security Agreements with the Funding Company pledging essentially every asset of the Project Bank Company to the Funding Company.83 The collateral subjectLoan to Agreement these security arrangements will include, Other Loan Documents on a case-by-case and highly negotiated basis, Lease (Ijāra) Understanding to Purchase sales, among other things, proceeds of product Projectrents Construction Istisna’a Funding Company Company Arranger Understanding to Sell and proceeds, cash and investments, accounts Managing Contractor Agreement and reserves, licenses, intellectual property rights, Sales Agreements/ Constructionrights, Contract Occupational Tenant Leases under technology and contractual rights General Off-takers/and construction contracts, operating agreements Contractor Tenants 84 sales agreements. The entirety of the collateral security provided by the Project Company to the

FIGURE 8: GENERIC SINGLE TRANCHE (IJĀRA) FINANCING STRUCTURE

IJ Ā RA ) FINANCING

Conventional Loan Agreement Other Loan Documents

Security Agreement

Off-take Agreements/ Occupational Tenant Leases

STRUCTURE

Non-Compliant

Assignment of Project Company Security Agreements

Non-Compliant

VOLUME III

Bank

SPRING 2009


GLOBAL INFRASTRUCTURE Project Lease (Ijāra)

Understanding to Purchase

Company

29


Funding Company is collectively referred to as the “Project Company Collateral”. These assets are pledged to secure (a) the payment and performance obligations of the Project Company pursuant to the Lease Conventional (Ijāra– )Non and the Understanding to Purchase, ` Compliant -compliant Shar īah and (b) on and after the time of exercise of the Bank Investors Understanding to Sell, if the same shall have been Loan Agreement Other Loan Documents exercised and if the obligations are irrevocable, Lease (Ijāra) the payment and performance obligations of the Understanding to Purchase Funding Project Project Company pursuant to the Understanding Understanding to Sell Company Company Managing Contractor Agreement to Sell. They are not provided in respect of the Sales Agreements various obligations underOccupational the Managing Contractor Tenant Leases Off-takers -takers /drafted to be Agreement because those rights Offare Tenants self-effecting and, in accordance with the terms of that agreement, include self-effecting variations and limitations arising in the different non-default andFIGUREdefault contexts. Similarly, the right of the 2: GENERIC COLLATERAL SECURITY STRUCTURE: IJ Ā RA - BASED FINANCING Project Company to pay off the financing at any time in a default scenario should not be restricted (just Mortgage, as it is not restricted in a conventional loan Assignment of Project Company Security Agreements Deed of Trust, agreement) and the collateral security package Security Agreements should thus not include the contractual rights of the Security Agreement Project Company under the Understanding to Sell, Funding Project Other Security Agreements Company 85 TheCompany Project Company even in a default scenario. is not permitted to pledge its assets directly to the Off -take Agreements / Occupational Tenant Leases loan financing.86 Bank to secure the conventional

Finally, the Funding Company will collaterally assign to the Bank all of the rights the Funding Company has in Project Company Collateral. FIGURE 5: GENERIC IJĀRA FINANCING STRUCTURE

The last assignment is of particular note.` The rights Conventional - Non-compliant Shar īah Compliant of the Funding Company in respect of the Project Bank Investors Company Collateral are not exercisable absent Loan Agreement a Other Lease Event of Default. If the Lease Events of Loan Documents Default do not match, precisely, the Loan Events of Lease (Ijāra) Understanding to PurchaseEventProject Default and Funding there shall be a Loan of Default Company Company Understanding to Sell but no Lease EventManaging of Default, the Bank can find Contractor Agreement itself in the rather difficult position of not being Sales AgreementsOccupational Tenant LeasesCollateral. able to realize on the Project Company Off-takers/ Specifically, it may not be able to obtain the direct Tenants benefit of product sales proceeds and occupational tenant rents.87 4.2. Bifurcated Istisna’a-Ijāra Structures

FIGURE 6: GENERIC COLLATERAL SECURITY STRUCTURE: IJĀRA-BASED FINANCING

A generic istisna’a-ijāra structure is set forth in Figure 7. This structure has also been used Bank frequently in North America with a wide range of Mortgage, Deed of Trust, Assignment of Project Company Security Agreements Security Agreements assets and is familiar to many Western financiers 88 Security Agreement and construction contractors. The structure Project Funding Company is comprisedCompany of the Other ijāra structure described in Security Agreements the preceding section along with an istisna’a structure. The discussion Occupational inOff-take thisAgreements/ section will focus Tenant Leases Off - takers / on the additional elements of the structure and Tenants Off-takers/ The collateral security arrangements between the differences between the istisna’a-ijāra Tenants and the the Funding Company and the Bank are previously discussed ijāra structure. essentially identical to any other conventional loan arrangement. All of these security interests will secure the obligations ofISTISNA the’ A - Funding Company to FIGURE 7: GENERIC ISTISNA’A - IJĀRA STRUCTURE FIGURE 3: GENERIC IJ Ā RA the Bank under the STRUCTURE Loan Agreement and related Bank documents. TheBank Funding Company will grant, Loan Agreement directly to the Bank, a first mortgage or deed Other Loan Documents Loan Agreement Other Loan Documents of trust on the real property (land and buildings) Lease (Ijāra) Lease (Ijāra) assets to which itFunding holds estate, right, title or interest. Understanding to Purchase Project Understanding to Purchase Istisna’a Construction Project Construction Funding Istisna’a Understanding to Sell Company Company Arranger Company Company Arranger Understanding to Sell The Funding Company willContractor also grant to the Bank Managing Agreement Managing Contractor Agreement securityConstruction interests in any other assets with respect Contract Sales Agreements / Sales Agreements/ Occupational Tenant Leases (and this will to which it has any right, title or interest Construction Contract Occupational Tenant Leases General Off -takers / Contractor include all of the various categoriesTenants noted above General Off-takers/ Contractor Tenants with respect to the Project Company Collateral).

FIGURE 4: GENERIC SINGLE TRANCHE (

30

IJ Ā RA ) FINANCING

STRUCTURE

GLOBAL INFRASTRUCTURE Non-Compliant



FIGURE 8: GENERIC SINGLE TRANCHE (IJĀRA) FINANCING STRUCTURE

Non-Compliant

Bank



An istisna’a is a construction contract.89 The mustasne’ (a client requiring the construction of an asset) orders from a sane’ (constructor) an asset meeting certain specifications (the masnou’), with asset delivery to be within a specified period of time.90 The mustasne’ will be required to pay the purchase price of that asset if the asset is manufactured or constructed within the specified time period and meets the agreed-upon specifications.91 The sane’ need not construct the asset itself (absent a contractual requirement that it do so); it may locate the asset in the market and purchase it for delivery to the mustasne’ or it may cause another party to construct the asset.92 If the original sane’ causes another sane’ to manufacture or construct, the original sane’ remains liable to the original mustasne’ for the delivery of the masnou’. If the Funding Company were not used in the structure, and no conventional loan were made, the banks (or a special purpose entity) would be the original sane’ and would contract with another sane’ (the end sane’) for the construction of the asset.93 The amount to be paid for the masnou’ must be fixed. That price may not be altered unless the specifications of the masnou’ are altered.94 The mustasne’ may sell the masnou’ to a third party. The method by which the Sharīʻah-compliant investors infuse funds into the Project Company is essentially the same as that described in the preceding section, although investment by the project developer is more common in a construction project. As noted in Figure 7, two special purpose entities are established, each of which is owned by a corporate service company: the “Funding Company” and the “Construction Arranger”.95 In many, if not most, cases, the General Contractor is not willing to enter into an istisna’a (or doing so would be prohibitively costly). Often, this is because General Contractors use standardized construction contracts and are avidly averse to modifying

them. The Construction Arranger is a structural modification designed to reduce transactional costs. The Construction Arranger is not necessary in a transaction in which the General Contractor is willing to enter into an istisna’a and it is not prohibitively costly to negotiate that agreement. In such a case, the Project Company or the Funding Company could enter into the istisna’a and the Construction Arranger would be unnecessary. In many jurisdictions, there are licensing issues with respect to general contractors and it is necessary to ensure that the Construction Arranger falls outside those licensing requirements. In any case, the Funding Company will hold legal title to the project being constructed. The Funding Company must obtain sufficient funds to construct the project. These funds are derived from two sources: the contribution by the Project Company of all funds received from the Sharīʻah-compliant investors and, in many cases, the project sponsor and/or operator; and the conventional interest-bearing loan from the Bank. The Project Company negotiates the Construction Contracts with the General Contractor. However the Construction Contracts are executed by the General Contractor and the Construction Arranger. It is at this point that the Sharīʻah-compliant structure becomes relevant.96 The Funding Company and the Construction Arranger will enter into the Istisna’a, a Sharīʻah-compliant construction contract. The Construction Contracts with the General Contractor are attached to the Istisna’a, usually as exhibits. The disbursement mechanism in the conventional Loan Agreement (including conditions precedent to disbursements) will be mirrored in the Istisna’a, although the Istisna’a will speak in terms of milestone completion payments rather than loan disbursements. In terms of documentary obligations, funds will be distributed to the Funding Company who will pay them over

VOLUME III

SPRING 2009


31

Conventional - Non-compliant

Shar īàh Compliant

Bank

Investors

Islamic Project Finance: An Introduction to Principles and Structures (continued) Loan Agreement Other Loan Documents


Funding Company

Project Company

Sales AgreementsOccupational Tenant Leases Off-takers/ Tenants

to the Construction Arranger who, in turn, will pay them to the General Contractor. In practice, the Bank makes payment directly to the FIGUREusually 6: GENERIC COLLATERAL SECURITY STRUCTURE: IJĀRA-BASED General Contractor (often pursuantFINANCING to an accounts agreement or lock-box arrangement). Bank

of Trust, is constructed, AsMortgage, the Deed project it is Security leased to the Assignment of Project Company Agreements Security Agreements Project Company pursuant to the Lease (Ijāra).97 Security Agreement This enables Funding the Project Company to operate the Project Company Other Security Agreements project and utilize operating revenues Company to pay rent under the Lease (Ijāra). The lease rate is generally Off-take Agreements/ Occupational equal to the debt service on Tenant the Leases conventional Off-takers/ loan (at least in jurisdictions in which the Funding Tenants Company is a “disregarded entity” for income tax purposes).98 Thus, the Funding Company will use its lease rentals to pay its debt service obligations to theFIGURE Bank.7: GENERIC ISTISNA’A - IJĀRA STRUCTURE

4.3. The Single-Tranche Ijāra-Based Structure Bank

The earliest Loan Agreementattempts to incorporate SharīʻahOther Loan Documents compliant elements in Middle Eastern project Lease (Ijāra) financings involved theUnderstanding insertion single to Purchaseof aProject Construction Istisna’a Funding Company Company Arranger Understanding to Sell Sharīʻah -compliant tranche (or multiple Sharīʻah Managing Contractor Agreement compliant tranches) into an otherwise conventional, Sales Agreements/ Construction Contract interest-based financing (referred Occupational to Tenanthere Leases as a 99 Generaltranche structure). single The Sharīʻah-compliant Off-takers/ Contractor Tenants tranche is usually effected using an istisna’a and/ or an ijāra structure. A simplified generic depiction of a single tranche ijāra structure is depicted in Figure 8. FIGURE 8: GENERIC SINGLE TRANCHE (IJĀRA) FINANCING STRUCTURE Non-Compliant

Bank


Lease (Ijāra) Compliant

Funding Company


Project Company


Participation

Leases or Offtake Agreements Tenants or Offtakers

Bank

In single-tranche transactions, a portion of the project assets are isolated. In an istisna’a-based structure, construction financing is provided pursuant to an istisna’a applicable to the isolated assets, and the remainder of the project is financed with conventional interest-bearing debt. The payments of the mustasne’ to the sane’ constitute the basis, directly or indirectly, of the repayments to the financing bank providing the Sharīʻahcompliant tranche. In an ijāra tranche structure (which is probably more common), construction of the isolated assets is often conventionally financed or financed pursuant to an istisna’a and the assets are then leased to the Project Company pursuant to an ijāra as previously discussed. The rent payments by the Project Company are the basis for repayment of the Sharīʻah-compliant tranche. In some transactions, the ijāra constitutes the second leg of a sale and leaseback transaction.100 Triggers, rights and remedies under the conventional loan agreement and the istisna’a or ijāra documents must be harmonized to ensure co-equal and pari passu treatment of the conventional tranches and the Sharīʻah-compliant tranches. These are particularly difficult issues, both conceptually and in terms of drafting. The project is usually a single integrated and indivisible whole. In most project financings it will be a necessity that both sets of documents default simultaneously lest a part of the project be subject to remedies or strictures while another group of assets is not subject to remedial action.101 Similarly, it is generally unacceptable to have one set of financiers not being paid while the other set of financiers is being paid from revenues of what is for all practical purposes one integrated project. Other examples relate to the sharing of proceeds upon the exercise of remedies. Even in the instance where there is absolute harmony with respect to events of default and the exercise of remedies and where all of the assets

FIGURE 9: GENERIC ISTISNA’A – PARALLEL ISTISNA’A STRUCTURE Entirely Sharīàh Compliant 32

GLOBAL INFRASTRUCTURE Parallel Istisna’a Agreement


Istisna’a Agreement

FIGURE 3: GENERIC

FIGURE 7: GENERIC ISTISNA’A - IJĀRA STRUCTURE

ISTISNA ’ A - IJ Ā RA

STRUCTURE Bank

Bank

Islamic Project Finance: An Introduction to Principles and Structures (continued) Loan Agreement Other Loan Documents

Loan Agreement Other Loan Documents

Lease (Ijāra) Construction Arranger

Istisna’a


Funding Company

Understanding to Sell

Project Company

Construction Istisna’a Arranger

Managing Contractor Agreement Construction Contract

Sales Agreements / Occupational Tenant Leases

General Contractor

Leases orOfftake Agreements

Further, there are significant issues of which group of financiers will control the exercise of remedies, and related issues of priority of the respective interests in any remedy proceeding. The interests of the conventional and Sharīʻah-compliant tranches and related FIGURE financiers may be significantly different, 5: GENERIC ISTISNA ’ A – PARALLEL ISTISNA ’ A STRUCTURE particularly if a portion of the assets backing the Entirely Shar īàh Compliant Sharīʻah-compliant tranche is not fully available Parallel to the conventional tranches (for example, where Istisna’a Istisna’a Agreement Agreement Construction Developer tranche Banks the assets backing the Sharīʻah -compliant Contractor Masnou Masnou End Sane ’ and End Sane ’ are available to supportMustasne only’ principal –Mustasne not’ interest Total Istisna’a Cost Istisna’a Amount – payments due to the conventional tranches). Complicated intercreditor arrangements will be structured to address these and similar issues, and those intercreditor arrangements will themselves stress Sharīʻah compliance (and have given rise to extensive debate among Islamic scholars, FIGURE 6: GENERIC SUKUK AL - IJ Ā RA FINANCING STRUCTURE financiers and investors). Entirely Shar ī àh Compliant The “permissible variance” conceptsInvestors evolving from Holders the Sukuk Dow Jones Fatwā have been invoked to effect solutions to the foregoing issues. It is likely that Lease ( Ijāra ) this trend will continue for the foreseeable future Understanding to Purchase Funding Project to Sell given Company the pressing Understanding infrastructure needs Company throughout Managing Contractor Agreement the OIC, the necessity, and desirability of involving Sales Agreements conventional Western financiers in these large Occupational Tenant Leases capital projects, the desire of Offhost countries - takers / Tenants to move toward Sharīʻah-compliant financing

IJ Ā RA

BANK

Project Company

Sales Agreements/ Occupational Tenant Leases

General Contractor

are sold as an integrated whole, it is unlikely that the assets allocated to one portion of the financing (say, the ijāra) will have a collateral value equal to the amounts secured under that portion. Both compliant and conventional financiers will demand FIGURE 4: GENERIC SINGLE TRANCHE ( IJ Ā RA ) FINANCING participation on a pro rata basis, which means STRUCTURE there will almost certainly be collateral sharing Conventional Loan Agreement Other Loan Documents amongNon-Compliant them. Thus, some of the assets subject to the ijāra are in essence pledged to secure a Lease I(jāra) Understanding to Purchase ribā-based financing, and vice versa. The compliant Compliant Understanding to Sell and noncompliant portions end up securing Managing Contractor Agreement one another.102 Participation

FIGURE 7: GENERIC


Construction Contract

Off -takers / Tenants

Sukuk

Funding Company

Off-takers/ Tenants

techniques, the reluctance of all financiers to use purely Sharīʻah-compliant structures, and existing legal impediments, among other factors. 4.4. Istisna’a – Parallel Istisna’a Structures FIGURE 8: GENERIC SINGLE TRANCHE (IJĀRA) FINANCING STRUCTURE

A project financing structure that is frequently used Conventional Loan Agreement in the Middle East and Southeast Asia, and that Other Loan Documents Bank Non-Compliant involves no conventional debt, is comprised of two back-to-back istisna’a contracts. The structure has Project Lease (Ijāra) not been used with any frequency in transactions Company Understanding to Purchase Funding involving banks (whether Western Compliant non-Islamic Company Understanding to Sell or resident in thoseManaging jurisdictions) Contractor Agreement because of concerns about bank liability and legal (particularly Participation Leases or Offtake Agreements bank regulatory) issues as well as underwriting Tenants or Bank – parallel istisna’aOfftakers structure matters. This istisna’a is illustrated in Figure 9.103 FIGURE 9: GENERIC ISTISNA’A – PARALLEL ISTISNA’A STRUCTURE Entirely Sharīàh Compliant

Construction Contractor End Sane’

Parallel Istisna’a Agreement

Banks

Masnou Total Istisna’a Cost


Developer

Masnou Sane’ and Mustasne’

Istisna’a Amount

End Mustasne’

The original (or end) mustasne’ (the Developer) FIGURE 10:the GENERIC SUKŪK will request Banks, asAL-IJĀRA the original sane’, to FINANCING STRUCTURE finance the construction of the project pursuant Entirely Sharīàh Compliant to the Istisna’a Agreement. In accordance with accepted Sharīʻah principles, the Banks will act Sukūk Investors Holdersin the Parallel Istisna’a Agreement as mustasne’ SukukConstruction Contractor, the end sane’. with the Lease (Ijāra) The terms of the Istisna’a Agreement and the Understanding to Purchase Funding Project Parallel Istisna’a Agreement essentially Understanding to Sellwill be Company Company Managing Contractor payment. Agreement identical except as regards Pursuant to the Parallel Istisna’a Agreement, Sales Agreements -the Banks will Occupational Tenant Leases make payment to the Construction Contractor on Off-takers/ Tenants

FIGURE 11: GENERIC IJĀRA BANK PARTICIPATION STRUCTURE

PARTICIPATION

STRUCTURE

VOLUME III Participation Agreement Share Call Agreement

SPRING 2009 Islamic Bank


33


a current installment basis104 while the obligation of the Developer to pay the Banks for construction will be on a deferred installment basis and will include a profit amount for the Banks. Of course, all required elements for a valid Istisna’a agreement must be satisfied with respect to both the Istisna’a Agreement and the Parallel Istisna’a Agreement. For example, the agreements will have to be adherent to the Sharīʻah principles and precepts pertaining to conformity to agreed specifications, options of inspection, delivery, and defects, particularly latent and nondiscoverable defects. The drafting should incorporate inspection rights and appropriate waivers of liability to address these principles and should be precise as to the time and liabilities associated with delivery of the masnou’ (the project). For example, it is prudent to require ongoing inspections of the work by the original mustasne’ (the Developer) with failure to so inspect, or negligence in inspecting, relieving the Bank of liability. Incorporation of periodic delivery and acceptance concepts will also limit liability exposures.105 One of the liability issues that has impeded the use of this structure arises as a result of a critical imperative of istisna’a structures under Sharīʻah principles and precepts: the Banks will be obligated to the Developer on the Istisna’a Agreement regardless of whether the Construction Contractor performs on the Parallel Istisna’a Agreement. The Istisna’a Agreement and the Parallel Istisna’a Agreement are entirely separate and distinct agreements and there will be no privity between the Developer, as the original or end mustasne’, and the Construction Contractor, as the endsane’. Careful structuring and drafting is necessary to address the liability exposure of the Banks.

34


However, there are acceptable means of addressing these issues. These include (a) damage limitation provisions in the Istisna’a Agreement that limit the damages payable by the Banks to the Developer in circumstances where there was a default on the Parallel Istisna’a Agreement (although these provisions do not make direct reference to the Parallel Istisna’a Agreement), and (b) provisions for extension of performance periods where the Parallel Istisna’a Agreement is not performed in a timely manner (again, usually without direct reference to the parallel Istisna’a Agreement). 4.5. Sukūk al-Ijāra Structures A slight variation to the bifurcated ijāra structure discussed in section 4.1 of this article will eliminate the need for conventional debt. This variation makes use of the sukūk al-ijāra as a substitute for the conventional debt. Many of the Sharīʻah-compliant real estate (and private equity) transactions in North America and Europe have involved conventional interest-bearing debt provided by conventional banks and have been structured using the bifurcated ijāra structure, but have also been structured in anticipation of the possible substitution of the sukūk al-ijāra for the conventional debt with minimal structural change and low transaction costs. Those transactions have also been structured to allow a conventional bank or financial institution to hold the sukūk al-ijāra and syndicate or participate that holding in accordance with existing underwriting criteria of those banks and financial institutions and in accordance with existing conventional banking regulations. The sukūk al-ijāra is illustrated in Figure 10 (trust, trustee and similar elements are not depicted in this illustration).


Parallel Istisna’a


Banks

Cost

End Mustasne

Istisna’a Amount

Parallel Agreement Istisna’a Masnou Agreement

’

Construction End Sane ’ Contractor End Sane’

AL - IJ Ā RA

Banks

End Developer Mustasne ’

Istisna’a Amount

Masnou

Contractor

Masnou

Sane’ and Mustasne’

Total Istisna’a Cost

SUKUK

AL - IJ Ā RA

End Sane’

End Mustasne’

Istisna’a Amount

Investors

Investors Lease ( Ijāra ) Understanding to Purchase

Sukuk Funding

nderstanding to Purchase

Project


Lease (Ijāra)

Company

Managing Contractor Agreement

Company

ging Contractor Agreement

Project


Company


Funding Company

UnderstandingSales to Sell Agreements

Occupational Tenant Leases

Sales Agreements Occupational Tenant Leases

Project Company


Off - takers /

Sales Agreements - Tenants Occupational Tenant Leases

Off - takers / Tenants

Off-takers/ Tenants

IJ Ā RA

BANK

PARTICIPATION

TRUCTURE

Lease (Ijāra )


aging Contractor Agreement Mortgage Security Documents Site Lease Sales Agreements

E 8: GENERIC

ba

SUKUK

AL - MUD Ā RABA

STRUCTURE Rabb ul-mall

uk ers

Investors

Lease (Ijāra) Understanding to Purchase Understanding to Sell

Project Company

It is apparent that the only structural change is the substitution of the sukūk Holders for the Bank FIGURE 11: GENERIC IJĀRA FIGURE 7: GENERIC IJ Ā RA BANK PARTICIPATION BANK PARTICIPATION STRUCTURE (compare Figure 5). IfSTRUCTURE the sukūk is to be publicly offered or privately placed, the Funding Company Islamic Participation Agreement Bank (and Project Company) will have to comply with Share Callthe Agreement Share Pledge Lease (Ijāra ) Participationsecurities Agreement relevant laws, and the Funding Company Share Call Agreement Understanding to Purchase Share Pledge will have to be constituted as an issuer trust or issuer Understanding to Sell Lease (Ijāra) Managing Contractor Agreement special purpose entity Understanding integrating relevant fiduciary to Purchase Mortgage to Sellissuance vehicle and trust concepts (or aUnderstanding separate Security Documents Managing Funding Project Site Lease Contractor Agreement will have to beCompany established). However, the structure Company Mortgage Sales Agreements is also amenable to having a conventional Bank Security Documents Site Lease (the Bank in Figure 5) be the sole (or sole initial) Sales Agreements Sukūk Holder on terms quite similar to those that would otherwise be incorporated in a conventional Off-takers loan. Such a transaction could be structured as a “loan” for regulatory purposes in Western FIGURE 8: GENERIC SUKUK AL - MUD Ā RABA jurisdictions andMudāraba a “sukūk ” for Sharīʻah purposes. STRUCTURE FIGURE 12: GENERIC SUKŪK Exploration of these possibilities should further Rabb ul-mall Investors AL-MUDĀRABA STRUCTURE Sukuk Holders facilitate the acceptance of Sharīʻah -compliant Mudāraba Sukuk financing techniques in Western jurisdictions, and Sukūk Lease (Ijāra) ul-mall Rabb also allow for implementing transactions atInvestor a lower Holders Understanding to Purchase Funding Project Istisna’a Construction level of transaction Company costs. Company Understanding to Sell Arranger Sukūk Managing Contractor Agreement

Lease (Ijāra)

Managing Contractor Agreement Construction Contract

Sales Agreements Occupational Tenant Leases Mud ārib


Construction Istisna’a Arranger General Contractor

Funding Company

Sales Agreements Understanding to Purchase Occupational Tenant Leases

Mud ārib


Managing Contractor

General Contractor

Off -takers / Tenants Agreement

Project Company

Off-takers/ Tenants

Mudārib

SUKUK

AL - MUSH

Ā RAKA

Istisna’a Amount

End Mustasne’

FIGURE 11: GENERIC IJĀRA BANK PARTICIPATION STRUCTURE Islamic Bank Participation Agreement Share Call Agreement Share Pledge

FORMATION AND

Lease (Ijāra) Understanding to Purchase Understanding to Sell

Funding Company

Managing Contractor Agreement Mortgage

Project Company

Security Documents Site Lease Sales Agreements Off-takers

For purposes of thisSUKŪK discussion, let us assume FIGURE 12: GENERIC AL-MUDĀRABA STRUCTURE that (i) an energy, fuel production or other project Mudāraba has been constructed by the Project Company in the United StatesSukūk or another Western jurisdiction Rabb ul-mall Investor and has enteredHolders the operational phase, (ii) the Sukūk construction financing was incurred directly by the Lease (Ijāra) Project Company, (iii) the Understanding Project toCompany desires Purchase Construction Funding Project Istisna’a to take financing put long Understanding to Sell and Company Company Arranger out the construction Managing Contractor Agreement

General Contractor

VOLUME III FIGURE 9:

Sane’ and Mustasne’






Developer

Masnou

Sharīʻah compliant has been used in energy and fuel Sukūk Investors production Holders project financings in the United States (and other jurisdictions). It is here referred to as an Sukuk “ijāra participation structure” Lease (Ijāra) because the Islamic Understanding to Purchase Bank providing and Funding the financing for construction Project Understanding to Sell Company operation ofCompany the project is repaid pursuant to a profit Managing Contractor Agreement participation of 100% in the income of the Funding Sales Agreements Leases Company. The income Occupational of the Tenant Funding Company Off-takers/(Ijāra). A is comprised of rent under the Lease Tenants generic ijāra participation structure is illustrated in Figure 11.

Sukuk

Lease ( Ijāra )

Masnou

FINANCING STRUCTURE Entirelyof Sharīàh Compliant A variant the basic ijāra structure that is entirely

Investors

Sukūk Holders


Banks

4.6. Ijāra Participation Structures FIGURE 10: GENERIC SUKŪK AL-IJĀRA

FINANCING

STRUCTURE FIGURE 10: GENERIC SUKŪK AL-IJĀRA Entirely Shar ī àh Compliant FINANCING STRUCTURE Sukuk Holders Sharīàh Compliant Entirely

FINANCING

Parallel Istisna’a

Developer

Masnou

Sane ’ and Banks Mustasne ’


FIGURE 6: GENERIC SUKUK


Istisna’a Agreement Islamic Project Finance: An Introduction to Principles and Structures (continued) Agreement Construction Construction Contractor

Developer

Masnou

Sane ’ and Mustasne ’

STRUCTURE ely Shar ī àh Compliant

y

Entirely Sharīàh Compliant

Entirely Sharīàh Compliant

Entirely Shar īàh Compliant

Mudārib

Off-takers/ Tenants

SPRING 2009 GLOBAL INFRASTRUCTURE FIGURE 13: SUKŪK AL-MUSHĀRAKA

35


term financing in place,106 (iv) there are no Sharīʻahcompliant equity investors in the transaction (i.e., unlike the transactions illustrated in Figures 5 and 10, there are no such investors in the Project Company), (v) the Project Company owns the land on which the project has been constructed and it is prohibitively expensive (due to potential transfer tax incurrences) to move title to the land,107 (vi) the Project Company is the operator of the project, (vii) conventional investors, through the Project Company, provide 25% of the construction cost of the project as a pure equity investment and an Islamic Bank provides 75% of the construction cost of the project, (viii) the Islamic Bank will only provide financing if the entire transaction is Sharīʻah compliant, and (ix) the Islamic Bank is “foreign” to the jurisdiction in which the long-term financing transaction occurs and the Islamic Bank is not taxed as doing business in that jurisdiction (and does not desire to be taxed as doing business in that jurisdiction). The transaction will be structured as a sale-andleaseback in which the Project Company sells the operating facilities to the Funding Company (thereafter, the Funding Company owns all title to the facility assets). In order to provide the Funding Company with the necessary real estate rights to own the facility on the land, the Project Company will concurrently lease the land on which the facility has been constructed to the Funding Company (pursuant to the Site Lease). The Funding Company will thereafter lease the operating facilities, and sublease the land, to the Project Company (pursuant to the Lease (Ijāra)). To effect the lease and sublease of the facilities and the land, and effect the financing arrangements, the customary ijāra-based Sharīʻah-compliant structure will be put in place. It is comprised of the Lease (Ijāra), the Understanding to Purchase, the Understanding

36


to Sell, and the Managing Contractor Agreement. These documents are essentially the same as the customary documents previously discussed, with a few variances. First, because title to the land is held by the Project Company and the land is leased to the Funding Company for the period of the financing pursuant to the Site Lease, the Lease (Ijāra) will contain a sublease of the land back to the Project Company to allow the Project Company to occupy the land and operate the facility (the facility being leased to the Project Company pursuant to the Lease (Ijāra)). Second, the rent on the Lease (Ijāra) will not be set as identical to a conventional loan rate because there is no conventional loan. The rent rate will likely still be determined relative to a reference rate (such as LIBOR, EURIBOR or EIBOR), but will stand alone as a pure lease rate. Third, the provisions of the Managing Contractor Agreement relating to the making of decisions and determinations by the Funding Company will be significantly modified because of the absence of a conventional loan and the elimination of an entire set of decisions and determinations in respect of that loan (these provisions may be included in the Participation Agreement, thereby eliminating the need for the Managing Contractor Agreement). The Project Company will provide a first mortgage or deed of trust on the real estate assets (i.e., the land and improvements constituting real estate) and security interests over all other Project Company assets (including personal property, receivables and payments in respect of off-take arrangements and proceeds of insurance) to the Funding Company. These will be provided to secure the payment and performance obligations of the Project Company under the customary Sharīʻah documents, as noted above. These obligations will include the payment of rent under the Lease (Ijāra), the payment of the purchase prices under the Understanding to Purchase and the Understanding to Sell, the


Sukuk


Funding


Company


Lease (Ijāra)

Project Company


Funding Company

Islamic Project Finance: An Introduction to Principles and Structures (continued) Sales Agreements Occupational Tenant Leases


Project Company

Managing Contractor Agreement Sales Agreements Occupational Tenant Leases

Off - takers / Tenants

Off-takers/ Tenants

performance of the FIGURE 7: GENERIC IJ Ā RA covenant BANK PARTICIPATION obligations of the STRUCTURE Project Company under the Lease (Ijāra), and the performance of the maintenance and insurance Participation Agreement Share Call Agreement obligations of the Project Company under the Share Pledge Lease (Ijāra ) Managing Contractor Agreement. Understanding to Purchase Understanding to Sell

Agreement The financing willManaging beContractor provided by the Islamic Bank Mortgage to the Funding Company Security Documents to enable the Funding Lease Company to acquireSitethe operating facilities from Sales Agreements the Project Company. The Islamic Bank and the Funding Company will enter into a Participation Agreement pursuant to which the Islamic Bank will take a 100% participation in the income of the Funding Company. The income of the Funding Company will be comprised entirely of rent under FIGURE 8: GENERIC SUKUK AL - MUD Ā RABA ), purchase the Lease (IjāraMudāraba STRUCTURE payments under the Understanding to PurchaseRabband the Investors Understanding ul-mall Sukuk Holdersof insurance and awards, and to Sell, proceeds Sukuk amounts realized on the collateral. The Funding (Ijāra) Company will retain no Lease income from these (or Understanding to Purchase Funding Project Istisna’a Construction Company other) sources. Company Understanding to Sell Arranger

FIGURE 11: GENERIC IJĀRA

BANK PARTICIPATION STRUCTURE 4.7. Muḍāraba Structures

The muḍārabaIslamic is, and has long been, a preferred Bank method of project financing under the Sharīʻah, Participation Agreement Share Call Agreement although it has not been frequently used in modern Share Pledge Lease (Ijāra) project financings. It is a purely Sharīʻah-compliant Understanding to Purchase structure. A generic muḍāraba structure is set Understanding to Sell forth in Figure 12.108 This illustration depicts a Managing Contractor Agreement Funding Project Company Company Mortgage a bank financing. sukūk financing, rather than Security Documents However, as with the bank ijāra – sukūk al-ijāra, Site Lease the structures are easily interchangeable. To tie Sales Agreements the generic structure more closely to configurations Off-takers used in current project financings, this illustration also incorporates the istisna’a-ijāra structure. FIGURE 12: GENERIC SUKŪK AL-MUDĀRABA STRUCTURE Mudāraba Sukūk Holders

I-2

Investor

Sukūk Lease (Ijāra)


The most difficult issues that arise- in connection Sales Agreements Construction Contract Occupational Tenant Leases Mud ārib with General the use of this Ijāra participationOffstructure relate -takers / Tenants Contractor to taxation and bank regulatory considerations. For example, great care will have to be exercised to ensure that the Islamic Bank is not “doing business” or “conducting banking business” within the United States or other relevant jurisdiction. Doing business would subject the Islamic Bank to taxation within the United States or such other jurisdiction (possibly in violation of bank regulatory requirements if those have not been satisfied). Conducting banking business may subject the FIGURE 9: SUKUK AL - MUSH Ā RAKA FORMATION AND FUNDING Islamic Bank to the full range of banking licensing and regulatory requirements within the United Sukuk Holders StatesSukukor other relevant jurisdiction. Careful legal Proceeds structuring should enable the Islamic Bank to Mush āraka Agreement Project utilize this structureMur ābaha without adverse tax and Issuer Agreement Company regulatory consequences, but it is very careful PC-1 structuring indeed. I-1

Rabb ul-mall

Construction Istisna’a Arranger

Funding Company


Project Company

Managing Contractor Agreement Sales Agreements Occupational Tenant Leases

Construction Contract General Contractor

Off-takers/ Tenants

Mudārib

A muḍāraba is a profit-sharing partnership defined by the nature of the contributions of the muḍārib and the rabb ul-maal to the partnership.109 One party (the bank or the sukūk holders) acts as the 13: SUKŪK AL-MUSHĀRAKA rabb FIGURE ul-maal (the capital provider), which capital FORMATION AND FUNDING may be provided in cash or in kind (with the rules of the different madhahib varying as to the Sukūk Holders particulars of in-kind contributions). The other party (the Sukuk FundingProceeds Company, in Figure 12) acts as the muḍārib (the manager) and contributes services Agreement (but, in the classical Mushāraka formulation, no capital Project in cash Issuer Company Murābaha Agreement or in kind). There may be more than one rabb ulI-1

Mush ā raka

I-2

I-n

I-n

VOLUME III

PC-1 Mushāraka

SPRING INFRASTRUCTURE FIGURE 14:2009 SUKŪK GLOBAL AL-MUSHĀRAKA PAYMENT

37


maal and more than one muḍārib. In a structure such as that depicted in Figure 12, the Funding Company may (likely will) engage an agent (wakil) to perform all or certain of its functions. The muḍāraba capital must be known and designated in a definite currency, although it may include debt for which a muḍārib or another person is liable.110 The agreement of the parties will govern the timing of, and conditions applicable to, the making of capital contributions; thus, capital infusions may be structured to be periodic (resembling, for example, lending structures for a construction financing). The business of the muḍāraba may be specifically limited or it may be unrestricted. A muḍāraba may be limited as to scope, time, activities, and other factors. Customary business practices guide the powers of the muḍārib to the extent not otherwise specified in the muḍāraba agreement. In the project finance context, the developer (as an agent, which may also be a principal in the Project Company) constructs and operates the project using capital provided by the banks or sukūk holders. The muḍāraba does not necessarily, and need not, correspond to an existing secular legal category (such as a partnership). This renders the muḍāraba a particularly flexible business form, especially in multi-jurisdictional transactions. It may be established with respect to a defined group of assets or activities, as distinct from the legal form of organization of a business. Thus, for example, the muḍāraba may focus on a single production line rather than the entirety of the business (all production lines within the same company). Allocation of expenses and revenues will then be determined with respect to the single production line. A defining characteristic of the muḍāraba is that losses from the operation of the muḍāraba must be borne by the rabb ul-maal absent infringement, default, negligence, or breach of contract provisions

38


by the muḍārib. The muḍārib suffers the loss of its services, and therefore no loss of capital (unless the muḍārib has also contributed capital to the muḍāraba). Profit, in a muḍāraba, is that amount which exceeds the muḍāraba capital provided by the rabb ulmaal. Loss (wadee’ah) is the amount by which the muḍāraba capital is decreased or diminished. Certain muḍāraba expenses are deducted from the muḍāraba funds prior to distribution of profits, although the muḍārib is expected to bear many expenses. The presumption, as a Sharīʻah matter, is that the muḍārib is responsible for operational expenses, including the purchase, transportation, storage, sale, and collection activities of a business. However, some types of expenses may be allocable to the muḍārba itself. This is a matter that is usually determined in consultation with the Sharīʻah board and the resulting determination will be embodied in the muḍāraba agreement. The muḍāraba agreement may also specify required reserves, which may be treated as expenses of the muḍāraba. Examples include reserves for taxes, insurance, and bad debts. The muḍārib will be responsible for collecting the debts owed to the muḍāraba, whether the muḍārib realizes a profit or loss as a result of its activities.111 Profit allocations must be specified at the inception of the contract. It is permissible to provide for different percentages of profit distribution when the profit exceeds certain levels, thresholds, or amounts.112 There can be no predetermined or conclusive profit allocation to any of the parties and arrangements allocating all profit or a lump sum to a single party are impermissible; profits must be distributed in accordance with fixed ratios.113 Consistent with this principle, guarantees may not be taken for the purpose of securing the muḍāraba capital; return of capital may not be assured or guaranteed. However, guarantees may be taken by the rabb



ul-maal to secure the ultimate repayment of the capital, minus losses plus profits, and/or to secure the rabb ul-maal against infringement, default, negligence, or breach by the muḍārib. Profits may only be paid after the rabb ul-maal has received a return of its capital (including a retrieval of previous losses). Thus, any periodic distributions of profit during the period of the muḍāraba are considered tentative and are subject to the final accounting upon liquidation of the muḍāraba.114 As a general matter, assets purchased by the muḍārib in effecting the business of the muḍāraba are deemed owned by the rabb ul-maal. Therefore, the muḍārib is not entitled to a share of the profits until those goods are sold and profit is realized. More recently, tandeed concepts, actual and constructive, have been applied to allow determinations as to allocation of returns to both the muḍārib and the rabb ul-maal upon termination of the joint venture, even if all assets have not been sold or disposed (based upon constructive sale concepts). Obligations of the muḍārib may also be secured by a mortgage or pledge (rahn). Upon the termination of the muḍāraba, the muḍārib is obligated to return the muḍāraba capital, plus profit and minus loss, to the rabb ul-maal. Failure to do so results in liability on the muḍārib, including as a usurper. Any profits made by the muḍārib through the use of assets after the capital should have been returned to the rabb ul-maal will be payable over to the rabb ul-maal. The muḍārib and the rabb ul-maal may agree upon methodologies for determinations as to the occurrence of infringement, default, negligence, or breach for which the muḍārib may be held liable for the return of the muḍāraba capital. Default or breach by the muḍārib of the provisions of the muḍāraba agreement, and exceeding authority, will result in liability for the muḍārib.115 And, under the

Sharīʻah, usage and practice standards will apply to the activities of the muḍārib and failure to carry out certain activities or exercise the requisite standard of care will result in liability to the muḍārib. The rabb ul-maal generally may not participate in the management or service component.116 The contract establishing the muḍāraba may, and usually does, specify in detail the terms under which the partnership will operate. The muḍāraba may be free or limited; most are strictly limited. The muḍāraba agreement may specify those matters that require the consent of the rabb ulmaal. Sharīʻah boards usually require rabb ulmaal consent if the muḍārib desires to contribute money to the muḍāraba and mix that money with the money of the rabb ul-maal. Sharīʻah boards will usually allow rabb ul-maal consent rights that are akin to those provided to limited partners in limited partnership structures, such as those pertaining to changes in the fundamental business of the venture or the fundamental terms of the joint venture arrangement, sale of all or substantially all of the assets of the venture, bankruptcy declarations, and similar “minority shareholder” rights provisions. In publicly offered sukūk al-muḍāraba transactions, the sukūk holders frequently have relatively limited consent rights; the consent rights closely resemble those afforded conventional bond or asset backed securities holders and depend upon the nature of the transaction. Similarly, covenants in a sukūk al-muḍāraba transaction are quite similar in many ways to those in an equivalent conventional transaction.117 Thus, for example, the agreement will address the permissible purposes of the partnership, consent rights, use of funds, positive and negative covenants, incurrence of indebtedness, permissible expenses, permissible and required reserves, representations and warranties, profit and loss

VOLUME III

SPRING 2009


39


allocation, and infringement, default, negligence or breach. It is important to note that each contractual element is the subject of extensive Sharīʻah precepts and principles. However, as a general statement, with careful structuring and drafting, it is possible to create a muḍāraba arrangement that gives the financiers most (not all) of the protections that they have in a conventional financing. The muḍāraba is a partnership arrangement and does expose the financiers to a different risk profile than they have in conventional financings. Some examples may be illustrative and re-emphasize some of the important principles. The primary difference between a muḍāraba arrangement and a conventional interest-based financing arrangement with respect to profits and losses (i.e., the muḍārib developer is not liable for failure to return the capital (except in specified situations)) gives rise to misunderstandings and considerable restructuring (in the minds of the conventional participants). Western participants are quite unaccustomed to the idea that the relationship between the financiers and the developer is one of partnership, not preferred payment as in a conventional financing. Losses from the operation of the muḍāraba must be borne by the rabb ul-maal absent infringement, default, negligence or breach of contract provisions by the muḍārib Developer. The rabb ul-maal suffers the loss of its capital, and the muḍārib suffers the loss of its work and efforts. This allocation of losses is a particularly difficult point for conventional interest-based financiers in a project financing. The primary means of addressing this in transactions involving interest-based financiers have focused on the contractual provisions pertaining to infringement, default, negligence and breach. In the

40


case of muḍārib infringement, default, negligence or breach, the muḍārib may be held liable for the return of the Muḍāraba capital. Default under, or breach of the terms of, the muḍāraba agreement may give rise to muḍārib developer liability. So will exceeding of contractual authority by the muḍārib or failure to exercise requisite care in the performance of responsibilities. Careful drafting of the muḍāraba agreement can significantly narrow the area of consternation and controversy. The scope of the muḍārib’s authority, responsibilities, obligations, liabilities and ability to act in a wide range of situations, as well as the nature of infringement, default, negligence and breach, can be addressed in a manner quite similar to conventional partnership and loan agreements (but so as to be responsive to relevant Sharīʻah principles). 4.8. Mushāraka Structures Another structure that is purely Sharīʻah compliant and involves no conventional debt is one based upon the use of a joint venture (sharikā, sharikāt mahassa or mushāraka). The term mushāraka derives from the same root as sharikāt or Alsharikā. Al-sharikā is a broad term which, based on its meaning of “sharing”, and in the commercial and financial realm, encompasses various joint ownership arrangements (sharikāt ul-milk) and partnerships for profit effected by mutual contract (sharikāt ul-‘aqd).118 Sharikāt ul-‘aqd are divided into: (a) partnerships in which all partners invest capital in a commercial enterprise (sharikāt ulamwaal); (b) partnerships in which the partners jointly undertake to provide services and distribute the fees in an agreed ratio (sharikāt ul-a’mal); and


aging Contractor Agreement

Funding Company

Site Lease

Project Company

Sales Agreements Off-takers

SUKUK

AL - MUD Ā RABA

FIGURE 12: GENERIC SUKŪK AL-MUDĀRABA STRUCTURE

STRUCTURE Rabb ul-mall

uk ers

(c) partnershipsMudāraba in which the partners, having made no capital investment, purchase an asset (usually a Sukūk Rabb ul-mall Investor commodity) on aHolders deferred basis and sell the asset on the spot market, with the profits being distributed Sukūk in an agreed ratio (sharikāt Lease ul-‘aqd (Ijāra) ). Mushāraka, Understanding to Purchase into use in a Construction term which has only recently come Funding Project Istisna’a Understanding to Sell Company Arranger Company the field of Islamic finance, is a subset of sharikāt Managing Contractor Agreement category referring, primarily, to sharikāt ul-amwaal Sales Agreements Construction Contract Tenant Leases and, occasionally, to sharikāOccupational t ul-a’mal. A generic General Off-takers/ mushāraka transactional structure is graphically Mudārib Contractor Tenants depicted in Figures 13 and 14, again focusing on the Sukūk structure: the sukūk al-mushāraka. Figure 13 focuses on the formation and funding of the Mushāraka, and Figure 14 is directed to the repayment of the financing.

Investors

Lease (Ijāra) Understanding to Purchase

y

Project Company


Sales Agreements Occupational Tenant Leases Mud ārib

AL - MUSH


Ā RAKA

FIGURE 13: SUKŪK AL-MUSHĀRAKA FORMATION AND FUNDING

FORMATION AND

FUNDING

Sukūk Holders Proceeds

Sukuk

Mush āraka Agreement Project Company

Mur ābaha Agreement

Mushāraka Agreement Issuer

PC-1

I-2 I-n

SUKUK

AL - MUSH

Ā RAKA

PAYMENT

Payment 1 Payment 2

Project Company

Payment n

Project Company

Murābaha Agreement

I-1

Mush ā raka

FIGURE 10:

PC-1 Mushāraka

The members of the joint venture are (a) the Issuer of the Sukūk which is funded by the Sukūk Holders 14: SUKŪK AL-MUSHĀRAKA PAYMENT (in a FIGURE non-sukūk transaction, the “Issuer” would be the bank financiers and there would be no sukūk), and (b)Sukūk theHolders Project Company (which is usually the project ndeveloper and operator). The Issuer will 2 1 be the “finance partner”Payment and1 controls all financial Projectand the matters pertaining to the Payment 2Mushāraka, Issuer

Project Company will be the “technical partner” and will control technical, construction and operation matters of the Mushāraka, in each case as specified in the Mushāraka Agreement. Figure 13 illustrates that (i) the Issuer is funded by the Sukūk issuance, and (ii) the Issuer provides financing by making a series of capital contributions to the joint venture (the Mushāraka) and acquiring joint venture interests (hissas) in respect of each such capital contribution. These capital contributions are made periodically (say, monthly) as construction financing is required and subject to satisfaction of conditions precedent that are quite similar to those in any conventional financing (such as completion of monthly or other periodic construction milestones). This capital is used by the Mushāraka to make payments in respect of construction and operation, with the Project Company controlling the construction process and other technical matters. These periodic contributions are designated I1 through I-n in Figure 13. The Project Company (the developer/operator) frequently contributes in-kind assets as a significant part of its capital contribution. This may include land, its rights under various project documents (construction contracts, supply and offtake agreements, etc.), its rights under permits, and cash. This contribution is usually required to be made prior to the time the Issuer makes its contributions. The Project Company contribution is designated as “PC-1” in Figures 13 and 14. This is frequently a one-time contribution, made prior to the making of any capital contributions by the Issuer. There may be other capital contributions by the Project Company, such as in respect of cost overruns (these are not depicted in this illustration).

Company

Payment n

PC-1 I-1

-1

-2

Mortgage

Site Lease

E 8: GENERIC

-n


Islamic Project Finance: Security An Introduction to Principles and Structures (continued) Documents

Sales Agreements

ba

K


Mortgage Security Documents

Mush ā raka

I-2 I-n

PC-1 I-1 I-2 I-n

I-1 Mushāraka

I-2 I-n

VOLUME III

FIGURE 18: BAHRAIN FINANCIAL HARBOUR

SPRING 2009


41

Proceeds

Sukuk

Mushāraka Agreement

Project Islamic Project Finance: An Introduction to Principles and Structures (continued) Issuer Company Murābaha Agreement

I-1 I-2 I-n

PC-1 Mushāraka

FIGURE 14: SUKŪK AL-MUSHĀRAKA PAYMENT Sukūk Holders n

2

1 Payment 1 Project Company

Payment 2

Issuer

Payment n PC-1 I-1 I-2

I-1 Mushāraka

I-n

I-2 I-n

Management of the Mushāraka is established in the Mushāraka Agreement, in accordance with the desires of the partners.120 This affords the partners considerable flexibility in allocating management responsibilities between and among partners; joint rights of management are frequent and usual. Historically, the presumption was that all partners would participate in the management of the Mushāraka. If all partners participate in the management of the Mushāraka, each partner is treated as the agent of all other partners (akin to general partnership concepts in Anglo-American law). Given the contractual basis of the Mushāraka and the degree of latitude afforded the partners in agreeing as to operational matters, partnership agreements and operating agreements are useful models for structuring mushāraka arrangements.

The repayment of the financing provided by the Sukūk Holders (through the Issuer, who is the actual member of the Mushāraka) is effected by periodic quarterly) of the hissas There are significant differences between the FIGURE 18:(say, BAHRAIN FINANCIAL sales HARBOUR Entirely Sharīàh Compliant previously acquired by the Issuer to the Project madhahib regarding the rules applicable to capital Company pursuant to a murābaha (deferred contributions, especially as to the permissibility and Bridge Holding 119 Investment payment sale at Financier a mark-up) arrangement. This Company Manageris effect of in-kind contributions. However, the schools depicted in Figure 14 by the disconnection of hissa all seem to agree that capital, once contributed, is Investment Bridge Financing Management ownership by the Issuer (designated “I-1” through License Land Mortgages Facility Agreementthe property of the mushāraka (rather than any one “I-n”) and transfer of ownership of those hissas to individual partner) and inures to the benefit of all Project Manager Appointment Project the Project Company. This transfer is made each partners.121 The madhahib are also unanimous on Istisna’a Manager Ijāra Project Company time a payment is made by the the view that a partner may not assume liability for Project Purchase Understanding Issuer Equity Company to the Issuer as “Payment 1” through Construction(designated Sale Understanding the capital of another partner, including by way of Contracts “Payment n”). The IssuerSalewill the proceeds guarantee (or assured payment, lump sum payment Agency use Agreement Collateral Security of each such payment to make payments on the or fixed fee payment). Guarantees may be taken Contractors Sale AgreementsUpon Trust-Agency Sukūk Certificates Sukūk to the Sukūk Holders. payment in full, Leases Agreementby the partners to secure the ultimate repayment all hissas will be Retail owned by the Project Company. of the capital, minus losses plus profits, and/or to Sukūk The structure Purchasers (with modifications) allows Holders for Lessees secure the partners against infringement, default, participation by both Islamic banks and conventional negligence, or breach by the managing partners. Western banks. The structure is relatively simple, Absent agreement to the contrary in the mushāraka involving only two primary agreements: (a) the agreement, and again akin to general partnership Mushāraka (sharikāt mahassa) Agreement; and concepts under Anglo-American common law, the (b) the Murābaha Agreement (see Figure 13). This liability of each partner is unlimited. structure has been used in a number of Middle Eastern sukūk issuances.

42




the joint venture. In addition, some elements of the mushāraka structure in the Sukūk context was the subject of the AAOIFI Sukūk Clarification (and are discussed infra).122

Profit and loss definitions are largely the same as with muḍāraba, although there are some fundamental differences. In current practice, profit allocations may be in any ratio agreed by the partners. Profits may be allocated in accordance with a points system, and that points system may be structured to take cognisance of the amount of capital contributed and the period of participation of that capital in the venture. That position has long been accepted by the Hanbalī and Hanafī madhahib, although the Hanafī madhab modified the position if, pursuant to their agreement, one or more partners did not participate in management; in that case, participation of that partner in the profits of the mushāraka would be limited to the ratio of that partner’s contributed capital. The Mālikī and Shāfi’ī schools historically required that profit distributions be in accordance with ratios of contributed capital. Profit from a specific period or operation may not be allocated to a specified partner, nor may a lump sum be allocated to a specific partner. In the majority view, losses, up to the amount of a partner’s capital contribution, must be distributed in accordance with the relative capital contributions of the partners. There are Sharīʻah precepts applicable to purchases and sales of interests (hissas) from one partner to another (as well as applicable murābaha precepts) that are critical in the implementation of this type of structure.

A threshold issue in the debate relates to the timing of execution of the murābaha agreements for the sale and purchase of the hissas. As a general matter, there are three different positions with respect to when the murābaha agreement(s) may be executed, and different scholars have adopted each of the positions: (i) a comprehensive single agreement, or all agreements, at the inception of the transaction (i.e., at formation of the joint venture); (ii) a comprehensive single agreement, or all agreements, at completion of construction; and (iii) a murābaha agreement with respect to each group of hissas at the time of completion of each milestone,123 effectively requiring multiple murābaha agreements, one executed at the time of each capital contribution. Alternatives (ii) and (iii) entail risks that the agreements may not all be executed, a difficult position for financiers. One of the reasons for differences of opinion among Sharīʻah scholars relates to compulsory sales issues. A selling partner (the Issuer, on behalf of the Sukūk Holders or financiers) would be obligated to sell if the buying partner (the Project Company developer/operator) elects to purchase, but the buying partner cannot be compelled to purchase.

The mushāraka structure raises a number of Sharīʻah issues that are currently the subject of debate among Sharīʻah scholars. These issues relate to (a) the times at which the murābaha agreements may be executed and priced, (b) the pricing of the hissas that are periodically resold to the Project Company (developer/operator), and (c) profit and loss allocations among the members of

A closely related issue relates to the establishment of the purchase price for the hissas being sold pursuant to the murābaha transaction. Specifically, at what point may the price for each hissa purchase be established.124 The positions of the Sharīʻah scholars vary, with some scholars taking each of the following positions with respect to establishment of the hissa sale price: (A) the price for each and

VOLUME III

SPRING 2009


43


every (say, quarterly) sale may be established at the inception of the entire transaction (i.e., at formation of the joint venture or partnership) for each hissa sale and purchase transaction as a negotiated price; (B) the price for each (say, quarterly) sale must be established at the time of that sale, often based upon the fair market value of the project at that time rather than a predetermined “financing price”; and (C) only at completion of the construction, as a comprehensive and fully inclusive fair market value can only be determined at that time. The majority position seems to be the first position, allowing a negotiated price (which may be a fixed or floating rate) to be established for all sales transactions at the time of formation of the joint venture. The focus on fair market value relates to the argument that a sale price that is in excess of the market price would represent a disproportionate share of the mushāraka profit and would thus be prohibited by the Sharīʻah. Another line of discussion focuses on the compulsory nature of the hissa purchase and sale.

Careful structuring is required in the implementation of any mushāraka transaction. That structuring must include precise discussions with the Sharīʻah scholars advising on the transaction with respect to each of the foregoing matters, among others. 4.9. Quadratic Partnership Structures and Variants

Before moving to a discussion of the AAOIFI Sukūk Clarification, consideration is given to one other entirely Sharīʻah-compliant structure that has been used in North American and Chinese transactions (and has not been the subject of a previous publication). This structure is referred to as a “quadratic partnership” structure. Since 2004, it has been used primarily in new construction financings (Figures 15-17 use construction examples). The structure has also been used in acquisition transactions and in Sharīʻah-compliant mezzanine financing transactions. It was originally developed for use in transactions involving governmental units or governmental financing involvement that Issues pertaining to allocations of profits and are subject to rigorous constraints that militate losses (particularly in the construction phase) against restructuring the transaction to include arise under both the Sharīʻah and local secular ijāra elements (even bifurcated ijāra structures). law, especially joint venture law and tax law. The Examples of transactions include public health parties clearly desire that the Issuer (financiers) care facilities or private health care facilities that not be allocated any profits, and not be liable for are financed in part with governmental funds or any losses, during the construction phase. In many using tax-exempt financing. And it was developed construction projects, these issues will be of little to allow the Sharīʻah-compliant investors to practical consequence (with possible exceptions participate as partners (usually limited partners) for tax considerations), assuming that completion with a local developer (usually the general partner), ultimately occurs, although this varies greatly from including for tax purposes. However, the structure jurisdiction to jurisdiction. In other cases, those has also been used in transactions where the allocations may themselves cause a recalculation Sharīʻah-compliant partners are not considered of, or be included in the calculation of, the sale partners for secular tax purposes. This article price of the hissas in the murābaha phase of considers only the general structural principles and does not examine the intricate tax considerations the transaction. and resulting structural variations.

44



Responsibilities Distribution

Distribution

Islamic Project Finance: An Introduction to Principles and Structures (continued) Tax

Tax

As a general matter, a partnership agreement is comprised of fourFIGUREcategories provisions, as 12: DISAGGREGATION of illustrated in Figure 15.

FIGURE 16: DISAGGREGATION

Management

Management FIGURE 15: PARTNERSHIP AGREEMENT PROVISIONS: CATEGORIES

NERSHIP AGREEMENT PROVISIONS: CATEGORIES

Responsibilities

Responsibilities

Distribution

Distribution

Management Tax

Tax

Responsibilities

Distribution

Tax

FIGURE 12:

URE 13:

The four categories of provisions are (a) management provisions, (b) provisions allocating responsibilities among the partners, (c) provisions FIGURE 13: Ī ÀH AGREEMENTS relating to distributions ofSHARprofits and losses, and (d) FIGURE 16: DISAGGREGATION Entirely Shar ī àh Compliant provisions relating to tax matters. The conception of the structure is to convert these four sets of Sharīʻah -compliant provisions Management into four separate Management Istisna ’a Management agreements in a manner that preserves (if that is the Istisna ’a desire in the specific transaction) the partnership Responsibilities Sale characterization of the overall arrangement for tax and other purposes. Thus, the first step in effecting Tax Distribution Sale the transaction is to disaggregate the Taxfour sets of provisions into four separate components. This is Tax graphically illustrated in Figure 16.

DISAGGREGATION

SHAR Ī ÀH

Entirely

Thereafter, four Sharīʻah-compliant agreements are created, one from each of the four disaggregated components, as depicted in Figure 17. For example, the “responsibilities” category in a development and construction transaction would be redrafted to constitute an Istisna’a arrangement FIGURE 17:purposes. SHARĪÀH AGREEMENTS for Sharīʻah One of the partners, the Entirely Sharīàh Compliant developer, is allocated the responsibilities of ensuring the development and construction of the project. The istisna’a arrangements are quite Management similar to the responsibilities that are allocated to Management Istisna’a that partner in a customary partnership, particularly Istisna’a a limited partnership arrangement for development undertakings. The modifications to ensure Sale Sharīʻah compliance and Sale satisfactionTaxof Istisna’a Tax requirements are relatively slight, and almost always consistent with the underlying economic, financial and risk allocations that would be embodied in the partnership agreement. Similarly, the “distribution” sections of a conventional development partnership agreement are modified

FIGURE 1: TENOR AND SHARĪÀH STRUCTURE BY NUMBER OF ISSUANCES FIGURE 17: SHARĪÀH AGREEMENTS 180 Entirely Sharīàh Compliant

AGREEMENTS

Shar ī àh Compliant

160 140

Management Management

Istisna ’a

120

Management

Istisna’a

Istisna’a

100 Sale

80

VOLUME III Sale

Tax

SPRING 2009


45

Islamic Project Finance: An Introduction to Principles and Structures (continued) Management

Responsibilities

Distribution

Tax

to become a “sale” agreement for Sharīʻah purposes (sometimes a wakāla (agency) arrangement for sale and sometimes a salam arrangement, for example). The transactional experience has been that these modifications are also relatively straightforward and can be made with fidelity to economic, financial and risk allocation parameters. FIGURE 17: SHARĪÀH AGREEMENTS Entirely Sharīàh Compliant

Management Management

Istisna’a

Sale

Tax

Istisna’a

Sale

Tax

This quadratic partnership structure has proven highly adaptable under differing tax, regulatory and secular law regimes, in a range of international jurisdictions, and both in cases where a true partnership is desired and in cases where the desire is to avoid partnership characterization. Some examples of where this structure is URE BY NUMBER OF ISSUANCES particularly effective include: situations in which an existing structure cannot feasibly be modified to accommodate a subsequent Sharīʻah-compliant investment; circumstances in which legal requirements mandate a specific type of structure that is not compatible with available Sharīʻah structures (such as an Ijāra), such as transactions which involve tax exempt financing; and situations in which the Sharīʻah-compliant investors desire to have no visibility in the transaction. The potential for use of the quadratic partnership structure is enormous, and exploration of possible uses is just beginning. Yea rs Ija ra h


46




5. AAOIFI Sukūk Clarification In March of 2008, after a series of meetings on Sukūk issues that have arisen since the issuance of the AAOIFI Sukūk Standard, the Sharīʻah Board of AAOIFI issued the AAOIFI Sukūk Clarification.125 The AAOIFI Sukūk Clarification applies to all sukūk, although it also addresses specific structural issues that have arisen with respect to specific types of sukūk. However, its impact is and will be much greater as the industry attempts to grapple with the tax, accounting, regulatory and legal ramifications of implementing the AAOIFI Sukūk Clarification. For example, practitioners working with entities or regulatory bodies that require reporting of operations and condition in accordance with generally accepted accounting principles (“GAAP”) or international accounting principles (“IAP”) are likely to confront a range of new issues that will require further clarification by Sharīʻah Boards. Commentators assert that the AAOIFI Sukūk Clarification has already had a dampening (one says ‘crippling’) effect on the sukūk markets. Such a cause and effect assertion is premature given the absence of any effort to determine the relative impact of other economic factors, such as the global effects of the subprime debt crisis and the current turmoil in the financial markets.126 It is clear, however, that the markets perceive the AAOIFI Sukūk Clarification to be consequential and recognize it as unique in the short history of Islamic finance. Issuance of the AAOIFI Sukūk Clarification was thought to be necessary as a result of a review of the structures of sukūk issued since 2003. The scholars determined that many of those sukūk issuances were essentially conventional “bonds” (rather than “entity securitizations” or “enterprise securitizations”) because: (a) they do not represent ownership in the commercial or industrial enterprises that issued them; (b) they generate regular payments determined as a percentage of




capital rather than as a percentage of profit; and (c) through various mechanisms, they essentially guarantee a return of the principal at maturity.127 Among the concerns relating to failure to represent ownership are the fact that many contemporary sukūk have been structured as entitlements to returns from entities rather than ownership of entities and others have included murābaha debt where there is no tangible asset to be owned.128 Concerns relating to the regular payment structures of contemporary sukūk focus on (i) payments to the fund manager to the extent that returns are greater than amounts due on the sukūk129 and (ii) loans by fund managers to the sukūk holders or their proxies where returns are insufficient to pay fixed amounts on the sukūk. The issues pertaining to the guarantee of principal derive from the use of promises, by the issuer or fund manager or a similar party, to purchase the subject assets at an amount equal to the amount at which the assets were originally sold into the sukūk structure (i.e., at the principal amount of the sukūk).130 As noted above, the sukūk markets are among the most rapidly growing in the field of Islamic finance. Tradability of sukūk instruments is an important feature, particularly as the Islamic finance industry attempts to develop sustainable, coherent, financeside capital markets. Sukūk issuances have been structured to include a range of different types of debt instruments, including residual debt from consummated murābaha transactions, which has raised Sharīʻah issues that were clarified in the AAOIFI Sukūk Standard. The AAOIFI Sukūk Clarification notes that tradable sukūk instruments must represent ownership (fractional undivided ownership) by the sukūk holders in actual assets that may be possessed and disposed of legally in accordance with the Sharīʻah.131 This reemphasizes that the Sharīʻah principles and precepts applicable to possession and disposition of assets must be at the forefront in structuring any sukūk issuance or instrument. Sharīʻah-compliant tangible assets are

one such type of asset. Others include usufructs and services that may be compliantly possessed and sold, which reemphasizes recognition of the sukūk al-ijāra concept where appropriately comprised and structured. Further, the AAOIFI Sukūk Clarification notes that the manager of the sukūk issuance bears the burden of establishing and certifying “the transfer of ownership of such assets in its (Sukuk) books, and must not keep them as his own assets.”132 This aspect of the AAOIFI Sukūk Clarification will likely give rise to further discussion and the need for further clarification. For example, the manager of the sukūk issuance will likely not be the originator of the underlying assets. The manager may be the issuer of the sukūk, but often is not. Does the AAOIFI Sukūk Clarification require that there be an asset transfer for book purposes on the books of the originator as well as on the books of the issuer (assuming the manager is the issuer)?133 In the context of a non-enterprise sukūk (i.e., an asset securitization or other asset sukūk), this would require something approaching a “true sale” transfer from the originator to the issuer, and the issuance of a sukūk in the nature of “pass-through” certificate by the issuer, meaning that asset ownership would lie with the sukūk holder for tax and other purposes. In the case of an enterprise Sukūk, this would mean, presumably, that the sukūk holder is a “partner” or “joint venturer” or otherwise possesses an “equity-type” interest. The extent to which this requirement is compatible with existing corporate, partnership, limited liability and other entity laws will give rise to a broad range of issues (similar to those addressed in the early 1980s in connection with the issuances of conventional passthrough certificates). Will it be possible to structure transactions to allow a book ownership transfer at the manager level even where such a transfer does not occur at the asset originator level?134 In any event, the contemplated transfer may be subject to different characterizations under AAOIFI

VOLUME III

SPRING 2009


47


accounting and auditing principles and either GAAP (generally accepted accounting principles) or IAP (international accounting principles). This is an important area for further inquiry given that essentially all securities exchanges and secular regulators operate on a GAAP or IAP basis, and require disclosure and reporting to be in compliance with GAAP or IAP. In some transactions, it may be desirable to avoid adverse tax consequences (such as transfer taxes) associated with a book transfer. In other transactions, there may be a transfer for one tax purpose, but not for another, and the necessity or desirability of book transfers will need to be considered in these transactional contexts. Thus, for example, transfers may be structured to ensure ownership transfer for some tax purposes (say, capital gains or profit realization) but not for other tax purposes. Here again, different issues are likely to arise in different jurisdictions. Similarly, complete transfers may not be desirable at inception of the transaction where the costs, requirements or complexities of local law or practice are significant. Examples include collateral security elements and ownership dispersion and owner consent practices. The AAOIFI Sukūk Clarification requires that “a tradable sukūk must not represent receivables or debt, except in the case of a trading or financial entity that is selling all of its assets, or a portfolio which includes a standing financial obligation such that debt was incurred indirectly, incidental to a physical asset or a usufruct in accordance with the guidelines mentioned in [the AAOIFI Financial Paper Standard].”135 This requirement is directed at inclusion of murābaha debt in Sukūk transactions and will require further elucidation. Numerous sukūk transactions have been structured to ensure, as a practical matter, a fixed income stream to the sukūk holder, even where the profits

48


on or payments from the underlying obligations are variable or uncertain over time.136 In many transactions, this was accomplished by having the manager of the sukūk (whether a muḍārib, a sharik (partner) or a wakīl (agent)), undertake to offer and make (presumably non-interest-bearing) loans to the sukūk holders at times when there were shortfalls in performance below the periodic payout on the sukūk instruments. These loans are repayable out of periodic excesses over the sukūk payments and/or out of the sale proceeds of the subject assets upon maturity of the sukūk. The AAOIFI Sukūk Clarification makes clear that loans of this type are impermissible.137 However, the clarification does permit the sukūk issuer to accumulate reserves out of profits or payments on the underlying obligation and the use of those reserves to make sukūk payments at times of such shortfalls.138 This aspect of the clarification is also likely to raise some interesting tax issues where taxation is based upon current income prior to funding of various transactional reserves. For example, in a tax pass-through entity (such as a partnership or limited liability company in some jurisdictions), this income would be attributable to each of the sukūk holders, pro rata, at the time it is earned, and would be taxable to those holders despite the absence of cash distributions, and it is likely that different tax rates will be applicable to each of such sukūk holders. Subsequent distribution of the reserves to different sukūk holders (or the same sukūk holder at a different time) may entail double taxation or (less likely given the diligence of taxing authorities) no taxation to some persons. There has been discussion of the permissibility of periodic distributions to sukūk holders in anticipation of profitable operations and prior to tandeed and determination of actual profits and losses. The AAOIFI Sukūk Clarification does note that it is permissible to make distributions of expected earnings, on account, in accordance



with AAOIF Muḍāraba Standard, article (8/8), “or to obtaining project financing on the account of sukuk holders.”139 The quoted language is of direct relevance to project financing transactions. Presumably, the language is intended to legitimize periodic distributions, without actual or constructive tandeed, and without actual profit realization, so as to facilitate construction and development transactions. Further clarification of this aspect of the AAOIFI Sukūk Clarification will be eagerly awaited by the project finance community. The obligation of a party (muḍārib, sharik or wakīl) to purchase assets from the sukūk holders (or their ownership representative, such as a trust) at extinguishment of the sukūk was also addressed in the AAOIFI Sukūk Clarification.140 The principles set forth in the clarification acknowledge that the assets may be purchased at the maturity of the sukūk for (1) their net value, (2) their market value, (3) their fair market value, or (4) a price to be agreed at the time of their purchase in accordance with the AAOIFI Sharīʻah standards pertaining to partnerships (AAOIFI Mushāraka Standard) and guarantees (AAOIFI Guarantees Standard). Differentiations between some of these pricing concepts is not entirely clear and remain for future clarification. For example, does net value relate to book value? In this regard, note the imputed net value discussed in connection with ijāra transactions that is discussed in the next paragraph of this article. In project financing and asset securitization transactions, fair market value generally speaks to arm’s-length transactions between an informed and willing buyer and an informed and willing seller, each under no compulsion to buy or sell (with specific transactionspecific qualifications imposed for determination purposes). What is the difference between this type of concept and the concept of “market value”? Is market value determinable only at the time of the purchase and sale (and sukūk redemption) transaction? May it be otherwise defined? Of

course, a requirement that the purchase price may be established only at the time of the transaction is expressly contrary to existing market practices and introduces a degree of uncertainty that may prevent market acceptance (although it certainly enhances the essential elements of Sharīʻah compliance). Much remains for future clarification in this area. Specific clarifications were made with respect to aspects of lease-related assets. First, if the assets of a sukūk al-mushāraka, a sukūk al-muḍāraba or a sukūk al-wakāla are of lesser value than assets leased by way of a lease ending in possession (ijarah muntahiya bbi’t-tamlik), the fund manager will be permitted to purchase those (leased?) assets upon extinguishment of the sukūk for the remaining lease payments on the assets, by considering these payments to be the net value of those assets.141 Second, the lessee in a sukūk alijāra is permitted to agree to purchase the leased assets upon extinguishment of the sukūk for their “nominal” value as long as the lessee is not also an investment partner, muḍārib or agent.142 To summarize the impact of the AAOIFI Sukūk Clarification: precedents from sukūk issuances since 2003 will have limited, if any, precedential value going forward, at least to the extent that they contain devices and structures referred to in the AAOIFI Sukūk Clarification. It is clear that the AAOIFI Sharīʻah Board intends to scrutinize sukūk structures, to bring this rapidly expanding market device into greater harmony with the Sharīʻah, and to frown upon mimicry of conventional bond structures, particularly where they do not serve the fundamental principles of Islamic finance. It is also clear that the AAOIFI Sharīʻah Board intended to issue a bell-weather call for greater rigor, and greater and continuing oversight, in the industry, as evidenced by the final operative clause of the AAOIFI Sukūk Clarification:143

VOLUME III

SPRING 2009


49

Sukuk

Proceeds Mushāraka Agreement

Projectand Structures (continued) Islamic Project Finance: An Introduction to Principles Issuer Company

Murābaha Agreement

I-1

PC-1

I-2

Mushāraka

I-n

Shariah supervisory boards must not consider their responsibility to be over when they issue a fatwa on the structure of sukuk. Rather, they must review all contracts and documentation to the actual transaction, and then oversee the ways that these FIGURE 14: SUKŪKrelated AL-MUSHĀRAKA PAYMENT are implemented in order to be certain that the operation complies at every stage with Shariah guidelines and requirements as specified in the Shariah Standards, and that the Sukūk Holders investment of Sukuk proceeds and what those proceeds are converted to takes place in naccordance with one [or another] of the approved Shariah methods of investment as 2 1 stated in Shariah Standard (17) on the subject of Investment Sukuk, Article (5/1/8/5). Payment 1

Project Company

Payment 2 Issuer 6. Bahrain Financial Harbour Sukūk Payment n

The July 2005 Bahrain Financial Harbour Sukūk provides an example of a Sharīʻah-compliant financing (involving no conventional debt) that combines a number of the structural elements described in this PC-1 article, most notably istisna’a , ijāra and sukūk concepts. The structure also includes a Sharīʻah-compliant I-1 I-1 Mushāraka interim investment mechanism and a Sharīʻah -compliant bridge financing facility. Figure 18 provides I-2 I-2 a graphic summary I-n of the overall documentary structure of the project financing transaction. A more I-n detailed discussion of this structure is presented elsewhere,144 and the purpose here is to allow the reader to explore how the foregoing structures might be incorporated, with modifications, into a full-scale project financing. That exploration will inevitably include consideration of how the structures must be modified, under both secular law and the Sharīʻah, and what additional structuring may be required in an actual project financing transaction. FIGURE 18: BAHRAIN FINANCIAL HARBOUR Entirely Sharīàh Compliant Bridge Financier

Holding Company

Bridge Financing Facility

License

Contractors

Istisna’a Ijāra Project Company

Purchase Understanding Sale Understanding

Issuer

Equity

Sale Agency Agreement Collateral Security Sale Agreements Leases Retail Purchasers Lessees

50

Investment Management Agreement

Land Mortgages

Project Manager Appointment

Project Manager Construction Contracts

Investment Manager


Trust-Agency Agreement

Sukūk Certificates Sukūk Holders



The project is comprised of the “Financial Centre Development Phase” of the Bahrain Financial Harbour Project in Manama, Kingdom of Bahrain. Sukūk Certificates were issued and the proceeds of the issuance serve as the basis for financing the construction of the project. Pending application to construction costs, those proceeds are invested with the Investment Manager in Sharīʻah-compliant investments. The variable rate Sukūk Certificates were registered, certificated and transferable. Each Sukūk Certificate represents a fractional undivided beneficial ownership interest in the trust assets (essentially the project, proceeds of investments, proceeds from sales or rentals of project components or space, certain insurance proceeds, and related contracts), and the sole recourse of the Sukūk Holders is to the trust assets. For present purposes, there are a few notable features. One such feature pertains to the use of the Ijāra and the Istisna’a between the Issuer (equivalent to the Funding Company) and the Project Company and the fact that the Project Company entered into the Construction Contracts. The Ijāra is an “advance lease” and there were payments of “advance rentals” in respect of uncompleted portions of the project (with customary rent being payable with respect to completed portions).145 This raises interesting questions (resolved in the structure) as to what happens in the circumstance that construction does not reach full completion. Another feature relates to the investment of Sukūk issuance proceeds pending application in respect of construction costs and the availability of the advance rentals to pay construction costs. Yet another feature relates to funds available to repay the Sukūk Holders: these include the proceeds of sales of retail units and space and rents from the leasing of space, the Sharīʻah-compliant revolving bridge facility, and proceeds from the investment of Sukūk issuance proceeds. And consider the

implications of the feature, implied in Figure 18 from the existence of the Trust-Agency Agreement, whereby the Issuer was constituted a trustee and agent on behalf of the Sukūk Holders, here under applicable trust laws of the Kingdom of Bahrain. 7. Conclusion The focus of this article is the different types of techniques that are available to effect large, complex infrastructure and project financings in harmony with the Sharīʻah. Clearly, there will be increasing demand for the implementation of these structures. Capital is flowing into the oil and gas producing countries within the OIC, especially in the Middle East and Malaysia. Those countries, and others, are upgrading existing infrastructure, embarking on expansion of infrastructure conceptions, and attempting to broadly diversify away from oil and gas chains: witness the development activities in Abu Dhabi, Bahrain, Dubai, Malaysia, Oman, Saudi Arabia, Sharjah, and Qatar, among others. More and more projects are entering (or will soon enter) the construction phase. The size, complexity and scope of these projects will require cooperative, knowledgeable participation by both Western and Sharīʻah-compliant participants. It will require just and fair allocation of risks among these participants. Each group of participants has fundamentally different conceptions of economic reward based upon fundamentally different conceptions of risk participation. Western financiers are accustomed to preferential receipt of their economic reward (interest and principal). Under the Sharīʻah, a preference of this type is impermissible; the risks of the transaction or undertaking are not adequately shared by the participants. The challenge is to develop and implement structures that permit involvement of both types of participants without violation of the Sharīʻah and in a manner that satisfies the competing economic, institutional,

VOLUME III

SPRING 2009


51


political, legal, regulatory and accounting constraints to which each of the participants is subject. To remain competitive, Western financial institutions as well as Islamic financial institutions will need to be fully conversant with these types of financing structures. This article is intended to provide an introduction to the fundamental concepts and structures that must be mastered in order to achieve the requisite degree of cooperation. It has attempted to suggest ideas pertaining to harmonization of principles from two disciplines (project finance and Islamic finance) that were born in the same period, grew independently and in different environments (particularly as regards risk/reward paradigms and principles), and, of necessity, are now converging. Transactional implementation will require refinements to the myriad complexities

52


of a broad range of different projects in a manner that serves the business needs of a wide array of participants, each having a unique perspective and each subject to a unique set of constraints, some of them being difficult to harmonize with the perspectives and constraints of other participants. The hope is that this process will be viewed as a creative opportunity whose realization will enhance awareness and knowledge of both economic systems (interest-based and Islamic) and of the fundamental cultural, moral, ethical, religious and legal principles that guide the existences of people. As the history of both modern project finance and modern Islamic finance has taught us, the rewards of this type of cooperative and interactive process are shared by and bring benefits to all.



Bibliography In this bibliography, hyphenation, or its absence, has been ignored in names that incorporate “al”, “Al” or “El”. AAOIFI Gurantees Standard: Shari’a Standard No. (5), Guarantees, in AAOIFI Sharīʻah Standards (2004), at 53. AAOIFI Ijāra Standard: Shari’a Standard No. (9), Ijarah and Ijarah Muntahia Bittamleek, in AAOIFI Sharīʻah Standards (2004), at 135. AAOIFI Istisna’a Standard: Shari’a Standard No. (11), Istisna’a and Parallel Istisna’a, in AAOIFI Sharīʻah Standards (2004), at 175. AAOIFI Muḍāraba Standard: Shari’a Standard No. (13), Mudaraba, in AAOIFI Sharīʻah Standards (2004), at 227. AAOIFI Mushāraka Standard: Shari’a Standard No. (12), Sharika (Musharaka) and Modern Corporations, in AAOIFI Sharīʻah Standards (2004), at 197. AAOIFI Payment Default Standard: Shari’a Standard No. (3), Default in Payment by a Debtor, in AAOIFI Sharīʻah Standards (2004), at 29. AAOIFI Sharīʻah Standards (2004): Shari’a Standards 1425-6 H/2004-5 (Accounting and Auditing Organization for Islamic Financial Institutions 2004).

Abdal-Haqq (1996): Irshad Abdal-Haqq, Islamic Law: An Overview of Its Origin and Elements, 1 Journal of Islamic Law 1 (1996). Abdal-Haqq (1997): Irshad Abdal-Haqq, Legal Injunctions of the Qur’an, 2 Journal of Islamic Law 53 (1997). Abdel-Wahab (1962-1963): Salah-Eldin AbdelWahab, Meaning and Structure of Law in Islam, 16 Vanderbilt Law Review 115 (1962-1963). Abdul Rauf (2005): What is Islamic Law?: The Fifth Annual John E. James Distinguished Lecture, Walter F. George School of Law, Mercer University, Macon, Georgia, September 20, 2005, 57 Mercer Law Review 595 (2005-2006). Abdulmalik (2008): Atif Abdulmalik, Rising to the Challenge of Phenomenol Growth, Arab Banker, located at http://www.arab-banker.com/ dir/1901/1901-IslamicFinance2.asp. Abdus-Shahid (1984): Talib Siraaj AbdusShahid, Interest, Usury and the Islamic Development Bank: Alternative, Non-Interest Financing, 16 Law and Policy in International Business 1095 (1984). Ackerman (1981): James M. Ackerman, Interest Rates and the Law: A History of Usury, 1981 Arizona State Law Journal 61 (1981). Adam & Thomas (2004): Nathif J. Adam and Abdulkader Thomas, eds., Islamic Bonds: Your Guide to Issuing, Structuring and Investing in Sukuk.

AAOIFI Sukūk Clarification: an issuance, styled as a “resolution” or “advisory” of the Sharīʻah Adam & Thomas (2005): Nathif J. Adam Supervisory Board of AAOIFI, which is available and Abdulkader Thomas, Islamic fixed-income under the “Latest News” section on the AAOIFI securities: sukuk, in Jaffer (2005), at 72-81. web site at http://www.aaoifi.com (copy on file with the author). Adhieh (2005-2006): Robert B. Ahdieh, The Strategy of Boilerplate, 104 Michigan Law Review AAOIFI Sukūk Standard: Shari’a Standard 1033 (2005-2006). No. (17), Investment Sukuk, in AAOIFI Sharīʻah Standards (2004), at 295.

VOLUME III

SPRING 2009


53


al-Awani & El-Ensary (1998): Taha J. alAwani and Waleed El-Ensary, Linking Ethics and Economics: The Role of Ijtihad in the Regulation and Correction of Capital Markets, in Second Harvard Forum (1998), at 99-126.

Al Jazeera: How Financial Bubble Burst (2008): Rob Reynolds, How the Financial Bubble Burst, Al Jazeera, September 20, 2008, available at http://english.aljazeera.net/news/ americas/2008/09/200892002154293624.html.

Al-Azami (2003): M.M. Al-Azami, The History of Qur’anic Text from Revelation to Compilation: A Comparative Study with the Old and New Testaments (2003).

Al Omar (2000): Mohammed S. Al Omar, Islamic Project Finance: A Case Study of the Equate Petrochemical Company, in Third Harvard Forum (2000), at 259-64.

Al-Ghazālī: Buchman (1998): Abū Hamid AlGhazālī, The Niche of Lights, David Buchman, translator (1998).

Algaoud & Lewis (2007): Latifa M. Algaoud and Mervyn K. Lewis, Islamic critique of conventional banking, in Hassan & Lewis (2007), at 38-48.

Al-Ghazālī: Marmura (2000): Abū Hamid AlGhazālī, The Incoherence of the Philosophers, Michael A. Marmura, translator (2000).

Ali (2005): S. Nizam Ali, ed., Islamic Finance: Current Legal and Regulatory Issues (2005), (which is a selection of articles from the Sixth Harvard University Forum on Islamic Finance).

the

al-Hibri (1998-1999): Azizah al-Hibri, Islamic and American Constitutional Law: Borrowing Possibilities or a History of Borrowing, 1 University of Pennsylvania Journal of Constitutional Law 492 (1998-1999). Al-Zuhayli (2003): Wahbah Al-Zuhayli (Mahmoud El-Gamal, translator, and Muhammad S. Eisaa, revisor), Al-Fiqh Al-Islami wa-Adillatuh (Islamic Jurisprudence and its Proofs), Wahbah al-Zuhayli, Financial Transactions in Islamic Jurisprudence, which is a translation of Volume 5 of Al-Fiqh Al‘Islami wa ‘Adillatuh, fourth edition (1997) and appears in two volumes. Al Hilal Group (2007): Islamic bond sales in Gulf to double next year, Al Hilal Group, November 19, 2007, as located at the web site of Islamic Finance Information Service, located at https://www. securities.com/doc.html?pc=IG&sv=IFIS&doc_ id=156710655. Al Jazeera: End of US Capitalism?: Is This the End of US Capitalism?, Al Jazeera, September 19, 2008, available at http://english.aljazeera.net/ news/americas/2008/09/2008918184050627504. html.

54


Ali (2008): S. Nazim Ali, ed., Integrating Islamic Finance in the Mainstream: Regulation, Standardization and Transparency (2008) (which is a selection of articles from the Seventh Harvard University Forum on Islamic Finance). Ali-Karamali and Dunne (1994): Shaista P. AliKaramali and Fiona Dunne, The Ijtihad Controversy, 9 Arab Law Quarterly 238 (1994). Allen (2000): Roger Allen, An Introduction Arabic Literature (2000).

to

Alvi (2008): Ijlal Alvi, Capacity Building Needs for Issuing Sovereign Sukuk, Dow Jones Islamic Market Indexes Newsletter, Issue 2, August 2008, available at http://img.en25.com/Web/DowJonesIndexes/ DJIM_QNL_082708_0.pdf. Ambinder, de Silva & Dewar (2000-2001): Loren Page Ambinder, Nimali de Silva, and John Dewar, The Mirage Becomes Reality: Privatization and Project Finance Developments in the Middle East Power Market, 24 Fordham International Law Journal 1029 (2000-2001).



AME Info: GCC Infrastructure (2008): $1.5 trillion for a 10 year GCC infrastructure boom, AME Info, January 29, 2008, available at http://www. ameinfo.com/145251.html. AME Info: Qatar Expenditures (2005): Next step in Qatar’s $15 billion infrastructure spending, AME Info, June 27, 2005, available at http://www. ameinfo.com/63152.html. Amison (1995): Martin Amison, Privatization and Project Finance in the Middle East, 14 International Financial Law Journal 14 (1995). Anderson (1997-1998): Kenneth Anderson, Three Roles for the Private Equity Market in Foreign Investments: Comment on Mailander’s “Searching for Liquidity”, 13 American University International Law Review 125 (1997-1998). Andrade & de Castro (1998-1999): Mario Andrade and Mario A. de Castro, The Privatization and Project Finance Adventure: Acquiring a Colombian Public Utility Company, 19 Northwestern Journal of International Law and Business 4225 (1998-1999).

Anwar (2007): YBhg Dato’ Zarinah Anwar, Keynote Address: The Malaysian Capital Market – Roadmap and Strategies Going Forward, remarks at Invest Malaysia 2007, 21 March 2007, located at http://www.sc.com.my/eng/html/resources/speech/ sp_20070321.html. Arab News: Gulf Construction (2008): Sarah Abduallah, Gulf construction to top SR1.2 trillion, Arab News, August 18, 2008, available at http:// www.arabnews.com/page=6§ion=0&article=1 13010&d=18&m=8&y=2008. Arberry (1969): A.J. Arberry, ed., Religion Middle East (1969).

in the

Archer & Abdel Karim (2002): Simon Archer and Rifaat Ahmed Abdel Karim, eds., Islamic Finance: Innovation and Growth (2002). Archer & Abdel Karim (2006): Simon Archer and Rifaat Ahmed Abdel Karim, Islamic Finance: The Regulatory Chllenge (2007). Archer & Abdel Karim (2007): Simon Archer and Rifaat Ahmed Abdel Karim, Accounting standards for Islamic financial services, in Hassan & Lewis (2007), at 302-09.

Ansari (1994): Zafar Ishaq Ansari, Islamic Juristic Terminology Before Šāf‘ī: A Semantic Analysis with Special Reference to the Kūfa, in Hallaq (2004), at 215-38.

Armstrong (2001): Arabia (2001).

Ansari-pour (1994), M A Ansari-pour, Interest in International Transactions under Shiite Jurisprudence, 9 Arab Law Quarterly 158 (1994).

Arnholz & Gainor (2007): John Arnholz and Edward E. Gainor, Offerings of Asset-Backed Securities (2007).

Ansari-pour (1996): M A Ansari-pour, The Illegality of Taking Interest From Muslim Countries, 11 Arab Law Quarterly 281 (1996).

Arnold (2007): Wayne Arnold, Adapting Finance to Islam, The New York Times, November 22, 2007, located at http://www.nytimes. c o m / 2 0 0 7 / 11 / 2 2 / b u s i n e s s / w o r l d b u s i n e s s / 22islamic.html?adxnnlx=1195734166-w8s7k2Ok3 YOpXj4iIkQ%203w&pagewanted=all.

Anwar (2005): YBhg Dato’ Zarinah Anwar, A Strong and Vibrant Sector for Sustainable Growth – the Role of Capital Market, a presentation to The Investor’s Conference 2005 in conjunction with the 30th Annual Meeting of the Islamic Development Bank, 22nd June 2005, slides 17-26, located at http://www.sc.com.my/eng/html/resources/ discussion/2005/IDB_conference.pdf.

H. C. Armstong, Lord

of

Avini: Avisheh Avini, The Origins of the Modern English Trust Revisited, 70 Tulane Law Review 1139 (1995-1996). Ayub (2007): Muhammad Ayub, Understanding Islamic Finance (2007).

VOLUME III

SPRING 2009


55


Babai (1998): Don Babai, Islamic Project Finance: Problems and Promises, in Second Harvard Forum (1998), at 173-78. Badr (1977-1978): Gamal Moursi Badr, Islamic Law: Its Relation to Other Legal Systems, 26 The American Journal of Comparative Law 187 (1977-1978). Ballantyne (1987): W M Ballantyne, The Shari’a: A Speech to the IBA Conference in Cairo, on Arab Comparative and Commercial Law, 15-18 February 1987, 2 Arab Law Quarterly 12 (1987). Ballantyne & Stovall (2002): William M. Ballantyne and Howard L. Stovall, eds., Arab Commercial Law: Principles and Perspectives (2002). Baragona (2004-2005): Katherine C. Baragona, Project Finance, 18 The Transnational Lawyer 139 (2004-2005). Barron’s: Credit Crunched (2008): Sandra Ward, Bailout or Not, Credit Will Be Crunched, Barron’s, September 22, 2008, available at http://online.barrons.com/article/ SB122187640064459597.html?mod=b_hpp_9_ 0002_b_this_weeks_magazine_home_left. Bernstein (1965): J.L. Bernstein, Background of a Gray Area in Law: The Checkered Career of Usury, 51 American Bar Association Journal 846 (1965). Bertoletti & Cunha (2004): Maria Edit Bertoletti and Rodrigo Ferraz P. Cunha, Project Finance in Brazil: Brief Analysis of Political and Collateral Risk Mitigation, 32 International Business Lawyer 59 (2004). Beximco (2004): Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd and Others, [2004] EWCA CIV 19, [2204] All ER 280 (Jan), relating to governing law (English or Sharīʻah ) in the litigation context.

Bloomberg: AAOIFI Decree Cripples Sukūk (2008): Haris Anwar, Islamic Bond Decree Cripples Sukuk, Imperils Projects (Update 2), Bloomberg.com, September 3, 2008, available at http://www.bloomberg. c o m / a p p s / n e w s ? p i d = 2 0 6 0 11 0 9 & s i d = a _ Zh0q70aPxY&refer=home. Bloomberg: AAOIFI Usmani (2008): Will McSheehy, AAOIFI’s Sheikh Usmani Says New Sukuk Rules Apply to All Sales, Bloomberg.com, March 16, 2008, available at http://www.bloomberg. com/apps/news?pid=newsarchive&sid=a1CSDPv cS4CQ. Bloomberg: Fannie Freddie Credit-Default Swaps (2008): Oliver Biggadike and Laura Chochrane, Fannie, Freddie Credit-Default Swaps May be Unwound (Update 2), Bloomberg. com, September 8, 2008, available at http://www. bloomberg.com/apps/news?pid=20601087&sid=aj sxbVS.W2lQ&refer=home. Bloomberg: Fannie-Freddie Takeover (2008): Rebecca Christie and John Brinsley, U.S. Takeover of Fannie, Freddie Offers ‘Stopgap’ (Update 2), Bloomberg.com, September 8, 2008, available at http://www.bloomberg.com/apps/news?pid=20601 087&sid=aWg_UqhhCrYU&refer=home. Bloomberg: Saudi Electric (2008): Abdulla Fardan, Saudi Electricity to Spend $6.9 Billion on Four Power Projects, Bloomberg.com, June 29, 2008, available at http://www.bloomberg.com/apps/ news?pid=newsarchive&sid=afz5J_BR7JrU. Bloomberg: Sukūk Surge (2007): Will McSheehy & Shanthy Nambiar, Islamic Bond Fatwas Surge on Million-Dollar Scholars, BLOOMBERG, May 1, 2007, http://www. bloomberg.com/apps/news?pid=20601109&sid=a. DsH16oTM6U&refer=home (this article suggests that the amount of wealth managed according to Islamic law is approximately $1 trillion and projects that it could reach $2.8 trillion by 2015).

Bjerre (2002): Carl S. Bjerre, Project Finance, Securitization and Consensuality, 12 Duke Journal of Comparative and International Law 411 (2002).

56




Bloomberg: Tamweel Seeks $500 Million (2008): Haris Anwar, Tamweel Seeks Up to $500 Million in Islamic Loans (Update 1), Bloomberg. com, August 13, 2008, available at http://www. bloomberg.com/apps/news?pid=newsarchive&sid =aLBwK2EKGez8.

Business Week: Hedge Funds Implode (2007): Matthew Goldstein and David Henry, Bear Stearns’ Bad Bet, Business Week, October 11, 2007, available at http://www.businessweek.com/print/ bwdaily/dnflash/content/oct2007/db20071011_ 175964.htm.

Bloomberg: UAE Bond Investors (2008): Haris Anwar, U.A.E. Bond Investors Face Untested Laws in Default, S&P Says, Bloomberg.com, August 19, 2008, available at http://www.bloomberg.com/apps/ news?pid=newsarchive&sid=a0snaRWsDpMw.

Business Week: SEC Wants Answers (2007): The SEC Wants More Answers, Business Week, September 17, 2007, available at http://www. businessweek.com/magazine/content/07_38/ b4050052.htm?dlbk.

Blount (2008): Jeffrey A. Blount, Stoking China’s Furnace: Implications of the 2008 Sichuan Earthquake for China’s Energy Infrastructure, in Moser (2008 – II), at 65.

Calkoen (1997): Willem J.L. Calkoen, New Delhi, Here We Come!, 25 International Business Lawyer 386 (1997).

Blount & Du (2008): China’s Olympic Growth: Opportunities and Challenges Presented by Private Sector Participation in Infrastructure Development, in Moser (2008 – I), at 14. Bowers (1998): William C. Bowers, Tax and Project Finance: United States, 26 International Business Lawyer 229 (1998). Boxberger (1998): Linda Boxberger, Avoiding Ribā: Credit and Custodianship in Nineteenth and Early-Twentieth Century Ḥaḍramawt, 5 Islamic Law and Society 196 (1998). Broome (2002): Lisa Lamkin Broome, Framing the Inquiry: The Social Impact of Project Finance, 12 Duke Journal of Comparative and International Law 439 (2002).

Campos (1997): Buillermo Campos, Piping finance into Brazil, 8 International Tax Review 30 (1997). Carlson (1998): David Gray Carlson, The Rotten Foundations of Securitizations, 39 William & Mary Law Review 1055 (1998). Cattan: Henry Cattan, The Law of Waqf, in Khadduri & Liebesney (1955), at 203. Choi & Gulati (2005-2006): Contract as Statute, 104 Michigan Law Review 1129 (2005-2006). Clement-Davies (2008): Christopher ClementDavies, Public-Private Partnerships in Central and Eastern Europe: Structuring Concession Agreements, in Moser (2008 – I), at 28.

Brown (2008): Chris Brown, Strategic Planning: Its Role in Public Procurement, in Moser (2008 – II), at 23.

Codd (1999): Rachel Anne Codd, A Critical Analysis of the Role of Ijtihad in Legal Reforms in the Muslim World, 14 Arab Law Quarterly 112 (1999).

Burnett (2008): Henry G. Burnett, Dispute Resolution Under Brazil’s Federal PPP Law, in Moser (2008 – I), at 19.

Collier (1994): Jane F. Collier, Intertwined Histories: Islamic Law and Western Imperialism, 28 Law & Society Review 395 (1994).

VOLUME III

SPRING 2009


57


Collins, Belsky & Case (2007): Michael Collins, Eric Belsky, and Karl E. Case, Exploring the Welfare Effects of Risk-based Pricing in the Subprime Mortgage Market, Harvard University (Graduate School of Design and John F. Kennedy School of Government) Joint Center for Housing Studies, Working Paper Series (April 2004), available at http://www.jchs.harvard.edu/publications/finance/ babc/babc_04-8.pdf.

Davis (2008): Henry A. Davis, ed., Infrastructure Finance: Trends and Technologies (2008).

Coles (2000-2001): Ian Coles, The Julietta Gold Mining Project: Lessons for Project Finance in the Emerging Markets, 24 Fordham International Law Journal 1052 (2000-2001).

DeLorenzo (2001): Yusuf Talal DeLorenzo, Shari’ah Supervision of Islamic Mutual Funds, in Fourth Harvard Forum (2002), at 67-76.

Comair-Obeid (1996): Nayla Comair-Obeid, The Law of Business Contracts in the Arab Middle East (1996). Cook (1996): Jacques Cook, Infrastructure Project Finance in Latin America, 24 International Business Lawyer 260 (1996). Coulson (1964): Noel J. Coulson, A History Islamic Law (1964).

of

Coulson (1984): Noel J. Coulson, Commercial Law in the Gulf States: The Islamic Legal Tradition (1984). Croke (2004-2005): James J. Croke, Jr., Project Finance and Securitization: A Natural Hybrid, 18 Transnational Law Journal 159 (2004-2005). Crothers (1995-1996): John D. Crothers, Project Finance in Central and Eastern Europe from a Lender’s Perspective: Lessons Learned in Poland and Romania, 41 McGill Law Journal 285 (1995-1996). Dar, Harvey & Presley (1998): Humayan A. Dar, David I. Harvey, and John R. Presley, Profitability, and Agency in Profit- and Loss-sharing in Islamic Banking and Finance, in Second Harvard Forum (1998), at 51-62.

58


Dar & Moghul (2009): Humayan A. Dar and Umar Moghul, The Chancellor Guide to the Legal and Shari’a Aspects of Islamic Finance (2009).

Delescluse (2004): Aude Delescluse, ChadCameroon: A Model Pipeline?, 5 Georgetown Journal of International Affairs 43 (2004).

DeLorenzo (2004): Yusuf Talal DeLorenzo, Shari’a Supervision of Islamic Funds, in Jaffer (2004), at 12-34. DeLorenzo (undated – DJIMI): Yusuf Talal DeLorenzo, Shari’ah Supervision of Islamic Mutual Funds, at http://www.djindexes.com/mdsidx/index. cfm?event=showIslamicArticles (undated). DeLorenzo (undated GFC): Yusuf Talal DeLorenzo, Shari’ah Supervision in Modern Islamic Finance, at http://www.guidancefinancial.com/ pdf/Shari’ah_Supervision_in_Modern_Islamic_ Finance.pdf (undated). DeLorenzo & McMillen (2007): Yusuf Talal DeLorenzo and Michael J.T. McMillen, Law and Islamic Finance: An Interactive Analysis, in Archer & Abdel Karim (2007), at 136-201. Dolan (1998): Patrick D. Dolan, Lender’s Guide to Securitization of Commercial Mortgage Loans, 115 Banking Law Journal 597 (1998). Dolan (1998 – LL): Patrick D. Dolan, Lender’s Guide to the Securitization of State Lottery Winnings and Litigation Settlement Payments, 115 Banking Law Journal 710 (1998). Dolan (1999): Patrick D. Dolan, Securitization of Equipment Leases, New York Law Journal, August 11, 1999, at 1.



Dolan & Davis (2006): Patrick D. Dolan and C. VanLeer Davis III, Securitizations: Legal and Regulatory Issues (2006). Doulis (2008): Maria Doulis, The State of the Empire: Infrastructure Needs of New York State and New York City, in Moser (2008 – II), at 15. Dow Jones (2008): Guide to the Dow Jones Islamic Market Index, June 2007, Dow Jones Indexes, available at http://www.djindexes.com/ mdsidx/index.cfm?event=showIslamicLinks. Duncan, Desai & Rieger (2004): Michael Duncan, Bimal Desai, and Julie Rieger, Islamic Bankers Take Role on International Projects, 23 International Financial Law Review 52 (2004). Dutton (1994): The Introduction to Ibn Rushd’s Bidayat Al-Mujtahid, 1 Islamic Law & Society 188 (1994). Ebrahim (1998): Muhammed-Shahid Ebrahim, Integrating Islamic and Conventional Project Finance, in Second Harvard Forum (1998), at 183-94. Economist: Alchemists of Finance (2007): The Alchemists of Finance, The Economist, May 17, 2007, available at http://www.economist. com/specialreports/displayStory.cfm?story_ id=9141486. Economist: All Fall Down (2008): All Fall Down, The Economist, October 10, 2008, available at http://www.economist.com/finance/displayStory. cfm?story_id=12405370&source=features_box_ main. Economist: America’s Vulnerable Economy (2007): America’s Vulnerable Economy, Economist, November 15, 2007, available at http://www. economist.com/opinion/displaystory.cfm?story_ id=10134118.

Economist: Bearish Turns (2007): Bearish Turns, Economist, June 21, 2007, available at http://www.economist.com/finance/displaystory. cfm?story_id=9378742. Economist: Big Bear (2008): The Big Bear, Economist.com, October 16, 2008, available at http://www.economist.com/finance/displayStory. cfm?source=hptextfeature&story_id=12437747. Economist: Black Boxes (2007): Black Boxes – Investment banks/ inventions for transforming risk are ingenious, but hard to fathom, The Economist, May 17, 2007, available at http://www.economist. com/specialreports/displaystory.cfm?story_ id=9141547. Economist: Boutique Shopping (2007): Boutique Shopping, Economist, September 13, 2007, available at http://www.economist. com/specialreports/displaystory.cfm?story_ id=9753232. Economist: Capitalism at Bay (2008): Capitalism at Bay, Economist, October 16, 2008, available at http://www.economist. com/opinion/displaystory.cfm?source=most_ commented&story_id=12429544. Economist: Cheap Money (2006): In Search of Cheap Money, The Economist, July 20, 2006, available at http://www.economist.com/research/ articlesBySubject/displaystory.cfm?subjectid=348 936&story_id=E1_STJRSPS. Economist: China Transportation (2008): Rushing on by road, rail and air, Economist, February 14, 2008, available at http://www.economist.com/ world/asia/displaystory.cfm?story_id=10697210. Economist: Dawn in Desert (2007): Dawn in the Desert, Economist, December 7, 2007, available at http://www.economist.com/displaystory.cfm?story_ id=10235761.

VOLUME III

SPRING 2009


59


Economist: Enduring Attraction (2007): Enduring Attraction, Economist, September 13, 2007, available at http://www.economist.com/ specialreports/displaystory.cfm?story_id=9753281.

Economist: Housing Hangover (2007): The trouble with the housing market, Economist, May 22, 2007, available at http://www.economist.com/ opinion/displaystory.cfm?story_id=8888776.

Economist: Fair Value Accounting (2008): All’s Fair, Economist, September 18, 2008, available at http://www.economist.com/finance/displaystory. cfm?story_id=12274096.

Economist: In the Sun (2007): Places in the sun, Economist, February 22, 2007, available at http:// www.economist.com/research/articlesBySubject/ displaystory.cfm?subjectid=348936&story_ id=8695139.

Economist: Fate Worse Thank Debt (2008): A Fate Worse Thank Debt, Economist, September 25, 2008, available at http://www.economist.com/ finance/displayStory.cfm?source=hptextfeature&st ory_id=12306060. Economist: Fortune Frowned (2008): When Fortune Frowned, Economist, October 9, 2008, available at http://www.economist.com/ specialreports/displayStory.cfm?source=hptextfeat ure&story_id=12373696. Economist: Friends, Rivals (2007): Friends and rivals, Economist, September 13, 2007, available at http://www.economist.com/specialreports/ displaystory.cfm?story_id=9753218. Economist: Game Is Up (2007): The game is up, Economist, August 16, 2007, available at http://www.economist.com/finance/displaystory. cfm?story_id=9659784. Economist: History of Modern Finance (2008): Link by Link: A Short History of Modern Finance, Economist, October 16, 2008, available at http://www.economist.com/displayStory. cfm?source=most_recommended&story_id=1241 5730&fsrc=nwlgafree. Ecomonist: Hit By A Rock (2007): Hit by a rock: The credit crisis hits the high street, Economist, September 14, 2007, available at http://www. economist.com/daily/news/displaystory.cfm?story_ id=9821067&CFID=14015254&CFTOKEN=76373 850.

60


Economist: India (2007): India on fire, Economist, February 1, 2007, available at http:// w w w. e c o n o m i s t . c o m / f i n a n c e / d i s p l a y s t o r y. cfm?story_id=E1_RGNVGRT. Economist: Is There A Future? (2008): Is There A Future?, Economist, September 18, 2008, available at http://www.economist.com/finance/ displaystory.cfm?story_id=12274054. Economist: Media Oasis (2007): Media oasis, Economist, October 4, 2007, available at http://www.economist.com/business/displaystory. cfm?story_id=9917887. Economist: Money Magnets (2007): Magnets for money, Economist, September 13, 2007, available at http://www.economist.com/specialreports/ displaystory.cfm?story_id=9753240. Economist: Moving Marketplaces (2007): Marketplaces on the move, Economist, September 13, 2007, available at http://www.economist. com/specialreports/displaystory.cfm?story_ id=9753184. Economist: Nightmare on Wall Street (2008): Nightmare on Wall Street, Economist, September 15, 2008, available at http://www.economist.com/ finance/displayStory.cfm?story_id=12231236&sou rce=features_box_main. Economist: Nuclear Winter? (2008): A Nuclear Winter?, September 18, 2008, available at http:// www.economist.com/finance/displayStory.cfm?so urce=hptextfeature&story_id=12274112.



Economist: Offshore (2007): Offshore and beyond the pale, Economist, February 22, 2007, available at http://www.economist.com/research/ articlesBySubject/displaystory.cfm?subjectid=348 936&story_id=8740214. Economist: Recycling Petrodollars (2005): Recycling the petrodollars, The Economist, November 10, 2005, available at http://www. economist.com/research/articlesBySubject/ displaystory.cfm?subjectid=549375&story_id=E1_ VTPGNRT. Economist: Securitisation Gone Wrong (2007): Securitisation: When it goes wrong …, Economist, September 20, 2007, available at http://www.economist.com/finance/displaystory. cfm?story_id=9830765.

Einhorn: Private Profit and Socialized Risk (2008): David Einhorn, Private Profits and Socialized Risk, Grant’s Spring Investment Conference, April 8, 2008. El-Gamal (2000): Mahmoud A. El-Gamal, An Economic Explication of the Prohibitions of Riba in Classical Islamic Jurisprudence, in Third Harvard Forum (2000), at 29-40. El-Gamal (2003): Mahmoud A. El-Gamal, “Interest” and the Paradox of Contemporary Law and Finance, 27 Fordham International Law Journal 108 (2003-2004). El-Gamal (2005): Mahmoud A. El-Gamal, Mutuality as an Antidote to Rent-Seeking in Shari‘a-Arbitrage in Islamic Finance (April 2005), available at http://www.ruf.rice.edu/~elgamal/files/ Mutuality.pdf.

Economist: Shapes, Sizes (2007): All shapes and sizes, Economist, September 13, 2007, available at http://www.economist.com/specialreports/ displaystory.cfm?story_id=9753204.

El-Gamal (2006): Mahmoud A. El-Gamal, Islamic Finance: Law, Economics, and Practice (2006).

Economist: Spreading the Muck (2007): Spreading the muck – Is risk ending up in the right places?, Economist.com, May 17, 2007, available at http://www.economist.com/specialreports/ displaystory.cfm?story_id=9141693.

El-Gamal (2007): Mahmoud A. El-Gamal, Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering (2007), available at http://www.ruf.rice.edu/ ~elgamal/files/Incoherence.pdf.

Economist: State Capitalism (2008): The Rise of State Capitalism, Economist, September 18, 2008, available at http://www.economist. com/specialreports/displaystory.cfm?story_ id=12080735.

El-Gamal (2008): Mahmoud A. El-Gamal, Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering, 25 Wisconsin International Law Journal 605 (2008).

Economist: Suffering A Seizure (2008): Suffering a seizure, Economist, September 8, 2008, available at http://www.economist.com/finance/ displayStory.cfm?story_id=12078933&source=feat ures_box_main.

El-Gamal (undated): Mahmoud A. El-Gamal, Limited and Dangers of Shari‘a Arbitrage, available at http://www.ruf.rice.edu/~elgamal/files/Arbitrage. pdf.

Economist: The Rules (2007): The rules of the game, Economist, September 13, 2007, available at http://www.economist.com/specialreports/ displaystory.cfm?story_id=9753293.

Elgari (2002): Mohamed Ali Elgari, Purification of Islamic Equity Funds: Methodology and Sharīc Foundation, in Fourth Harvard Forum (2002), at 77-80.

VOLUME III

SPRING 2009


61


Ellis (1998-1999): Robert Dean Ellis, Securitization Vehicles, Fiduciary Duties, and Bondholder’s Rights, 24 Journal of Corporate Law 295 (1998-1999).

Fadel (2008): Mohammad H. Fadel, Riba, Efficiency and Prudential Regulation: Preliminary Thoughts, 25 Wisconsin International Law Journal 655 (2008).

English (2006): Linda M. English, Public Private Partnerships in Australia: An Overview of their Nature, Purpose, Incidence and Oversight, 29 University of New South Wales Law Journal 250 (2006).

Fasano & Iqbal: Diversification (2003): GCC Countries: From Oil Dependence to Diversification, International Monetary Fund (2003), available at http://imf.org/external/pubs/ft/med/2003/eng/ fasano/index.htm.

Erlandson (2008): Paul Erlandson, Infrastructure: The Investment that Saves the World, in Moser (2008 – I), at 1.

FDIC – Blair Testimony (2007): Statement of Sheila C. Blair, Chairman, Federal Deposit Insurance Corporation on Possible Responses to Rising Mortgage Foreclosures before the Committee on Financial Services, U.S. House of Representatives; 2128 Rayburn House Office Building April 17, 2007, available at http://www.fdic.gov/ news/news/speeches/chairman/spapr1707.html.

Euromoney (2007 – Bond): Islamic Finance: Bonds’ Car is Shariah-compliant, Euromoney Magzine as contained at the web site of the Islamic Finance Information Service, April 1, 2007, located at https://www.securities.com/doc. html?pc=IG&sv=IFIS&doc_id=135956893. Euromoney (2007 – Banks): Banks Take the Next Step in Islamic Finance Structures, Euromoney Magzine, as contained at the web site of the Islamic Finance Information Service, February 1, 2007, located at https://www.securities.com/doc. html?pc=IG&sv=IFIS&doc_id=135958129. Fadeel (2007): Mahmoud Nasreldin Ahmed Fadeel, Legal Aspects of Islamic Finance, in Archer & Abdel Karim (2007), at 90-108. Fadel (2001): Mohammad Fadel, The Regulation of Risk in Islamic Law, Common Law, and Federal Regulatory Law, in Fourth Harvard Forum (2002), at 81-88. Fadel (2007): Mohammad H. Fadel, Riba, Efficiency and Prudential Regulation, a presentation at the symposium Islamic Law in a Globalized World: Implications for Contemporary Islamic Finance, University of Wisconsin, March 2, 2007, Twenty-Fifth Anniversary of the University of Wisconsin International Law Journal (copy on file with the author).

62


Feldman, Berrocal & Sharfsten (1986-1987): Rodger D. Feldman, Nicholas J. Berrocal and Howard L. Sharfsten, Public Finance Through Privatization: Providing Infrastructure for the Future, 16 Stetson Law Review 705 (1986-1987). Ferguson (2001): Nick Ferguson, Project finance keeps Philippines market moving, 20 International Financial Law Review 77 (2001). Fifth Harvard Forum (2003): The Proceedings the F ifth H arvard U niversity F orum on I slamic Finance: Islamic Finance: Dynamics and Developments (2005). of

Forbes: Subprime Aftershocks (2007): Matthew Swibel, Aftershocks From The Subprime Quake, Forbes.com, August 28, 2007, available at http://www.forbes.com/ businessinthebeltway/2007/08/28/airlineswashington-beltway-biz-wash-cz_ms_ 0828beltway.html. Forry (1995): John I. Forry, Infrastructure project finance opportunities in Mexico, 14 International Financial Law Review 45B (1995).



Forster (1996): Richard Forster, Where the deals get done in Asia, 15 International Financial Law Review 19 (1996). Forward (2006): Paul Forward, Public Private Partnership of Conflict: Is It Time For A New Approach?, 29 University of New South Wales Law Journal 263 (2006). Fourth Harvard Forum (2002): The Proceedings Fourth Harvard University Forum on Islamic Finance: Islamic Finance: The Task Ahead (2002). of the

Fratcher: William F. Fratcher, The Islamic Wakf, 36 Missouri Law Review 153 (1971). Frilet (2000): Marc Frilet, Uniform Commercial Laws, Infrastructure and Project Finance in Africa, 28 International Business Lawyer 213 (2000). Frost (1997): Christopher Frost, Asset Securitization and Corporate Risk Allocation, 72 Tulane Law Review 101 (1997). FT Big Freeze (2008): Gillian Tett, Big Freeze Part 1: How it Began, The Financial Times Limited, August 3, 2008, available at http://www. ft.com/cms/s/0/a09f751e-6187-11dd-af94000077b07658,dwp_uuid=13e90304-4dc011dd-820e-000077b07658.html?nclick_check=1, John Gapper, Big Freeze part 2: Banking, The Financial Times Limited, August 4, 2008, available at http://www.ft.com/cms/s/0/cc160f46-624f-11dd9ff9-000077b07658,dwp_uuid=13e90304-4dc011dd-820e-000077b07658.html, Chris Giles, Big Freeze part 3: The economy, The Financial Times Limited, August 5, 2008, available at http:// www.ft.com/cms/s/0/79da1340-631b-11dd-9fd00000779fd2ac,dwp_uuid=13e90304-4dc0-11dd820e-000077b07658.html, and Big Freeze part 4: A US recovery, The Financial Times Limited, available at http://www.ft.com/cms/s/794801a8-63e8-11dd844f-0000779fd18c,dwp_uuid=13e90304-4dc011dd-820e-000077b07658,Authorised=false. html?_i_location=http%3A%2F%2Fwww.ft.com

%2Fcms%2Fs%2F0%2F794801a8-63e8-11dd844f-0000779fd18c%2Cdwp_uuid%3D13e903044 d c 0 - 11 d d - 8 2 0 e - 0 0 0 0 7 7 b 0 7 6 5 8 . h t m l & _ i _ r e f e r e r = h t t p % 3 A % 2 F % 2 F w w w. ft.com%2Fbigfreeze, collectively. FT: ECB and Bank of England Funds Injection (2008): Ralph Atkins, Delphine Strauss and Noma Cohen, ECB and Bank of England Inject Funds, The Financial Times Limited, September 15, 2008, available at http://www.ft.com/cms/s/0/6e90abdc82f8-11dd-907e-000077b07658.html. FT: Wall Street Crisis (2008): Francesco Guerrera, Krishna Guha and Greg Farrlel, Wall Street Crisis Deepens, The Financial Times Limited, September 15, 2008, available at http:// www.ft.com/cms/s/0/f8834910-82aa-11dd-a019000077b07658.html?nclick_check=1. Funk (1993): David A. Funk, Traditional Islamic Jurisprudence, 20 Southern University Law Review 213 (1993). Fyzee (1949): Asaf A.A. Fyzee, ed., Outlines of Muhammadan Jurisprudence (1949). Fyzee (1963): A.A.A. Fyzee, The Relevance of Muhammadan Law in the Twentieth Century, 1963 Cambridge Law Journal 261 (1963). Fyzee (2008): Tahir Mahmoud Fyzee, ed., Asaf A.A. Fyzee, Outlines of Muhammadan Jurisprudence (2008). Gaudiosi: Monica M. Gaudiosi, The Influence of the Islamic Law of Waqf on the Development of the Trust in England: The Case of Merton College, 136 University of Pennsylvania Law Review 1231 (1987-1988). Gerber (1993-1994): David L. Gerber, Prometheus Born: The High Middle Ages and the Relationship Between Law and Economic Conduct, 38 St. Louis University Law Journal (1993-1994).

VOLUME III

SPRING 2009


63


Gibb (1982): Hamilton A.R. Gibb, Studies on the Civilization of Islam (1982). Gillespie (2008): David A. Gillespie, U.S. Public Infrastructure Investment: Selected Tax Considerations, in Moser (2008 – I), at 43. Glaeser & Scheinkman (1998): Edward L. Glaeser and José Scheinkman, Neither a Borrower Nor a Lender Be: An Economic Analysis of Interest Restrictions and Usury Laws, 41 Journal of Law and Economics 1 (1998). Goldziher (1910): Ignaz Goldziher, Introduction to Islamic Theology and Law (1910: special edition 1982 translated by Andras Hamouri and Bernard Lewis). Goode (1982): R.M. Goode, Usury in English Law, 1 Arizona Journal of International & Comparative Law 38 (1982). Grant: Confidence Game (2008): James Grant, The Confidence Game, The Wall Street Journal, October 18, 2008, available at http:// online.wsj.com/article/SB122428355436946301. html?mod=todays_us_weekend_journal. Guardian: FSA Regulation (2008): We’ll Get Tough with City, Says Watchdog, Guardian, October 17, 2008, available at http://www.guardian.co.uk/ business/2008/oct/17/marketturmoil-banking. Guardian: Haunted by History (2008): Clive Webb, Haunted by History, Guardian, October 3, 2008, available at http://www.guardian.co.uk/ business/2008/oct/03/us.economy.bail.out. Guardian: Turner Inverview (2008): Interview: Lord Turner ‘Our Touch Will Be Heavier. We Have to Focus on the Risks’, Guardian, October 17, 2008, available at http://www.guardian.co.uk/ business/2008/oct/17/marketturmoil-creditcrunch. Hallaq (1985-86): Wael B. Hallaq, Legal Reasoning in Islamic Law and the Common Law: Logic and Method, The Logic of Legal Reasoning

64


in Religious and Non-Religious Cultures: The Case of Islamic Law and the Common Law, 34 Cleveland State Law Review 79 (1985-1986). Hallaq (1997): Wael B. Hallaq, A History of Islamic Legal Theories: An Introduction to Sunnĩ uşũl al-fiqh (1977). Hallaq (2001): Wael B. Hallaq, From Regional to Personal Schools of Law? A Reevaluation, 8 Islamic Law and Society 1 (2001). Hallaq (2004): Wael B. Hallaq, The Formation of Islamic Law (2004). Hallaq (2005): Wael B. Hallaq, The Origins Evolution of Islamic Law (2005).

and

Hamoudi (2006-2007): Haider Ala Hamoudi, Judicial Schizophrenia in Islamic Finance, 7 Chicago Journal of International Law 605 (2006-2007). Hamoudi (2007): Haider Ala Hamoudi, Muhammad’s Social Justice or Muslim Cant?: Langdellianism and the Failures of Islamic Finance, 40 Cornell International Law Journal 89 (2007). Hamoudi (2007 - PW): Haider Ala Hamoudi, The Muezzin’s Call and the Dow Jones Bell: Necessity of Realism in the Study of Islamic Law, Legal Studies Research Paper Series, Working Paper No. 200708, September 2007, available at http://papers.ssrn. com/sol3/papers.cfm?abstract_id=1014670. Haneef (2005): Mohamed Rafe Md. Haneef, Recent Trends and Innovations in Islamic Debt Securities: Prospects for Islamic Profit and Loss Sharing Securities, in Ali (2005), at 29-60. Hansen (2004-2005): Kenneth W. Hansen, Managing Political Risks in Emerging Market Investment: Part Two – Building Up To A Drawdown: International Project Finance and Privatization – Expert Presentations on Lessons to be Learned, 18 The Transnational Lawyer 77 (2004-2005).



Harrell, Rice & Shearer (1996-1997): Charles E. Harrell, James L. Rice III and W. Robert Shearer, Securitization of Oil, Gas, and Other Natural Resource Assets: Emerging Financing Techniques, 52 Business Lawyer 885 (1996-1997). Harris (2008): Gregg W. Harris, Foreign Investment in India: Strategies to Diminish Legal Risks, in Moser (2008 – I), at 24. Hassan (1982): Farooq A. Hassan, The Sources of Islamic Law, 76 American Society of International Law Proceedings 65 (1982). Hassan & Lewis (2007): M. Kabir Hassan and Mervyn K. Lewis, eds., Handbook of Islamic Banking (2007). Hattstein & Delius: Markus Hattstein and Peter Delius, Islam: Art and Architecture (undated). Hayeck (1996): Paul G. Hayeck, An Economic Analysis of the Justifications for Usury Laws, 15 Annual Review of Banking Law 253 (1996). Hayes & Cummings (2001 – I): Ellen Hayes and Amy Cummings, Taming the risks of project finance: part one: corruption and legislative reform, 20 International Financial Law Journal 27 (2001). Hayes & Cummings (2001 – II): Ellen Hayes and Amy Cummings, Taming the risks of project finance: part two: political risk and insurance, 20 International Financial Law Journal 17 (2001). Head (2004): John W. Head, For Richer or for Poorer: Assessing the Criticisms Directed at the Multinational Development Banks, 52 University of Kansas Law Review 241 (2004). Heck (2008): Gene W. Heck, The Economic Transformation of Saudi Arabia, in Moser (2008 – II), at 1. Hegazy (2005): Walid Hegazy, Fatwas and the Fate of Islamic Finance: A Critique of the Practice of Fatwa in Contemporary Islamic Finance, in Ali (2005), at 133-52.

Hegazy (2007): Walid S. Hegazy, Contemporary Islamic Finance: From Socioeconomic Idealism to Pure Legalism, 7 Chicago Journal of International Law 581-603 (2007). Hegazy (2008): Walid Hegazy, Islamic Liability as Practiced by Islamic Financial Institutions, 25 Wisconsin International Law Journal 797 (2008). Henry & Wilson (2004): Clement M. Henry and Rodney Wilson, eds., The Politics of Islamic Finance (2004). Hicks (1982): Stephen C. Hicks, The Fuqaha and Islamic Law, 30 American Journal of Comparative Law 1 (1982). Hill (1996): Claire A. Hill: Securitization: A Low-Cost Sweetener for Lemons, 75 Washington University Law Quarterly 1061 (1996). Hoffman (1998): Scott L. Hoffman, The Law Business of International Project Finance: A Resource for Governments, Sponsors, Lenders, Lawyers and Project Participants (1998). and

Holt, Lambton & Lewis (1970): P. M. Holt, Ann K. S. Lambton and Bernard Lewis, eds., The Cambridge History of Islam: Volume 2: The Further Islamic Lands, Islamic Society and Civilization (1970). Hooker (1993): Barry Hooker, Fatawa in Malaysia 1960-1985: Third Coulson Memorial Lecture, 8 Arab Law Quarterly 93 (1993). Hooper (1933): Judge C.A. Hooper, translator, (cited as “Majelle: Hooper”), Majalat Al-Ahkam AlAdliyah (an English language translation prepared by Judge C.A. Hooper as The Civil Law of Palestine and Trans-Jordan, Volumes I and II (1933), and reprinted in various issues of 4 Arab Law Quarterly 1968). Hurgronje (1957): C. Snouck Hurgronje, Selected Works (1957).

VOLUME III

SPRING 2009


65


Husain (2002): Syed Tariq Husain, Project Finance, in Archer & Abdel Karim (2002), at 143-50. IFSB (2008): Islamic Finance: Global Legal Issues Challenges (2008).

and

IHT: Credit, Bubbles, Betrayals (2007): Roger Cohen, Easy Credit, Bubbles and Betrayals, International Herald Tribune, August 19, 2007, available at http://select.nytimes.com/ iht/2007/08/19/opinion/IHT-19edcohen.1.html?ex= 1187755200&en=8b0407164991cf7e&ei=5121&e mc=eta1. iStockAnalyst: Infrastructure (2008): Emerging Markets Infrastructure: The Issue from Morgan Stanley’s Head Researchers, iStockAnalyst, August 8, 2008, available at http://www.istockanalyst.com/ article/viewarticle+articleid_2494051.html. Jaffer (2004): Sohail Jaffer, ed., Islamic Asset Management: Forming the Future for Shari’aCompliant Investment Strategies (2004). Jaffer (2008): Sohail Jaffer, ed., Islamic Wealth Management (2008; currently in printing). J.F.B. (1865): J.F.B., Usury, 13 American L aw Register 321 (Novermber 1864 – November 1865). Johnstone (2004): David Johnstone, A Turn in the Epistemology and Hermeneutics of Twentieth Century Uṣūl al-Fiqh, 11 Islamic Law and Society 233 (2004). Jones (2006): Richard D. Jones, The Emergence of CMBS in Petersen (2006), at 1-17. Juwana, Barlinti & Dewi (2008): Himahanto Juwana, Yeni Salma Barlinti and Yetty Komalasari Dewi, Sharia Law as a System of Governance in Indonesia: The Development of Islamic Financial Law, 25 Wisconsin Journal of International Law 773 (2008).

66


Kahan & Klausner (1997): Marcel Kahan & Michael Klausner, Standardization and Innovation in Corporate Contracting (or “The Economics of Boilerplate”), 83 Virginia Law Review 713 (1997). Kamali (1996): Mohammed Hashim Kamali, Methodological Issues in Islamic Jurisprudence, 11 Arab Law Quarterly 3 (1996). Kamali (2003): Mohammed Hashim Kamali, Principles of Islamic Jurisprudence, Third Revised and Enlarged Edition (2003). Kamarck (2004-2005): Martin Kamarck, Priming the Pump: Tapping the Global Capital Markets to Fund the World’s Infrastructure Needs, 18 The Transnational Lawyer 125 (2004-2005). Kerr (1995-1996): Thomas M. Kerr, Supplying Water Infrastructure to Developing Countries via Private Sector Project Financing, 8 Georgetown International Environmental Law Review 91 (1995-1996). Khadduri (1953-1954): Majid Khadduri, Nature and Sources of Islamic Law, 22 George Washington Law Review 3 (1953-1954). Khadduri (1984): Majid Khadduri, The Islamic Conception of Justice (1984). Khadduri & Liebesny (1955): Majid Khadduri and Herbert J. Liebesny, eds., Law in the Middle East (1955). Khaleej: UAE Infrastructure (2007): Issac John, Infrastructure projects in UAE exceed $300b, Khaleej Times, 9 May 2007, available at http://www. middleeastelectricity.com/upl_images/news/Infrast ructure%20projects%20in%20UAE%20exceed%2 0300b.pdf. Khan (1983-1984): Khizr Muazzam Khan, Juristic Classification of Islamic Law, 6 Houston Journal of International Law 23 (1983-1984). Khan (1997): Mansoor H. Khan, Designing an Islamic model for project finance, 16 International Financial Law Review 13 (1997).



Khan (2003-2004): Ali Khan, The Reopening of the Islamic Code: The Second Era of Ijtihad, 1 University of St. Thomas Law Journal 341 (2003-2004). Kim (2006): Joon H. Kim, Korean Environmental Regulations: Ready to Take on One of the World’s Largest Private Real Estate Development Projects, 15 Pacific Rim Law and Policy Journal 489 (2006). Klein (1994-1995): Daniel Klein, The Islamic and Jewish Laws of Usury: A Bridge to Commercial Growth and Peace in the Middle East, 23 Denver Journal of International Law and Policy 535 (1994-1995). Kornfield: Subprime Testimony (2007): Testimony of Warren Kornfield, Managing Director, Moody’s Investors Service, before the Subcommittee on Securities, Insurance and Investment, United States Senate, April 17, 2007. Kourides (1970): P. Nicholas Kourides, The Influence of Islamic Law on Contemporary Middle Eastern Legal Systems: The Formation and Binding Force of Contracts, 9 Columbia Journal of Transnational Law 384 (1970). Kourides (1972): P. Nicholas Kourides, Traditionalism and Modernism in Islamic Law: a Review, 11 Columbia Journal of Transnational Law 491 (1972). Kozarovski (2006): Dragi Kozarovski, Public Private Partnerships – A Solution Worth Pursuing Despite Their Complexity, 29 University of New South Wales Law Journal 308 (2006). Laclau (2008): Sergio A. Laclau, The Role of PPPs in Building Brazil’s Infrastructure, in Moser (2008 – II), at 31. Lahlou & Tanega (2007 – I): Mohamed Saad Lahlou and Joseph Tanega, Islamic Securitization: Part I - Accommodating the Disingenuous Narrative, published in the Journal of International Banking Law and Regulation in 2007, and available at http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=1148360.

Lahlou & Tanega (2007 – II): Mohamed Saad Lahlou and Joseph Tanega, Islamic Securitization: Part II – A Proposal for International Standards, Legal Guidelines and Structures, 22 Journal of International Banking Law and Regulation 359 (2007), and available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1150147. Lalka (2008): Robert T. Lalka, National Policy Framework for PPPs in the United States, in Moser (2008 – II), at 42. Lambton (1981): Ann K.S. Lambton, State and Government in Medieval Islam: An Introduction to the Study of Islamic Political Theory: The Jurists (1981). Landon (2007): Landon, Thomas, Jr., Islamic Finance and Its Critics, The New York Times, August 9, 2007, located at http://www.nytimes. com/2007/08/09/business/09trust.html?_r=1&th=& adxnnl=1&oref=slogin&emc=th&adxnnlx=11866707 38-L32tbRHTmEevwKoI29G6xg&pagewanted=all. Latman (2008): Marc Latman, China’s African Infrastructure Investment, in Moser (2008 – II), at 82. Lehman – Sherr Testimony (2007): Written Statement of David Sherr, Managing Director and Global Head of Securitized Products, Lehman Brothers Inc., Before the Senate Banking Subcommittee on Securities, Insurance and Investment, April 17, 2007, available at http:// banking.senate.gov/_files/sherr.pdf. Lewis (2007): Mervyn K. Lewis, Comparing Islamic and Christian Attitudes to Usury, in Hassan & Lewis (2007), at 64-81. Liebesny (1953): Herbert J. Liebesny, Impact of Western Law in the Countries of the Near East, 22 George Washington Law Review 127 (1953-1954). Liebesny (1972): Herbert J. Liebesny, Comparative Legal History: Its Role in the Analysis of Islamic and Modern Near Eastern Legal Institutions, 20 The American Journal of Comparative Law 38 (1972).

VOLUME III

SPRING 2009


67


Liebesny (1985-1986): Herbert Liebesny, English Common Law and Islamic Law in the Middle East and South Asia: Religious Influences and Secularization, 34 Cleveland State Law Review 19 (1985-1986). Loke (1998): Alexander F.H. Loke, Risk Management and Credit Support in Project Finance, 2 Singapore Journal of International and Comparative Law 37 (1998). Lupica (1998): Lois Lupica, Asset Securitization: The Unsecured Creditor’s Perspective, 76 Texas Law Review 595 (1998). Mailander (1997): Christopher J. Mailander, Searching for Liquidity: United States Exit Strategies for International Private Equity Investment, 13 American University International Law Review 71 (1997-1998). Majelle: Hooper: see Hooper (1933). Majelle: Tyser: Effendi (2001).

see Tyser, Demetriades &

Makdisi (1981): George Makdisi, The Rise of Colleges: Institutions of Learning in Islam and the West (1981). Makdisi (1985-1986): George Makdisi, Legal History of Islamic Law and the English Common Law: Origins and Metamorphoses, 34 Cleveland State Law Review 3 (1985-1986).

Malloy (2004-2005): Michael P. Malloy, International Project Finance: Risk Analysis and Regulatory Concerns, 18 The Transnational Lawyer 89 (2004-2005). MarketWatch: EEMEA Infrastructure (2007): Merrill Lynch: Russia and the Gulf Drive EEMEA Infrastructure Boom, MarketWatch, June 28, 2007, available at http://www.marketwatch.com/ news/story/merrill-lynch-russia-gulf-drive/story. aspx?guid=%7B7257B89C-CEBF-464D-93C1FF34554D533D%7D. MarketWatch: Panic (2007): Alistair Barr, ‘Panic’ takes hold as subprime lenders slump, MarketWatch, March 5, 2007, available at h t t p : / / w w w. m a r k e t w a t c h . c o m / n e w s / s t o r y / subprime-panic-takes-hold-investors/story. aspx?guid=%7B75E1EE31-0F63-422D-87152CB945DFF410%7D. MarketWatch: Subprime Threatens Lenders (2007): Alistair Barr, Subprime shakeout threatens specialists: Few independent subprime lenders may be left after mortgage crisis, MarketWatch, March 22, 2007, available at http://www.marketwatch. com/news/story/subprime-mortgage-crisis-mayleave/story.aspx?guid=%7BB942AE28-9E07472D-966E-1676CC0F6622%7D. Marray (2003-2004): Michael Marray, Sukuk and see, ProjectFinance, December 2003/January 2004, at 24.

Makdisi (1985): John Makdisi, Legal L91ogic and Equity in Islamic Law, 33 The American Journal of Comparative Law 63 (1985).

Marshall (1995): Tony Marshall, Project Finance in Vietnam, 23 International Business Lawyer 229 (1995).

Makdisi (1998-1999): John Makdisi, The Islamic Origins of the Common Law, 77 North Carolina Law Review 1635 (1998-1999).

Martin: Islamic Bonds (2008): Matthew Martin, The Evolution of Islamic Bonds, in MEED Special Report: Islamic Finance, available at http://www. meed.com/special_report/2008/09/the_evolution_ of_islamic_bonds.html.

Malinasky (1996): Laura A. Malinasky, Rebuilding With Broken Tools: Build-Operate-Transfer Law in Vietnam, 14 Berkeley Journal of International Law 438 (1996).

68


Mates (2004-2005): Carol M. Mates, Project Finance in Emerging Markets – The Role of International Finance Corporation, 18 The Transnational Lawyer 165 (2004-2005).



McArdle (1996): Wayne McArdle, EBRD: A Review of Project Finance Activities, 24 International Business Lawyer 431 (1996). McCormick (1998): Roger McCormick, Project Finance in Central and Eastern Europe, 26 International Business Lawyer 310 (1998). McManus (2008): Declan McManus, Financing a U.S. Infrastructure Investment: Comparing Traditional and Private Financing Methods, in Moser (2008 – I), at 47. McMillen (1998 – SCER): Michael J.T. McMillen, New Initiatives in Saudi Arabian Project Financing and the Expanding Role of Islamic Baking, Saudi Commerce and Economic Review, No. 48, April 1998. McMillen (1998 – MEED): Michael J.T. McMillen, Special Report: Project Finance: Reconciling New Funding with the Shari’ah, 38 Middle East Economic digest, 22 September 1998. McMillen (2000 – FILJ): Michael J.T. McMillen, Islamic Shari’ah-compliant Project Finance: Collateral Security and Financing Structure Case Studies, 24 Fordham International Law Journal 1184 (2000).

McMillen (2001 – THR): Michael J.T. McMillen, A Collateral Security Structure for Project and Secured Financings, in Third Harvard Forum (2002). McMillen (2003 – FHF): Michael J.T. McMillen, Shari’a-Compliant Financing structures and the Development of an Islamic Economy, in Fifth Harvard Forum (2003), at 89-108. McMillen (2003 – MEER I): Michael J.T. McMillen, Sharia-Compliant Project Finance, Part II: Project Financing and United States Jurisdictions, Middle East Executive Reports, Volume 24, No. 9 (2003). McMillen (2003 – MEER II): Michael J.T. McMillen, Sharia-Compliant Project Finance, Part III: Project Financing and United States Jurisdictions, Middle East Executive Reports, Volume 24, No. 10 (2003). McMillen (2004 – AM): Michael J.T. McMillen, Structuring the Shari’a-compliant transaction involving non-compliant elements, in Jaffer (2004), at 208-36. McMillen (2004 – IFSB): Michael J.T. McMillen, “Enforceable In Accordance With Its Terms”: A Proposal Pertaining to Islamic Shari’ah, Fourth Meeting of the Council and Second Meeting of the General Assembly of the Islamic Financial Services Board, Bali, Indonesia, 2 Raby’ al-awal 1425 H.E., April 2, 2004 C.E..

McMillen (2000 – THF): Michael J.T. McMillen, Islamic Shari’ah-compliant Project Finance: Collateral Security and Financing Structure Case Studies, in Third Harvard Forum (2002), at 111-31 (an earlier draft of this article is available at http:// www.djindexes.com/mdsidx/index.cf+9m?event=s howIslamicArticles, as are other articles relating to contemporary Islamic finance).

McMillen (2005): Michael J.T. McMillen, Structuring a Securitized Shari’ah-Compliant Real Estate Acquisition Finance: A South Korean Case Study, in Ali (2005), at 77-106.

McMillen (2000 – MEED): Michael J.T. McMillen, Special Report US, Briefing: Islamic Finance: Breaking the Mould, Middle East Economic Digest, Vol. 44, No. 38, at 28-29, 22 September 2000.

McMillen (2005 – Shirt): Michael J.T. McMillen, The Shirt as an Environmental Adaptation, The Shirt Report, The Shirt Store, New York, July 2005.

McMillen (2001 – MEER): Michael J.T. McMillen, Sharia-Compliant Project Finance, Part I: Project Financing and Islamic Jurisdictions – Saudi Arabia, Middle East Executive Reports, Volume 24, No. 8 (August 2001).

McMillen (2006 – CMLJ): Michael J.T. McMillen, Islamic Capital Markets: Developments and Issues, 1 Capital Markets Law Journal 136 (2006).

VOLUME III

SPRING 2009


69


McMillen (2006 – IBF): Michael J.T. McMillen, Creating a Secondary Market, Islamic Banking & Finance, Issue 11, July 2006, at 21-23. McMillen (2006 – IFR): Michael J.T. McMillen, Sukuk issuances and the glimpse of a secondary market, in Nicholson, Lori (2006), at 10-16. McMillen (2007 – CJIL): Michael J.T. McMillen, Contractual Enforceability Issues: Sukuk and Capital Markets Development, 7 Chicago Journal of International Law 427 (2007). McMillen (2007 – IBH): Michael J.T. McMillen, Islamic Project Finance, in Hassan & Lewis (2007), at 200-39. McMillen (2007 – IF): Michael J.T. McMillen, Shari’ah-Compliant Infrastructure and Project Finance, in Davis (2007). McMillen (2007 – IFSB): Michael J.T. McMillen, Toward an Effective Legal Framework for Islamic Finance: Securities Laws, Trusts, Enforceability and Sukuk (a report for the Islamic Financial Services Board and the International Organization of Securities Commissions, April 19, 2007, Kuala Lumpur, Malaysia; copy on file with the author). An earlier version of a portion of McMillen (2007 – IFSB) addressing trust concepts was co-authored by Michael J.T. McMillen and Sheikh Yusuf Talal DeLorenzo in a report to the Asian Development Bank (“ADB”) entitled Toward an Effective Legal Framework for Islamic Finance: Trust Concepts and Sukuk. This earlier report, in turn, was incorporated into a larger report to the ADB prepared by V. Sundararajan and Centennial Group Holdings, LLC, and entitled TA-6182-REG: Development of International Prudential Standards for Islamic Financial Services, Final Report, March 2007, and appears in full as Appendix 4 to that report. McMillen (2008 – Ali): Michael J.T. McMillen, Sukuk (Islamic Bonds and Securitizations): Toward a Viable Secondary Market, in Ali (2008).

70


McMillen (2008 – DJIMIN): Michael J.T. McMillen, Sukuk in Its Infancy: Misstep and Sequel, Dow Jones Islamic Market Indexes: Quarterly Newsletter, Issue 1, May 2008, located at http:// now.eloqua.com/e/er.aspx?s=812&lid=33&elq=oF 71972189AB4B799F291CA4BD1F5909. McMillen (2008 – ILF): Michael J.T. McMillen, Islamic Law Forum, in The International Lawyer (2008) (the “Year in Review” summary for the Islamic Finance Committee (formerly the Islamic Law Forum), a division of the International Law Section of the American Bar Association; Dr. McMillen was the first Chairman and is the current Co-Chairman). McMillen (2008 – IFSB): Michael J.T. McMillen, Securities Laws, Enforceability and Sukuk, in IFSB (2008), chapter 3, at 6-140. McMillen (2008 – JIEF): Michael J.T. McMillen, Sharī’ah-Compliant Project Finance: An Overview, Including Structures, in 1 Journal of Islamic Economics and Finance (2008; the inaugural issue, currently in printing). McMillen (2008 – PGIF): Michael J.T. McMillen, Shari’a-Compliant Project Finance: A Structural Overview, in Dar & Moghul, chapter 9 (2008). McMillen (2008 – WILJ): Michael J.T. McMillen, Asset Securitization Sukuk and Islamic Capital Markets: Structural Issues in the Formative Years, 25 Wisconsin International Law Journal 703 (2008). McMillen (2009 – CIPF): Sharīʻah-Compliant Project Finance: A Structural Overview, in The Chancellor Guide to Legal and Shariʻa Aspects of Islamic Finance, Humayan A. Dar & Umar F. Moghul, eds. (2009). McMillen (2009 – Jaffer): Michael J.T. McMillen, Islamic Capital Markets in the First Decade: Developments and Issues for the Future, in Jaffer (2008) (currently in printing).



McMillen (2009 – PEI): Michael J.T. McMillen, Islamic Finance and Infrastructure, in Investing in Infrastructure, Private Equity International Media (2008; currently in printing). McMillen & Crawford (2008): Michael McMillen and John A. Crawford, Sukuk in the First Decade: By The Numbers, Dow Jones Islamic Market Indexes Newsletter, Issue 3, December 2008, available at http://img.en25.com/Web/DowJonesIndexes/ DJIM_QNL_120408.pdf. McMillen & DeLorenzo (2008): Michael J.T. McMillen and Yusuf Talal DeLorenzo, Trust Laws and Islamic Finance, in IFSB (2008), chapter 4. McMillen & Kamalpour (2006): Michael J.T. McMillen and Abradat Kamalpour, An Innovation in Financing - Islamic CMBS, in Peterson (2006), at 382-412. Mears (1998): Patrick Mears, Tax and Project Finance: United Kingdom, 26 International Business Lawyer 224 (1998). MEED: Islamic Banks Exploit Misfortunes (2008): Matthew Martin, Islamic Banks Can Exploit Rivals’ Misfortune, Middle East Economic Digest, 26 October 2008, available at http://www.meed.com/ commentary/2008/10/islamic_banks_can_exploit_ rivals_misfortune.html. MEED: Gulf Defies Slowdown (2008): Richard Thompson, Gulf Defies the Global Slowdown, Middle East Economic Digest, October 16, 2008, available at http://www.meed.com/news/agenda/2008/10/ gulf_defies_the_global_slowdown.html. MEED: Saudi and UAE Rescue Packages (2008): Matthew Martin, Saudi Arabia and UAE Move to Ease Interbank Lending Rates, Middle East Economic Digest, 24 October 2008, available at http://www.meed.com/news/2008/10/saudi_ arabia_and_uae_move_to_ease_interbank_ lending_rates.html.

MEED Special Report: Islamic Finance (2008): Special Report: Banking – The Rise of Islamic Finance, Middle East Economic Digest, 14 September 2008, available at http://www.meed. com/special_report/index/2008/09/special_report_ banking__the_rise_of_islamic_finance.html, with links to a range of articles included in the report. MEED Special Report: Saudi Arabia Family Firms (2008): Special Report: Saudi Arabia – Family Firms Enter a New Era, Middle East Economic Digest, 16 October 2008, available at http://www. meed.com/special_report/index/2008/10/saudi_ family_firms_enter_a_new_era.html, with links to a range of articles included in the report. MEED Special Report: Saudi Arabia Industrial (2008): Special Report – Saudi Arabia: Building an Industrial Base, Middle East Economic Digest, 22 February 2008, available at http://www.meed.com/ industry/specialreport/2008/02/special_report_ _saudi_arabia_building_an_industrial_base. html, with links to a range of articles included in the report. Mehta (1998): Nikhil V. Mehta, Tax and Project Finance: United Kingdom, 26 International Business Lawyer 227 (1998). Melchert (1998): Christopher Melchert, Islamic Law, 23 Oklahoma City University Law Review 901 (1998). Merrill Lynch: Infrastructure (2007): 2007 – The Year Ahead: EM Infrastructure Theme, Merrill Lynch, December 5, 2006, copy on file with the author. Mian & Sufi (2008): Atif Mian and Amir Sufi, The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis, January 2008, available at http://ssrn.com/ abstract=1072304.

VOLUME III

SPRING 2009


71


Milgate (1999): Michael Milgate, Paris, Robert, Thomas and the ‘Heinous Sin’ of Usury, 5 Australian Journal of Legal History 243 (1999). Miller (1994 – I): Duncan Miller, Privatization and Project Finance I Russia and Poland and the Problems of Valuation (Part I), 20 Review of Central and European Law 157 (1994). Miller (1994 – II): Duncan Miller, Privatization and Project Finance I Russia and Poland and the Problems of Valuation (Part II), 20 Review of Central and European Law 271 (1994). Mirakhor & Zaidi (2007): Abbas Mirakhor and Iqbal Zaidi, Profit-and-loss sharing contracts in Islamic Finance, in Hassan & Lewis (2007), at 49-63. Miyamoto (1999-2000): Ken Miyamoto, Measuring Local Legal Risk Premium in Project Finance Bonds, 40 Virginia Journal of International Law 1125 (1999-2000). Moghul (1999): Umar F. Moghul, Approximating Certainty in Ratiocination: How to Ascertain the ‘Illah (Effective Cause) in the Islamic Legal System and How to Determine the Ratio Decidendi in the Anglo-American Common Law, 4 Journal of Islamic Law 125 (1999). Moghul (2007): Umar F. Moghul, No Pain, No Gain: The State of the Industry in Light of an American Private Equity Transaction, 7 Chicago Journal of International Law 469 (2007). Moody’s CMBS No.1 Report (2007): Moody’s Investors Service International Structured Finance Pre-Sale Report: UAE CMBS Vehicle No. 1 Limited, 25 June 2007. Moody’s – Kornfield Testimony (2007): Testimony of Warren Kornfeld, Managing Director, Moody’s Investors Service, Before the Subcommittee on Securities, Insurance and Investment, United States Senate, April 17, 2007, available at http://banking.senate.gov/_files/ kornfeld.pdf.

72


Moody’s Tamweel Report (2007): Moody’s Investors Service International Structured Finance Pre-Sale Report: Tamweel Residential ABS Cl (1) Ltd, 25 June 2007. Moore & Ciaccio (1986): Harold F. Moore & Evelyn D. Ciaccio, International Project Finance, 11 North Carolina Journal of International Law and Commercial Regulation 597 (1986). Morais (2004): Herbert V. Morais, Testing the Frontiers of Their Mandates: The Experience of Multilateral Development Banks, 98 American Society of International Law 64 (2004). Moran (2000): David E. Moran, The Role of the Dow Jones Islamic Market Index in Islamic Finance, in Third Harvard Forum (2000), at 257-58. Morgan Stanley: Infrastructure (2008): Emerging Markets Infrastructure: Just Getting Started, Morgan Stanley Investment Management, Morgan Stanley Research, April 2008, available at http://www.morganstanley.com/views/ perspectives/articles/6578.html. Morris & Ingram (2001): Investing (2001).

Guide To Islamic

Moser (2008 – I): Joel H. Moser, Global Infrastructure, Volume I (2008). Moser (2008 – II): Joel H. Moser, Global Infrastructure, Volume II (2008). Moser (2008 – Infrastructure): Joel H. Moser, Infrastructure Investment, American Style, in Moser (2008), at 40. Moser (2009 – I): Joel H. Moser, Global Infrastructure, Volume III (2009). Musawi (2007): Musawi v R E International (UK) Ltd and Others, [2007] EWHC 2981 (Ch), [2007] All ER (D) 222 (Dec), relating to governing law (English or Sharīʻah) in the arbitration context.



Nasr: Islamic Philosophy (2006): Sayyed Hossein Nasr, Islamic Philosophy from its Origin to the Present: Philosophy in the Land of Prophecy (2006). National: Bonds Treated As Equity (2008): Mohammad Abbas, Bonds Should Be Treated As Equity: Scholar Says Two Types of Sukuk Should Not Promise Returns, The National, June 2, 2008, page 8. National: Centres Fight for Islamic Finance (2008): As Oil Booms, Centres Fight for Islamic Finance, The National, July 25, 2008, page 2. National: Fitch Rules Stifling Market (2008): Will McSheehy, Strict Islamic Rules Risk Stifling the Bond Market, Fitch says, The National, May 12, 2008, page 1 (2008). National: Lack of Standards Dampens (2008): Asa Fitch, Lack of Sharia Standards Dampens Appetite for Islamic Debt Papers, The National, May 14, 2008, page 6. National: Sukūk Reckoning (2008): Sarah Hamdan, Sukuk are Facing a Great Reckoning, The National, page 8, September 8, 2008. Nevitt (1983): Peter K. Nevitt, Project Financing, Fourth Revised Edition (1983). Nevitt & Fabozzi (2000): Peter K. Nevitt and Frank J. Fabozzi, Project Financing: 7th Edition (2000). New Yorker: Trust Crunch (2008): James Surowiecki, The Trust Crunch, The New Yorker, October 20, 2008, available at http://www. n e w y o r k e r. c o m / t a l k / f i n a n c i a l / 2 0 0 8 / 1 0 / 2 0 / 081020ta_talk_surowiecki. Nicholson (2006): Lori Nicholson, Euromoney Islamic Finance Review 2006/07.

ed.,

NPR: Financial Giants Falling (2008): Financial Giants Falling: Lehman, Merrill Lynch, AIG, National Public Radio, September 15, 2008, available at http://www.npr.org/templates/story/ story.php?storyId=94617074. NY Times: 36 Hours (2008): Joe Nocera, 36 Hours of Alarm and Action as Credit Crisis Spiraled, The New York Times, October 2, 2008, available at http://www.iht.com/articles/2008/10/02/business/ 02crisis.php. NY Times: Abraaj (2006): A Middle East Equity Giant With a Small Global Footprint, The New York Times, December 8, 2006, available at http://www. nytimes.com/2006/12/08/business/worldbusiness/ 08dubai.html?scp=38&sq=middle%20east%20infr astructure&st=cse. NY Times: Agency’s ’04 Rule (2008): Stephen Labaton, Agency’s ’04 Rule Let Banks Pile Up New Debt, The New York Times, October 2, 2008, available at http://www.nytimes.com/2008/10/03/ business/03sec.html. NY Times: Bailout Losses and Gains (2008): Eric Dash, Few Stand to Gain on This Bailout, and Many Lose, The New York Times, September 7, 2008, available at http://www.nytimes.com/2008/09/08/ business/08scorecard.html?ref=business. NY Times: Banks Hold Bailout Money (2008): Louise Story and Eric Dash, Banks Are Likely to Hold Tight to Bailout Money, The New York Times, October 16, 2008, available at http://www.nytimes. com/2008/10/17/business/17bank.html?em. NY Times: Banks Shaken, Market Falters (2008): Andrew Ross Sorkin, Two Wall St. Banks Shaken, Market Falters, The New York Times, September 15, 2008, available at http://www. nytimes.com/2008/09/15/business/15lehman. html?_r=1&hp=&oref=slogin&pagewanted=all.

Noonan (1957): J.T. Noonan, Scholastic Analysis of Usury (1957).

VOLUME III

SPRING 2009


73


NY Times: Bernanke’s Education (2008): Roger Lowenstein, The Education of Ben Bernanke, The New York Times, The New York Times Magazine, January 20, 2008, available at http://www.nytimes. com/2008/01/20/magazine/20Ben-Bernanket.html?WT.mc_id=%20NYT-E-I-NYT-E-AT-0123L1&WT.mc_ev=click&ei=5087&en=b40266f70d61 0d3b&ex=1216702800&excamp=NYT-E-I-NYT-EAT-0123-L1&pagewanted=all. NY Times: Bonuses Not Profits (2008): Louise Story, On Wall Street, Bonuses, Not Profits, Were Real, The New York Times, December 17, 2008, available at http://www.nytimes.com/2008/12/18/ business/18pay.html?_r=1&th&emc=th. NY Times: British Central Bank Criticizes Cash Infusions (2007): Carter Dougherty, British Central Bank Critical of Cash Infusions, The New York Times, September 13, 2007, available at http://www.nytimes.com/2007/09/13/business/ worldbusiness/13bank.html?ref=worldbusiness. NY Times: Building Flawed Dreams (2008): David Streitfeld and Gretchen Morgenson, Building Flawed American Dreams, The New York Times, October 18, 2008, available at http://www.nytimes. com/2008/10/19/business/19cisneros.html?_ r=1&hp&oref=slogin. NY Times: Central Bank Infusions (2007): Carter Dougherty, British Central Bank Critical of Cash Infusions, The New York Times, September 13, 2007, available at http://www.nytimes. com/2007/09/13/business/worldbusiness/13bank. html?ref=worldbusiness. NY Times: Central Bank Warning (2007): Carter Dougherty and Edmund L. Andrews, A Warning from Bernanke, but No Hint of a Rate Cut, The New York Times, September 12, 2007, available at http://www.nytimes.com/2007/09/12/business/ worldbusiness/12fed.html?ref=worldbusiness.

74


NY Times: Citi Banker to ME (2008): Citi Moves Top Banker to Middle East, The New York Times, May 7, 2008, available at http://dealbook.blogs. nytimes.com/2008/05/07/citi-moves-top-banker-tomiddle-east/scp=2&sq=middle%20east%20infrast ructure&st=cse. NY Times: Citigroup Saw No Red Flags (2008): Eric Dash and Julie Creswell, Citigroup Saw No Red Flags Even as It Made Bolder Bets, The New York Times, November 22, 2008, available at http:// www.nytimes.com/2008/11/23/business/23citi.htm l?scp=7&sq=citigroup&st=cse. NY Times: Credit Crisis Hits Britain Lender (2007): Eric Pfanner, Credit Crisis Hits Lender in Britain, The New York Times, September 15, 2007, available at http://www.nytimes.com/2007/09/15/ business/worldbusiness/15mortgage. html?ref=worldbusiness. NY Times: Crises Public Aid (2008): Nelson D. Schwartz, A History of Public Aid During Crises, The New York Times, September 6, 2008, available at http://www.nytimes.com/2008/09/07/business/ 07bailout.html. NY Times: Crisis Grew, Options Shrank (2008): Charles Duhigg, Stephen Labaton and Andrew Ross Sorkin, As Crisis Grew, a Few Options Shrank to One, The New York Times, September 7, 2008, available at http://www.nytimes.com/2008/09/08/ business/08takeover.html?ref=business&pagewa nted=all. NY Times: Debt Watchdogs (2008): Gretchen Morgenson, Debt Watchdogs: Tamed or Caught Napping?, The New York Times, December 6, 2008, available at http://www.nytimes.com/2008/12/07/ business/07rating.html. NY Times: Deregulator Looks Back (2008): Eric Lipton and Stephen Labaton, A Deregulator Looks Back, Unswayed, The New York Times, November 16, 2008, available at http://www. nytimes.com/2008/11/17/business/economy/ 17gramm.html?_r=1&th&emc=th&oref=slogin.



NY Times: Desert Education (2007): Saudi King Tries to Grow New Ideas in the Desert, The New York Times, October 26, 2007, available at http:// www.nytimes.com/2007/10/26/world/middleeast/ 26saudi.html?_r=1&th=&oref=slogin&emc=th&pag ewanted=all.

NY Times: GE – Mubadala (2008): G.E. and Abu Dhabi Fund Form Financial Partnership, The New York Times, July 23, 2008, available at http://www. nytimes.com/2008/07/23/business/worldbusiness/ 23electric.html?scp=33&sq=middle%20east%20in frastructure&st=cse.

NY Times: End of Wall Street Era (2008): Tim Arango and Julie Creswell, End of an Era on Wall Street: Goodbye to All That, The New York Times, October 4, 2008, available at http://www.nytimes. com/2008/10/05/business/05era.html?ref=todaysp aper&pagewanted=all.

NY Times: Global Gamble Pain (2008): Charles Duhigg and Carter Dougherty, From Midwest to M.T.A., Pain from Global Gamble, The New York Times, November 1, 2008, available at http://www. nytimes.com/2008/11/02/business/02global. html?_r=1&th=&adxnnl=1&oref=slogin&emc=th&a dxnnlx=1225627241-zmItweVlbkSGs20vWweylQ.

NY Times: European Shares Fall (2008): Matthew Saltmarsh and Keith Bradshear, Shares Fall in Europe; U.S. Futures Slide, The New York Times, September 15, 2008, available at http://www. nytimes.com/2008/09/16/business/worldbusiness/ 16markets.html?hp. NY Times: Fannie, Freddie and You (2008): Ron Lieber, Fannie, Freddie and You: What It Means to the Public, The New York Times, September 7, 2008, available at http://www.nytimes.com/2008/09/08/ business/08consumer.html?ref=business. NY Times: Fannie, Freddie Dilemma (2008): Floyd Norris, The Dilemma of Fannie and Freddie, The New York Times, September 7, 2008, available at http://www.nytimes.com/2008/09/08/business/ 08norris.html?ref=business&pagewanted=all. NY Times: Fannie Tipping Point (2008): Charles Duhigg, Pressured to Take More Risk, Fannie Hit a Tipping Point, The New York Times, October 4, 2008, available at http://www.nytimes. com/2008/10/05/business/05fannie.html?_r=1&th =&adxnnl=1&oref=slogin&emc=th&adxnnlx=1223 202098-jRPk7k1aEhqXlfyuclnwHA&pagewanted= all. NY Times: Few Expect Rate Cut Panacea (2007): Edmund L. Andrews, Few Expect a Panacea in a Rate Cut by the Fed, The New York Times, September 3, 2007, available at http://www. nytimes.com/2007/09/03/business/03fed.html?_r= 1&th&emc=th&oref=slogin.

NY Times: Greenspan Legacy (2008): Peter S. Goodman, Taking Hard New Look at a Greenspan Legacy, The New York Times, October 8, 2008, available at http://www.nytimes.com/2008/10/09/ business/economy/09greenspan.html?ref=busine ss&pagewanted=all. NY Times: Hedge Fund Portfolio Sale (2007): Jenny Anderson, Hedge Fund Forced to Sell Its Portfolio, The New York Times, July 31, 2007, available at http://www.nytimes.com/2007/07/31/ business/31hedge.html?fta=y. NY Times: Hedge Funds Not Profiting (2007): Jenny Anderson, Hedge Funds Are Not Profiting From Market’s Current Volatility, The New York Times, August 3, 2007, available at http://www. nytimes.com/2007/08/03/business/03insider. html?_r=1&adxnnl=1&dlbk=&oref=slogin&adxnnlx =1186150659-B2Eh/q5/lvLRYbfmZKIEJg. NY Times: Housing Busts (2008): Housing Busts and Hedge Fund Meltdowns: A Spectator’s Guide, The New York Times, August 5, 2007, available at http://www.nytimes.com/imagepages/2007/08/05/ weekinreview/20070805_LOAN_GRAPHIC.html. NY Times: How Free Markets (2007): Alex Berenson, How Free Should a Free Market Be?, The New York Times, October 4, 2008, available at http://www.nytimes.com/2008/10/05/ weekinreview/05berenson.html.

VOLUME III

SPRING 2009


75


NY Times: Insurer Crisis (2008): Gretchen Morgenson, Behind Insurer’s Crisis, a Blind Eye to a Web of Risk, The New York Times, September 27, 2008, available at http://www.nytimes. com/2008/09/28/business/28melt.html?_r=1&hp =&adxnnl=1&oref=slogin&adxnnlx=12225420701MtricjIxOfmDiUf4JxI6w&pagewanted=all. NY Times: Mortgage Crisis Plea (2007): Paulson Asks Executives to Help in Mortgage Crisis, The New York Times, September 13, 2007, available at http://www.nytimes.com/2007/09/13/ business/13paulson.html?n=Top%2fReference%2 fTimes%20Topics%2fPeople%2fP%2fPaulson%2c %20Henry%20M%2e%20Jr%2e. NY Times: Mortgage Crisis Swallow Town (2007): Nelson D. Schwartz, Can the Mortgage Crisis Swallow a Town?, The New York Times, September 2, 2007, available at http://www.nytimes. com/2007/09/02/business/yourmoney/02village. html?ref=business&pagewanted=all. NY Times: Mortgage Finance Rescue (2008): Stephen Labaton and Edmund L. Andrews, In Rescue to Stabilize Lending, U.S. Takes Over Mortgage Finance Titans, The New York Times, September 7, 2008, available at http://www.nytimes. com/2008/09/08/business/08fannie.html?_r=1&th =&oref=slogin&emc=th&pagewanted=all. NY Times: Mortgage Giants Takeover (2008): Vikas Bajaj, Keith Bradsher and David Jolly, U.S. Takeover of Mortgage Giants Lifts Global Markets, The New York Times, September 8, 2008, available at http://www.nytimes.com/2008/09/09/business/ worldbusiness/09markets.html?ref=business&pag ewanted=all. NY Times: Perils of Government In Banking (2008): Steve Lohr, Government’s Leap Into Banking Has Its Perils, The New York Times, October 17, 2008, available at http://www.nytimes. com/2008/10/18/business/18system.html?_r=1&th &emc=th&oref=slogin.

76


NY Times: Reports Suggest Broader Mortgage Losses (2007): Vikas Bajaa and Edmund L. Andrews, Reports Suggest Broader Losses from Mortgages, The New York Times, October 25, 2007, available at http://www.nytimes.com/2007/10/25/ business/25mortgage.html?th=&adxnnl=1&emc=t h&adxnnlx=1193312962-efpBQakzfIaCQnESo8TZ vQ&pagewanted=all. NY Times: Running Out of Money (2008): Jenny Anderson, Running Out of Money, Cities Debate the Privatization of Infrastructure, The New York Times, August 26, 2008, available at http:// www.nytimes.com/2008/08/27/business/economy/ 27fund.html?sq=running%20out%20of%20money &st=cse&scp=3&pagewanted=all. NY Times: Saudi – A Construction Site (2008): The Construction Site Called Saudi Arabia, The New York Times, January 20, 2008, available at http://www.nytimes.com/2008/01/20/ business/worldbusiness/20saudi.html?_r=1&sq =saudi%20infrastructure&st=cse&adxnnl=1&ore f=slogin&scp=1&adxnnlx=1218971317-wlKPw/ 9L962vbY1IrpUo2g&pagewanted=all. NY Times: Struggling to Keep Up (2008): Joe Nocera and Edmund L. Andrews, Struggling to Keep Up as the Crisis Raced On, The New York Times, October 22, 2008, available at http://www. nytimes.com/2008/10/23/business/economy/ 23paulson.html?_r=1&th&emc=th&oref=slogin. NY Times: Tax Break and Housing Bubble (2008): Vikas Bajaj and David Leonhardt, Tax Break May have Helped Cause Housing Bubble, The New York Times, December 18, 2008, available at http://www.nytimes.com/2008/12/19/business/ 19tax.html?_r=1&hp. NY Times: Thundering Herd (2008): Gretchen Morgenson, How the Thundering Herd Faltered and Fell, The New York Times, November 8, 2008, available at http://www.nytimes.com/2008/11/09/ business/09magic.html?_r=1&th=&adxnnl=1 &oref=slogin&emc=th&adxnnlx=1226238170lY3Di9wrfTs6JoUD0hKbdA.



NY Times: Wall Street Champion Reaps Benefits (2008): Eric Lipton and Raymond Hernandez, A Champion of Wall Street Reaps Benefits, The New York Times, December 13, 2008, available at http://www.nytimes.com/2008/12/14/ business/14schumer.html. NY Times: Wall Street Lied to Its Computers (2008): Saul Hansell, How Wall Street Lied to Its Computers, The New York Times, September 18, 2008, available at http://bits.blogs.nytimes. com/2008/09/18/how-wall-streets-quants-lied-totheir-computers/?ref=technology. Oakley (2007): David Oakley, Treasury presses ahead with Islamic bond scheme, Financial Times through FT.com, February 17, 2008, located at http://www.ft.com/cms/s/0/d150ac9e-94b1-11dc9aaf-0000779fd2ac.html. Obaidullah (2000): Mohammed Obaidullah, Designing Islamic Contracts for Financing Infrastructure Development, in Third Harvard Forum (2000), at 163-76. Obaidullah (2005): Mohammed Obaidullah, Islamic Financial Services (2005) (published online and available at http://islamiccenter.kau.edu.sa/ english/publications/Obaidullah/ifs/ifs.html.

Pascual (2004-2005): Alfredo E. Pascual, Private Sector Participation in Infrastructure: Experience in Asia and the Role of the Asian Development Bank, 18 The Transnational Lawyer 107 (2004-2005). Pédamon (2000-2001): Catherine Pedamon, How is Convergence Best Achieved in International Project Finance?, 24 Fordham Journal of International Law 1272 (2000-2001). Peters (1987): Kristan L. Peters Hamlin, The Impact of Islamic Revivalism on Contract and Usury Law in Iran, Saudi Arabia and Egypt, 22 Texas International Law Journal 351 (1987). Peterson (2006): Andrew V. Peterson, ed., Commercial Mortgage Backed Securitisation: Developments in the European Market (2006). Peterson Subprime Testimony (2007): Written Testimony of Christopher L. Peterson, Subprime Mortgage Market Turmoil: Examining the Role of Securitization – A hearing before the U.S. Senate Committee on Banking, Housing and Urban Affairs Subcommittee on Securities, Insurance and Investment, April 17, 2007, available at http:// banking.senate.gov/_files/ACFE4F.pdf. Philby (1955): Arabia (1955).

H. St. John Philby, Sa‘ udi

Omar (1997): Mohamed Abdel-Khalek Omar, Reasoning in Islamic Law: Part One, 12 Arab Law Quarterly 148 (1997).

Philby (1977): H. St. John Philby, Arabia Wahhabis (1977).

Omar (1997 – II): Mohamed Abdel-Khalek Omar, Reasoning in Islamic Law: Part Two, 12 Arab Law Quarterly 353 (1997).

Pikiel & Plata (2008): Michael E. Pikiel and Lillian Plata, A Survey of PPP Legislation Across the United States, in Moser (2008 – I), at 52.

Omar (1998): Mohamed Abdel-Khalek Omar, Reasoning in Islamic Law: Part Three, 13 Arab Law Quarterly 23 (1998).

Prutzman & Jiang (1994): Deborah S. Prutzman and Howard H. Jiang, Lending to projects and enterprises in China, 13 International Financial Law Review 35 (1994).

Onar (1955): S.S. Onar, The Majalla, in Khadduri & Liebesny (1955), at 292-308. Parolai & Ellend-Goldsmith (1998): Richard Parolai and Michael Ellend-Goldsmith, Stade de France Securitized – the First French Project Bond, 17 International Financial Law Review 33 (1998).

of the

Quiggin (2006): John Quiggin, Public Private Partnerships: Options for Improved Risk Allocation, 29 University of New South Wales Law Journal 289 (2006).

VOLUME III

SPRING 2009


77


Quraishi (2006): Asifa Quraishi, Interpreting the Qur’an and the Constitution: Similarities in the Use of Text, Tradition and Reason in Islamic and American Jurisprudence, 28 Cardozo Law Review 67 (2006).

Robinson (2007): Karina Robinson, Islamic Finance is Seeing Spectacular Growth, International Herald Tribune, November 5, 2007, located at http://www.iht.com/articles/2007/11/05/ business/bankcol06.php.

Rahim (1911): Abdur Rahim, The Principles of Muhammadan Jurisprudence According to the Hanafi, Maliki, Shafi’i and Hanbali Schools (1911).

Rose (2005-2006): Carol M. Rose, Privatization - The Road to Democracy, 50 St. Louis University Law Journal 691 (2005-2006).

Rappeport (2007): Alan Rappeport, Subprime Securitization: How Much Spillover?, CFO.com, May 4, 2007, available at http://www.cfo.com/ article.cfm/9134857?f=related.

Rosenthal & Ocampo (1992): James A. Rosenthal & Juan M. Ocampo, Analyzing the Economic Benefits of Securitized Credit, 1 Journal of Applied Corporate Finance 32 (1992).

Rauf (2005-2006): Feisal Abdul Rauf, What is Islamic Law?, 57 Mercer Law Review 595 (2005-2006).

Roy (2007): Sudip Roy, Shariah-compliant finance: A product without a market, Euromoney Magazine, October 2006.

Rauner (1983): Stuart E. Rauner, Project Finance: A Risk Spreading Approach to Commercial Financing of Economic Development, 24 Harvard International Law Journal 145 (1983), at 146-56.

Salathé (1994): Gregory R. Salathé, Reducing Health Care Costs Through Hospital Accounts Receivable Securitization, 80 Virginia Law Review 549 (1994).

Ray (1995): Nicholas Dylan Ray, Arab Islamic Banking and the Renewal of Islamic Law (1995).

Saleh (1992): Nabil A. Saleh, Unlawful Gain and Legitimate Profit in Islamic Law, Second Edition (1992).

Ray (1997): Nicholas Dylan Ray, The Medieval Islamic System of Credit and Banking: Legal and Historical Considerations, 12 Arab Law Quarterly 43 (1997). Regan (2006): Michael Regan, Australian Involvement in Public Private Partnerships in the Asia-Pacific Region, 29 University of New South Wales Law Journal 342 (2006). Rehman (2008): Scheherazade S. Rehman, Globalization of Islamic Finance Law, 25 Wisconsin International Law Journal 625 (2008). Richardson (2006-2007): Christopher F. Richardson, Islamic Finance Opportunities in the Oil and Gas Sector: An Introduction to an Emerging Field, 42 Texas International Law Journal 120 (2006-2007).

78


Savory (1976): R. M. Savory, ed., Introduction Civilization (1976).

to Islamic

Schacht (1950): Joseph Schacht, The Origins Muhammadan Jurisprudence (1950).

of

Schacht (1955-KL): Joseph Schacht, PreIslamic Background and Early Development of Jurisprudence, in Khadduri & Liebesny (1955), at 28. Schacht (1955): Joseph Schacht, The Schools of Law and Later Developments in Jurisprudence, in Khadduri & Liebesny (1955), at 57-84. Schacht (1959): Joseph Schacht, Islamic Law in Contemporary States, 8 The American Journal of Comparative Law 133 (1959).



Schacht (1964): Joseph Schacht, An Introduction Law (1964).

to Islamic

Schacht & Bosworth (1974): Joseph Schacht with C.E. Bosworth, The Legacy of Islam, Second Edition (1974). Schena (2005): Patrick J. Schena, Banks, Distressed Loans, and the Development of Chinese Markets for Asset-Backed Securities, 29 Fletcher Forum of World Affairs 35 (2005). Schwarcz (1994-1995): Steven L. Schwarcz, The Alchemy of Asset Securitization, 1 Stanford Journal of Law, Business & Finance 133 (1994-1995). Schwarcz (2002): Steven L. Schwarcz, The Universal Language of International Asset Securitizations, 12 Duke Journal of International & Comparative Law 285 (2002). Schwarcz (2003-2004): Steven L. Schwarcz, Securitization Post-Enron, 25 Cardozo Law Review 1539 (2003-2004). Second Harvard Forum (1998): The Proceedings of the Second Harvard University Forum on Islamic Finance: Islamic Finance into the 21st Century (1998). Selamat (2007): Suhana Dewi Selamat, Development of Sukuk in the Islamic Capital Market, a presentation at the Banking and Financial Law School 2007 of the Global Islamic Finance Forum sponsored by Bank Negara Malaysia and the IFSB, March 27, 2007, in Kuala Lumpur, Malaysia (with the kind permission of Suhana Dewi Selalmat, a copy of this presentation (including presentation notes) is on file with the author). Seniawski (2000-2001): Barbara L. Seniawski, Riba Today: Social Equity, the Economy, and Doing Business Under Islamic Law, 39 Columbia Journal of Transnational Law 701 (2000-2001).

Sfeir (2000): George N. Sfeir, The Place of Islamic Law in Arab Legal Systems: A Brief for Researchers and Reference Librarians, 28 International Journal of Legal Information 117 (2000). Sharawy (2000): Hesham M. Sharawy, Understanding the Islamic Prohibition of Interest: A Guide to Aid Economic Cooperation Between the Islamic and Western Worlds, 29 Georgia Journal of International and Comparative Law 153 (2000). Shenker & Colletta (1990-1991): Joseph C. Shenker & Anthony J. Colletta, Asset Securitization: Evolution, Current Issues and New Frontiers, 69 Texas Law Review 1369 (1990-1991). Sherr Subprime Testimony (2007): Written Statement of David Sherr, Managing Director and Global Head of Securitized Products, Lehman Brothers Inc., before the Senate Banking Committee on Securities, Insurance and Investment, April 17, 2007. Short (2000-2001): Rodney Short, Export Credit Agencies, Project Finance, and Commercial Risk: Whose Risk Is It Anyway?, 24 Fordham International Law Journal 1371 (2000-2001). Siddiqi (2001): Mohammad Nejatullah Siddiqi, Islamic Banking and Finance, UCLA International Institute (2001), located at http://www.international. ucla.edu/article.asp?parentid=15056. Siddiqui (2004): Rushdi Siddiqui, Islamic indexes: the DJIM framework, in Jaffer (2004), at 46-58. Siddiqui (2007): Rushdi Siddiqui, Shari‛ah Compliance, Performance and Conversion: The Case of the Dow Jones Islamic Market IndexSM, 7 Chicago Journal of International Law 495 (2007). Silva (1998): Winston Bernard Silva, Malaysian project finance survives market turbulence, 17 International Financial Law Review 51 (1998).

VOLUME III

SPRING 2009


79


Sin (1991): Ho Miew Sin, Security in Project Finance for the Petroleum Industry in the People’s Republic of China, 1991 Singapore Journal of Legal Studies 55 (1991).

Spiegel: Yunus Interview (2008): Interview with Nobel Laureate Muhammad Yunus, Spiegel OnLine, October 10, 2008, available at http://www.spiegel. de/international/business/0,1518,583366,00.html.

Singh (1998): Gurbachan Singh, Tax and Project Finance: Singapore, 26 International Business Lawyer 213 (1998).

Standard & Poor’s CMBS Rating Criteria: U.S. CMBS Legal and Structured Finance Criteria of Standard & Poor’s (2003, with updates).

Sloane (1988): Peter D. Sloane, The Status of Islamic Law in the Modern Commercial World, 22 The International Lawyer 743 (1988).

Standard & Poor’s: Islamic Finance (2006): Special Report: Islamic Finance Comes of Age, Standard & Poor’s, A Division of the McGraw-Hill Companies, Inc. (a summary of some of the salient features is located at http://sandp.ecnext.com/ coms2/summary_0260-125170_ITM).

Soliman (2004): Samer Soliman, The Rise and Decline of the Islamic Banking Model in Egypt, in Henry & Wilson (2004), at 265-86. Souaiaia (2004-2005): Ahmed Souaiaia, On The Sources of Islamic Law And Practices, 20 Journal of Law and Religion 123 (2004-2005).

Standard & Poor’s: Islamic Finance (2008): Islamic Finance Outlook 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc..

Soutar (1996 – I): Tim Soutar and Judith Hanson, Government support assists Asian power projects, 15 International Financial Law Review 12 (1996).

Standard & Poor’s: Project Finance (2008): Global Project Finance Yearbook (2008), Standard & Poor’s, a division of The McGraw-Hill Companies, Inc..

Soutar & Hanson (1996 – II): Tim Soutar and Judith Hanson, Asian governments must write attractive contracts, 15 International Financial Law Review 29 (1996).

Standard & Poor’s: Rating Sukūk (2007): Standard & Poor’s Approach to Rating Sukuk, Standard & Poor’s Ratings Direct (September 17, 2007).

Sozzi (1996): Christopher J. Sozzi, Project Finance and Facilitating Telecommunications Infrastructure Development in Newly Industrializing Countries, 12 Santa Clara Computer and High Technology Law Journal 435 (1996).

Standard & Poor’s: Sukūk Report (2008): S&P Report Says Sukuk Market Continues to Grow, Standard & Poor’s, September 9, 2008, available at http://www2.standardandpoors.com/portal/site/ sp/en/us/page.article/2,1,1,0,1204839361804.html.

Spiegel: Broken Pact (2008): The Broken Pact with the People, Spiegel OnLine, October 8, 2008, available at http://www.spiegel.de/international/ business/0,1518,583007,00.html.

Stephenson, Rojas & Owner (2000): John Stephenson, Moderator, Miguel Jáuregui Rojas, and Michael Owner, Panelists (2000), Project Finance: A Hypothetical Case Involving the Financing of a Power Generation Plant I Guanajuato, Mexico, 8 U.S.-Mexico Law Journal 77 (2000).

Spiegel: Köhler Interview (2008): Interview with German President Horst Köhler, Spiegel OnLine, October 13, 2008, available at http://www.spiegel. de/international/germany/0,1518,583758,00.html.

80




Stephenson, Rojas, Hernández, Mates, Alvarado & de la Borbella (2004): John Stephenson, Moderator, Miguel Jáuregui Rojas, Carlos Malpica Hernández, Carol Mates, Gerardo Freire Alvarado, and Iñigo de la Borbolla, Panelists, Panel Discussion: Financing Mexican Infrastructure Development, 12 U.S.-Mexico Law Journal 41 (2004). Stuber & Semionato (1996): Walter Douglas Stuber and Maria Cecilia Semionato, Brazilian projects offer rewards, 7 International Tax Review 57 (1996). Suhrawardī: Walbridge & Ziai (1999): Shihāb al-Din Abū al-Futūh Yahyā ibnabash ibn Amīrak alSuhrawardī, The Philosophy of Illumination, John Walbridge and Hossein Ziai, translators (1999). Third Harvard Forum (2000): The Proceedings of The Third Harvard University Forum on Islamic Finance: Local Challenges, Global Opportunities (2000). Thomas: Critics (2007): Landon, Thomas, Jr., Islamic Finance and Its Critics, The New York Times, August 9, 2007, located at http://www.nytimes. com/2007/08/09/business/09trust.html?_r=1&th=& adxnnl=1&oref=slogin&emc=th&adxnnlx=11866707 38-L32tbRHTmEevwKoI29G6xg&pagewanted=all.

Time: Stiglitz (2008): Joseph Stiglitz, Nobel Laureate: How to Get Out of the Financial Crisis, Time in partnership with CNN, October 17, 2008, available at http://www.time.com/time/business/ article/0,8599,1851739,00.html. Tonery & McKoy (2008): Lisa Tonery and Letitia McKoy, Regulatory Challenges in Developing Interstate Gas and Electric Infrastructure in the U.S., in Moser (2008 – II), at 36. Toy (1994): Charles D. Toy, U.S. Government Project Finance and Political Risk Insurance for American Investment in Central and Eastern Europe and the NIS, 88 American Society of International Legal Proceedings 180 (1994). Troeller (1976): Gary Troeller, The Birth Saudi Arabia: Britain and the Rise of the House Sa‘ud (1976).

of of

Tyser, Demetriates & Effendi (2001): C. R. Tyser, D. G. Demetriades, and Ismail Haqqi Effendi (cited as “Majelle: Tyser”), The Majelle: Being an English Translation of Majrallah El-AhkamI-Adliya and a Complete Code on Islamic Civil Law (2001). Udovitch (1969 – CT): Abraham L. Udovitch, Credit as a Means of Investment in Medieval Islamic Trade, in Udovitch (1969 – PP).

Thomas: Securitization (2007): Abdulkader Thomas, Securitization in Islamic Finance, in Archer & Abdel Karim (2007), at 259.

Udovitch (1969 – OC): Abraham L. Udovitch, At the Origins of the Western Commenda: Islam, Israel, Byzantium?, in Udovitch (1969 – PP).

Time: End of Prosperity? (2008): Niall Ferguson, The End of Prosperity?, Time in partnership with CNN, October 2, 2008, available at http://www.time.com/time/business/ article/0,8599,1846450,00.html.

Udovitch (1969 – PP): Abraham L. Udovitch, At the Origins of the Western Commenda: Islam, Israel, Byzantium and Credit as a Means of Investment in Medieval Islamic Trade, Princeton Near East Papers, Numbers 9 and 10 (1969).

Time: Great Depression 2 (2008): Great Depression 2.0: Tracing the Meltdown, Time in partnership with CNN, undated, available at http://www.time.com/time/specials/packages/ article/0,28804,1846697_1846700,00.html.

US Federal Housing Finance Agency: Fact Sheet – Conservatorship (2008): Fact Sheet: Questions and Answers on Conservatorship, Federal Housing Finance Agency, United States of America, undated but made available on September 7, 2008, available at http://www.treas. gov//press/releases/reports/fhfa_consrv_faq_ 090708hp1128.pdf.

VOLUME III

SPRING 2009


81


US Federal Housing Finance Agency: Lockhart Statement (2008): Statement of FHFA Director James B. Lockhart, Federal Housing Finance Agency, United States of America, September 7, 2008, available at http://www. treas.gov/press/releases/reports/fhfa_statement_ 090708hp1128.pdf. US Federal Reserve: Bernanke Statement (2008): Statement by Federal Reserve Board Chairman Ben S. Bernanke, Board of Governors of the Federal Reserve System, United States of America, September 7, 2008, available at http:// www.federalreserve.gov/newsevents/press/other/ 20080907a.htm. US Treasury: Fact Sheet – GSE Credit Facility (2008): Fact Sheet: Government Sponsored Enterprise Credit Facility, United States Department of the Treasury, September 7, 2008, available at http://www.treas.gov/press/releases/reports/ gsecf_factsheet_090708.pdf. US Treasury: Fact Sheet – GSE MBS Purchase Program (2008): Fact Sheet: GSE Mortgage Backed Securities Purchase Program, United States Department of the Treasury, September 7, 2008, available at http://www. treas.gov/press/releases/reports/mbs_factsheet_ 090708hp1128.pdf. US Treasury: Fact Sheet – Preferred Stock Purchases (2008): Fact Sheet: Treasury Senior Preferred Stock Purchase Agreement, United States Department of the Treasury, September 7, 2008, available at http://www.treas.gov/press/releases/ reports/pspa_factsheet_090708%20hp1128.pdf, which is further clarified by US Treasury: FAQ – Preferred Stock Purchases (2008).

82


US Treasury: FAQ – Preferred Stock Purchases (2008): Frequently Asked Questions: Treasury Senior Preferred Stock Purchase Agreement, United States Department of the Treasury, September 11, 2008, available at http:// www.treasury.gov/press/releases/hp1131.htm. US Treasury: Paulson Statement (2008): Secretary Henry M. Paulson, Statement on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers, United States Department of the Treasury, September 7, 2008, available at http://treasury. gov/news/index1.html. Usmani (1998): Muhammad Taqi Usmani, An Introduction to Islamic Finance (1998). Usmani (1999 – ALQ): Muhammad Taqi Usmani, The Concept of Musharaka and Its Application as an Islamic Method of Financing, 14 Arab Law Quarterly 203 (1999). Usmani (1999): Justice Muhammed Taqi Usmani, The Text of the Historic Judgment on Riba, 23 December 1999, available online at http://www.albalagh.net/Islamic_economics/riba_ judgement.shtml. Usmani (2007): Muhammad Taqi Usmani, Sukuk and Their Contemporary Applications (undated, but prepared in 2007); prepared by Justice Usmani in his role as Chairman of the Shariah Council of AAOIFI as part of the deliberative process that resulted in the issuance of the AAOIFI Sukūk Clarification. Uthman (1998): Usama Uthman, A Short Outline of the Foundations of Islamic Economics, in Second Harvard Forum (1998), at 83-91.



Vesey-Fitzgerald (1955): S.G. Vesey-Fitzgerald, Nature and Sources of the Sharī’a, in Khadduri & Liebesny (1955), at 85-112. Vintner (1999): Graham D. Vintner, Project Finance: A Legal Guide (2nd Ed. 1998). Vitale (2000-2001): Robert Vitale, Privatizing Water Systems: A Primer, 24 Fordham International Law Journal 1382 (2000-2001). Vogel (2000): Frank E. Vogel, Islamic Law and Legal System: Studies of Saudi Arabia (Studies in Islamic Law and Society) (2000). Vogel & Hayes (1998): Frank E. Vogel and Samuel L. Hayes, III, Islamic Law and Finance: Religion, Risk and Return (1998). Wall Street Journal: $70 Billion Loan Program (2008): Banks Roll Out $70 Billion Loan Program, The Wall Street Journal, September 14, 2008, available at http://online. wsj.com/article/SB122144631339134981. html?mod=2_1553_leftbox. Wall Street Journal: Capitalism’s New Course (2008): David Wessel, In Turmoil, Capitalism in U.S. Sets New Course, The Wall Street Journal, September 20, 2008, available at http://online.wsj. com/article/SB122187076877559117.html. Wall Street Journal: Crisis on Wall Street (2008): Carrick Mollencamp, Susanne Craig, Serena Ng and Aaron Lucchetti, Crisis on Wall Street as Lehman Totters, Merrill is Sold, AIG Seeks to Raise Cash, The Wall Street Journal, September 15, 2008, available at http://online.wsj. com/article/SB122145492097035549.html.

Wall Street Journal: Dubai Anti-Credit Crunch (2008): Tahani Karrar, In Booming Dubai, Call It The Anti-‘Credit Crunch’, The Wall Street Journal, August 16, 2008, available at http://online.wsj.com/ article/SB121884306950645925.html. Wall Street Journal: Dubai’s Debt Load (2008): Chip Cummins, Dubai’s Heavy Debt Load Stirs Concern, The Wall Street Journal, October 10, 2008, available at http://online.wsj.com/article/ SB122357786070619869.html. Wall Street Journal: Fannie-Freddie Plan (2008): Joseph Schuman, The How, Why and What of Fannie-Freddie Plan, The Wall Street Journal, September 8, 2008, available at http://online.wsj. com/article/the_morning_brief.html. Wall Street Journal: Fannie-Freddie WinnersLosers (2008): Heidi N. Moore, Winners & Losers of the Fannie & Freddie Bailout, The Wall Street Journal, September 7, 2008, available at http:// blogs.wsj.com/deals/2008/09/07/winners-losersin-the-fannie-freddie-bailout/. Wall Street Journal: Gulf Country Measures (2008): Reem Shamseddine and Andrew Critchlow, Gulf Countries Unveil Measures to Back Banks, The Wall Street Journal, October 13, 2008, available at http://online.wsj.com/article/ SB122381464840826479.html. Wall Street Journal: Infrastructure Hit (2008): Paul Glader, Infrastructure Takes Hit, The Wall Street Journal, August 27, 2008, available at http:// online.wsj.com/article/SB121979832169474979. html?mod=djemheard.

VOLUME III

SPRING 2009


83


Wall Street Journal: Leasing Turnpike (2008): Craig Karmin, Leasing of Landmark Turnpike Puts State at Policy Crossroads, The News York Times, August 26, 2008, available at http://online.wsj.com/ article/SB121971201641371425.html. Wall Street Journal: Mortgage Fable (2008): A Mortgage Fable, The Wall Street Journal, September 22, 2008, available at http://online.wsj. com/article/SB122204078161261183.html. Wall Street Journal: Mortgage Giants Seized (2008): James R. Hagerty, Ruth Simon and Damian Paletta, U.S. Seizes Mortgage Giants, The Wall Street Journal, September 8, 2008, available at http://online.wsj.com/article/ SB122079276849707821.html?mod=hps_us_ whats_news. Wall Street Journal: Mounting Woes (2008): Deborah Solomon, Sudeep Reddy and Susanne Craig, Mounting Woes Left Officials With Little Room for Maneuver, The Wall Street Journal, September 8, 2008, available at http://online. wsj.com/article/SB122083060663308415. html?mod=hps_us_whats_news. Wall Street Journal: No Longer Preferred (2008): David Reilly and Peter Eavis, No Longer Preferred: A Lesson From Paulson, The Wall Street Journal, September 8, 2008, available at http:// online.wsj.com/article/SB122083827016408925. html?mod=djemheard. Wall Street Journal: Ultimatum Sparked End (2008): Deborah Soloman, Dennis K. Berman, Susanne Craig and Carrick Mollenkamp, Ultimatum by Paulson Sparked Frantic End, Wall Street Journal, September 15, 2008, available at http:// online.wsj.com/article/SB122143670579134187. html?mod=sphere_ts&mod=sphere_wd.

84


Wall Street Journal: U.S. – Bigger Role (2008): Bob Davis and Jon Hilsenrath, U.S. Poised for Bigger Role, The Wall Street Journal, September 8, 2008, available at http://online.wsj.com/article/ SB122083088815508425.html?mod=hps_us_ whats_news. Wall Street Journal: Worst Crisis Since ‘30s (2008): Jon Hilsenrath, Serena Ng and Damian Paletta, Worst Crisis Since ‘30s, With No End Yet In Sight, The Wall Street Journal, September 18, 2008, available at http://online.wsj.com/article/ SB122169431617549947.html?mod=todays_us_ page_one. Wallace (2004-2005): Don Wallace, Private Participation in Infrastructure and the Provision of Public Services, 18 The Transnational Lawyer 117 (2004-2005). Warde 2000: Ibrahim Warde, The Revitalization of Islamic Profit-and-loss Sharing, in Third Harvard Forum (2000), at 199-212. Watt (1985): W. Montgomery Watt, Islamic Philosophy and Theology (2nd Edition) (1985). Wegner (1982): Judith Romney Wegner, Islamic and Talmudic Jurisprudence: The Four Roots of Islamic Law and Their Talmudic Counterparts, 26 American Journal of Legal History 25 (1982). Weiss (1977-1978): Bernard Weiss, Interpretation in Islamic Law: The Theory of Ijtihād, 26 The American Journal of Comparative Law 199 (1977-1978). Wiederhold (1996): Lutz Wiederhold, Legal Doctrines in Conflict: The Relevance of the Madhhab Boundaries to Legal Reasoning in the Light of an Unpublished Treatise on Taqlīd and Ijtihād, 3 Islamic Law & Society 234 (1996).



Wiley (1998): Michael Wiley, Tax and Project Finance: Case Study: Australia, 26 International Business Lawyer 198 (1998). Williams (1994): John Alden Williams, The Word of Islam (1994). Williams & Castillo-Bernaus (2001): Annie Williams and Mark Castillo-Bernaus, ChadCameroon pipeline sets new standards for African project finance, 20 International Financial Law Review 10 (2001). Wilson (2002): Rodney Wilson, The evolution of the Islamic financial system, in Archer & Abdel Karim (2002), at 29-41. World Bank (2008): Global Development Finance: The Role of International Banking, The World Bank (2008). Wright & Yuniar (2007): Tom Wright and Yayu Yuniar, Islamic Finance Widens Pitch, The Wall Street Journal, September 5, 2007, located at http://online.wsj.com/article/ SB118893206328417150.html. Yaquby (2001): Nizam Yaquby, Trading in Equities: A Sharīʻa Perspective, in Fourth Harvard Forum (2001), at 119-28 (a version of this article may be found at http://www.djindexes.com/mdsidx/ index.cfm?event=showIslamicArticles.

Yuan (2008): Jingfeng Yuan, Application of the PPP Method in China, in Moser (2008 – II), at 70. Yzaguirre (1997-1998), Mark R. Yzaguirre, Project Finance and Privatization: The Bolivian Example, 20 Houston Journal of International Law 597 (1997-1998). Zahraa (2000): Mahdi Zahraa, Characteristic Features of Islamic Law: Perceptions and Misconceptions, 15 Arab Law Quarterly 168 (2000). Zawya: Aramco Expenditures (2008): Saudi Aramco: 09-14 Infrastructure Expenditure to Total $129B, Zawya Dow Jones, May 27, 2008, available at http://www.zawya.com/story.cfm/ sidZW20080527000081. Zhang (2000): Nan Zhang, Moving Towards a Competitive Electricity Market? The Dilemma of Project Finance in the Wake of the Asian Financial Crisis, 9 Minnesota Journal of Global Trade 715 (2000). Zukerman (2008): Jay Zukerman, Bridging the Gap: US Tax Considerations for Public-Private Partnership Availability Payment Transactions, in Moser (2008 – II), at 55.

Yepes: Infrastructure Expenditure (2006): Tito Yepes, Expenditure on Infrastructure in East Asia Region, 2006-2010 (2006), commissioned for the ADB-JBIC-World Bank East Asia Pacific Infrastructure Flagship Study; copy on file with the author.

VOLUME III

SPRING 2009


85


Endnotes 1 Michael J.T. McMillen is a Partner of Fulbright & Jaworski L.L.P. whose practice concentrates on Islamic finance (since 1996), project and infrastructure finance (since 1983) and structured finance. He is a current Co-Chair, and was the first Chair, of the Islamic Finance Committee (formerly the Islamic Law Forum), a division of the International Law Section of the American Bar Association. He also teaches Islamic Finance at the University of Pennsylvania Law School, the Wharton School of Business and other law, business and professional schools. Copyright © and all intellectual property rights retained by Michael J.T. McMillen. Ideas addressed in this article have been developed by Mr. McMillen in a number of previous seminars, conferences and articles, including: McMillen (2009 – CIPF); McMillen (2009 – Jaffer); McMillen (2009 – PEI); McMillen (2008 – DJIMIN); McMillen & Crawford (2008); McMillen (2008 – IFSB); McMillen & DeLorenzo (2008); McMillen (2008 – Davis); McMillen (2008 – WILJ); McMillen (2008 – PGIF); McMillen (2008 – ILF); McMillen (2008 – JIEF); McMillen (2008 – Ali); McMillen (2007 – IFSB); McMillen (2007 – IBH); McMillen (2007 – IFR); McMillen (2007 – IF); McMillen (2006 – CMLJ); McMillen (2006 – IFR); McMillen (2006 – IBF); DeLorenzo & McMillen (2006); McMillen & Kamalpour (2006); McMillen (2006 – IFR); McMillen (2006 – CMLJ); McMillen (2005); McMillen (2004 – AM); McMillen (2004 – IFSB); McMillen (2003 – FHF); McMillen (2003 – MEER I); McMillen (2003 – MEER II); McMillen (2001 – THF); McMillen (2001 – MEER); McMillen (2000 – FILJ); McMillen (2000 – THF); McMillen (2000 – MEED); McMillen (1998 – MEED); and McMillen (1998 – SCER). The process of developing the foregoing themes, and the significant travel involved, of necessity induced consideration of the sartorial matters addressed in McMillen (2005 – Shirt). All errors and inaccuracies in this article and the aforementioned seminars, conferences and articles are the sole responsibility of the author. Nothing in this article constitutes, or is intended to constitute, legal advice.

2 With a reluctant nod to customary usage, the terms “conventional” and “Western”, and correlative terms, are used in this article to refer to techniques, practices and jurisdictions in which interest-based financing (rather than Sharīʻah-compliant financing) is the predominant form (whatever the degree of presence of Islām in those jurisdictions and without regard to geography). Variations as between and among Western jurisdictions are ignored. This article also adopts, quite intentionally, and by way of general shorthand that may be offensive to scholarly purists (with apologies), a rather vague and elastic conception of “the Middle East” that generally includes the Arabian peninsula and predominantly Muslim areas of North Africa and is sometimes inclusive of Pakistan and Turkey. Unless otherwise expressly noted, differences as between and among these diverse jurisdictions are also disregarded. Similarly, variations as between and among the different madhahib (schools of Islamic jurisprudence) are ignored unless otherwise specifically noted. Despite the disregard for these differences, it is vitally important that the richness of diversity that is Islām be ever borne in mind. Islam [is] an entity which the Western world has always found it convenient to treat as a monolith in order to compensate for a failure to investigate its variety. Perhaps we might suggest, adopting de Saussure’s well-known categories, that Islam, like other faith systems, clearly stipulates what might constitute its langue – the canonical texts that lay down the basis for its principles, but that the parole, the actual application in such areas as the differences between the tenets of the Sunnī and the Shīʻī communities and the practices of Sufism and popular Islam, present us with a staggering variety of beliefs and rituals which reflect the world-wide scope of the faith. Allen (2000), at 11.

86




3 DeLorenzo & McMillen (2006), at 136-154, discusses the history of modern Islamic finance from the 1970s to the present. See also McMillen (2007 – WILJ), Wilson (2002), and Siddiqi (2001), and with respect to Islamic banking, Rehman (2008), at 637-44. For a particularly interesting snapshot of perceptions as to the relevance and appropriateness (more often, the perceived irrelevance and inappropriateness) of the Sharīʻah in 1987 and speculation as to its potential application in commercial realms, see Ballantyne (1987), especially at 12-13, 15-17, and 27-28. Consider, also, Fyzee (1963). Henry & Wilson (2004) includes numerous essays addressing different elements of the origin and growth of modern Islamic finance, including Soliman (2004), which challenges some conventional positions. Compare Hamoudi (20062007), Hamoudi (2007), Hamoudi (2007 - PW), Hegazy (2007), Rehman (2008), El-Gamal (2003), and, especially at 5-16, Ray (1995). 4 See Rauner (1983), at 146-56, for a summary of the origins and development of project finance in the period from and after 1969. Consider Head (2004) and Morais (2004), with respect to some of the criticisms of multinational development banks as project financing participants over the years, and Mates (2004-2005), with respect to the role of International Finance Corporation in more recent times. See also Short (20002001) with respect to export credit agencies and risk allocations. 5 See, e.g., Rauner (1983), at 149-50, and sources cited therein. 6 See, e.g., Nevitt (1983) and Nevitt & Fabozzi (2000). 7 See Loke (1998), which discusses the identification, bundling, allocation and management of project finance risks (although legal risks are not discussed in detail). The focus is on risks associated with each phase of a typical project financing transaction and includes discussion of credit support and collateral security arrangements. See

also Hansen (2004-2005), Harris (2008), Hayes & Cummings (2001 – I), Hayes & Cummings (2001 – II), Malloy (2004-2005), Miyamoto (1999-2000), Moore & Ciaccio (1986), and Short (2000-2001). For discussions of the social impacts, and social risks, of project financing, see Broome (2002) and Bjerre (2002). 8 The literature on the application of project financing techniques and structures in different industries and geographic locations is voluminous. See, e.g., Ambinder, de Silva & Dewar (2000), Amison (1995), Andrade & de Castro (1998-99), Andrade & de Castro (1998-99), Baragona (20042005), Bertoletti & Cunha (2004), Blount (2008), Blount & Du (2008), Bowers (1998), Calkoen (1997), Campos (1997), Coles (2000-01), Cook (1996), Crothers (1995-96), Delescluse (2004), Doulis (2008), Erlendson (2008), Ferguson (2001), Forry (1995), Forster (1996), Frilet (2000), Hansen (2004-2005), Gillespie (2008), Hayes & Cummings (2001-I), Hayes & Cummings (2001II), Heck (2008), Hoffman (1998), Kim (2006), Kerr (1995-96), Latman (2008), Loke (1998), Malinasky (1996), Malloy (2004-2005), Marshall (1995), Mates (2004-2005), McArdle (1996), McCormick (1998), McManus (2008), McMillen (2008 – Ali), McMillen (2008 – PGIF), McMillen (2008 – WILJ), McMillen (2007 – IBH), McMillen (2007 – IF), McMillen (2004 – AM), McMillen (2003 – FHF), McMillen (2003 – MEER III), McMillen (2003 – MEER II), McMillen (2002 – MEER), McMillen (2000 – FILJ), McMillen (2000 – THF), Mears (1998), Mehta (1998), Miller (1994 – I), Miller (1994 – II), Miyamoto (19992000), Moore & Ciaccio (1986), Morais (2004), Moser (2008), Moser (2008 – II), Pédamon (20002001), Prutzman & Jiang (1994), Regan (2006), Schena (2005), Short (2000-2001), Silva (1998), Sin (1991), Singh (1998), Soutar & Hanson (1996 – I), Soutar & Hanson (1996 – II), Sozzi (1996), Stephenson, Rojas & Owner (2000), Stephenson, Rojas, Hernández, Mates & Borbolla (2004), Stuber & Semionato (1996), Tonery & McKoy (2008), Toy (1994), Vintner (1998), Vitale (200001), Wiley (1998), Williams & Castillo-Bernaus

VOLUME III

SPRING 2009


87


(2001), Yzaguirre (1997-98), Zhang (2000), and the articles cited in the next paragraph. The already fulsome literature on public private partnership project financing concepts and techniques is growing. A sampling of articles includes: Berrocal & Sharfsten (1986-1987); Blount (2008); Blount & Du (2008); Brown (2008); Burnett (2008); Clement-Davies (2008); English (2006); Feldman; Forward (2006); Kozarovski (2006); Laclau (2008); Lalka (2008); Moser (2008 – I); Moser (2008 – II); Moser (2008 – Infrastructure); Pascual (2004-2005); Pédamon (2000-2001); Pikiel & Plata (2008); Quiggin (2006); Rose (20052006); Wallace (2004-2005); Yuan (2008); and Zukerman (2008). A sampling of articles focusing on project finance and the capital markets, including securitizations and the private equity investments, includes: Anderson (1997-1998); Bjerre (2002); Croke (2004-2005); Kamarch (2004-2005); and Parolai & Elland-Goldsmith (1998). 9 See, e.g., Loke (1998), at 41-75, Rauner (1983), at 156-81, Short (2000-2001), and the sources cited at note 7, supra. 10 Ribā concepts relate to any excess paid or received on principal, or an increase in price or return, particularly an increase that is in some manner a function of time. The literature on ribā (and usury) is extensive and the debate regarding ribā (and usury) remains vigorous. As to the different types of ribā, consider ribā al-fadl (relating to unequal spot trades in specified commodities), ribā nasa’/nasi’a (relating to credit transactions in specified commodities), ribā al-jahiliyya (relating to deferment and increase of price), and da/wa ta/ajjal (relating to discounting upon prepayment). These are discussed, among other places, in Fadel (2008) and Fadel (2007). A comprehensive treatment of ribā is provided in the legal opinion of Justice Muhammed Taqi Usmani in The Text of the Historic Judgment on Riba, 23 December 1999,

88


available online at http://www.albalagh.net/Islamic_ economics/riba_judgement.shtml (last visited on September 13, 2008). The judgment based upon that opinion, and others, is set forth in the Order Of The Supreme Court’s Appellate Bench In Riba Case, 9 Review of Islamic Economics 155-94 (2000), which is reprinted at http://www.financeinislam.com/ article/11/1/435. See also Vogel & Hayes (1998), at 71-95, Coulson (1984), at 11, Saleh (1992), at 11-43, Comair-Obeid (1996), at 43-57, Algaoud & Lewis (2007), at 38-48, Seniawski (2000-01), and Sharawy (2000), Ansari-pour (1994), Ansari-pour (1996), Abdus-Shahid (1984), Uthman (1998), at 83-91, al-Awani & El-Ensary (1998), and El-Gamal (2000). Histories, including comparatives histories, of usury, include Lewis (2007), Noonan (1957), Ackerman (1981), Klein (1994-95), Bernstein (1965), Boxberger (1998), Gerber (1993), Goode (1982), J.F.B. (1965), and Milgate (1999). Consider Glaeser & Schneikman (1998) and Hayeck (1996). Interest charges on unpaid sums are sometimes permitted in Sharīʻah-compliant contracts in late payment scenarios as an inducement to timely payment, although the interest received must then be donated to charity. See, e.g., AAOIFI Payment Default Standard at Section 2(h). 11 Although project participants strive to achieve the greatest possible degree of standardization under the circumstances, the size and complexity of many projects renders absolute standardization difficult, if not impossible, to obtain. The participants will then seek to achieve standardization in discrete segments of the project. For example, construction contractors will utilize engineering, procurement and construction contracts for a given type of project that have a standardized core, with variation being introduced to address project-specific factors. Standardization may be greater in one industry than another. Thus, for example, there is greater standardization in the implementation of a real estate project in North America or Europe than in the implementation of a petrochemical project in Africa, the Middle East, China or India. Loan agreements for electricity



projects are considerably less standardized than for, say, commercial or residential real estate projects, if only to facilitate securitization of the real estate financings. With respect to standardization in commercial contracts, see Ahdieh (20052006), Choi & Gulati (2005-2006) and Kahan & Klausner (1997). 12 With respect to ribā concepts, see note 10, supra. Gharar concepts focus on risk and uncertainty with respect to the subject matter of the contract, matters such as the deliverability, quantity or quality of such subject matter, and ambiguity with respect to consideration or the terms of the contract. Consider, in particular, Vogel & Hayes (1998), at 87-93. See also the discussion of risk (and not, specifically, gharar) in Fadel (2001). Maysīr concepts pertain to impermissible gambling, betting and wagering, i.e., to the taking of deliberately created or invited risks that are not necessary in an economic activity for gain (as distinguished from entrepreneurial risk that is inherent in economic activity). 13 In some jurisdictions, these needs, and related attempts at privatization, have given rise to strident policy debates. Consider, for example, Wall Street Journal: Leasing Turnpike (2008) and NY Times: Running Out of Money (2008) discussing debates in the United States. 14 Morgan Stanley: Infrastructure (2008). See also the following illustrative sampling of articles: Economist: Recycling Petrodollars (2005); AME Info: Qatar Expenditures (2005); NY Times: Abraaj (2006); Yepes: Infrastructure Expenditures (2006); Merrill Lynch: Infrastructure (2007); NY Times: Desert Education (2007); Economist: Dawn in Desert (2007); MarketWatch: EEMEA Infrastructure (2007); Khaleej: UAE Infrastructure (2007); Economist: India (2007); Morgan Stanley: Infrastructure (2008); World Bank (2008); Standard & Poor’s: Project Finance (2008); iStockAnalyst: Infrastructure (2008); NY Times:

Saudi – A Construction Site (2008); Zawya: Aramco Expenditures (2008); Heck (2008); Bloomberg: Saudi Electric (2008); NY Times: Citi Banker to ME (2008); NY Times: GE – Mubadala (2008); AME Info: GCC Infrastructure (2008); Fasano & Iqbal: Diversification (2003); and Economist: China Transportation (2008). In the short term, infrastructure spending has not escaped the knife of the present financial crisis: consider, for example, Wall Street Journal: Infrastructure Hit (2008), reporting that 8% of the US$60 billion in infrastructure projects slated for 2008 have been delayed or canceled (and this before the massive financial crisis to and including December 2008 and its aftermath). This is four times the historical cancellation rates of 2%. The cited figures ignore many initiatives in the transportation arena, such as aircraft and vessel financings, where Sharīʻah -compliant financings that are quite similar to those discussed in this article are used with frequency. The OIC, which promotes solidarity and cooperation among Muslim states, is currently comprised of the following member countries: Afghanistan, Albania, Algeria, Azerbaijan, Bahrain, Bangladesh, Benin, Brunei-Darussalam, Burkina-Faso, Cameroon, Chad, Comoros, Cote d’Ivoire, Djibouti, Egypt, Gabon, Gambia, Guinea, Guinea-Bissau, Guyana, Indonesia, Iran, Iraq, Jordan, Kazakhstan, Kuwait, Kyrgyz, Lebanon, Libyan Arab Jamahiriya, Malaysia, Maldives, Mali, Mauritania, Morocco, Mozambique, Niger, Nigeria, Oman, Pakistan, Palestine, Qatar, Saudi Arabia, Senegal, Sierra Leone, Somalia, Sudan, Suriname, Syria, Tajikistan, Togo, Tunisia, Turkey, Turkmenistan, Uganda, United Arab Emirates, Uzbekistan and Yemen. Various other states and organizations are observer members. The web site of the OIC is located at http://www. oic-oci.org/oicnew/. 15 A United Nations world population report, cited in Morgan Stanley: Infrastructure (2008) at 46, projects that almost 75% of the world’s urban population will be in urban centers within emerging markets by the year 2015.

VOLUME III

SPRING 2009


89


16 See, e.g., Wall Street Journal: Dubai AntiCredit Crunch (2008), which makes note of the increases in the Emirates Interbank Offered Rate as the credit crunch escalates and the high inflation rate in the United Arab Emirates, which may result in constraints on the ability of the UAE central bank to inject liquidity into the market. See also MEED: Saudi and UAE Rescue Packages (2008). 17 See, e.g., NY Times: Desert Education (2007), NY Times: Saudi – A Construction Site (2008), Zawya: Aramco Expenditures (2008); Heck (2008); Bloomberg: Saudi Electric (2008); and Arab News: Gulf Construction (2008). 18 See, e.g., Khaleej: UAE Infrastructure (2007), Arab News: Gulf Construction (2008), and AME Info: GCC Infrastructure (2008). 19 See, e.g., Khaleej: UAE Infrastructure (2007) and AME Info: GCC Infrastructure (2008). 20 See, e.g., AME Info: Qatar Expenditures (2005), Khaleej: UAE Infrastructure (2007) and AME Info: GCC Infrastructure (2008). 21 The chief economists of two of the largest banks in the Middle East have indicated at conferences in early 2008 that, for the first time, many Middle Eastern jurisdictions now derive more income from investments than from oil and gas revenues. 22 Thus, for example, it contains religious, moral and ethical prohibitions such as the impermissibility of engagement in the manufacture, distribution or consumption of alcohol or pork, pornography (including its manifestations in cinema and music), gambling and games of chance (and related activities), ribā (and thus interest-based finance), non-mutual insurance, and other activities. As a more general and systemic summary, consider Khadduri (1953-1954), at 8-9:

90



The divine law represents an effort to rationalize a world in which the Prophet Mohammed found chaos and conflict and his goal was order. The law provided guidance not only in establishing an ordered society, but also in distinguishing what is called husn (beauty) – hence to be followed – and qubh (ugly) – which should be avoided – or, in Western terminology, distinguishing between “good” and “evil.” The divine law is a system of obligations (fara’id) which help to show the right “path” (shari’a) to be travelled by the believer during his life-sojourn in order to obtain salvation. This “path,” however, narrow as it may seem, has given the believer several choices between the strictly enjoined (fard) and the strictly forbidden (haram). For between these two extremes the believer has the liberty of fulfilling certain “recommended” actions (mandub) and of “refraining” (makruh – objectionable) from others, but neither is the latter forbidden nor is the former obligatory. Further, between the “recommended” and the “objectionable,” there is the category of ja’iz to which the law is “indifferent” and where the believer has full freedom of action. For instance, the daily prayers or the fasting of the month of Ramadan are fard’[;] pork, wine and usury are haram’[;] any additional prayer is mandub; certain kinds of fish are makruh; but all other activities which do not fall within these categories are ja’iz. [footnote omitted]


23 Vesey-Fitzgerald (1955), at 85-86. Sharīʻah, considered as law, has two main divisions: ìbadāt, or ritual, which deals with religious matters, and muʻamalāt, or transactions. It is muʻamalāt that overlaps in nature and scope with other legal systems. See, e.g., Badr (1977-1978), especially at 187-90, and Hassan (1982), at 66. 24 While the Sharīʻah is the subject of voluminous scholarship, learning pertaining to the Sharīʻah as applied in Islamic finance is largely oral, although there is a growing body of literature and fatāwā. See, e.g., DeLorenzo & McMillen (2006), at 136-50. An exception to the predominance of oral formulations as they pertain to financial matters is the Majelle (Majalat al-Akham al-Adliyah), which is an unfinished digest of principles and rules of the Sharīʻah under the Hanafī madhab as applied in civil law transactions (muʻāmalāt). It was prepared by a committee of Ottoman Hanafī scholars during the period from 1869 to 1888, was published between 1870 and 1877, and was codified as law in the Ottoman empire as applicable to matters outside the commercial code. See Onar (1955); and see Liebesny (1953), at 130-32. Two English language translations are Majelle: Hooper and the Majelle: Tyser. A summary of some provisions of the Sharīʻah as applied in commerce and finance is contained in al-Zuhayli (2003). The most modern formulations of the Sharīʻah, and those having the greatest influence on modern Islamic finance, are the various Sharīʻah standards promulgated by the Accounting and Auditing Organization for Islamic Financial Institutions, which are set forth in AAOIFI Sharīʻah Standards(2004). General summary textbooks of Islamic law are Fyzee (1949) and Fyzee (2008).

United States and the United Kingdom, where the Sharīʻah is not incorporated into the secular law to any extent, it is a body of commands that are not sanctioned by the state unless such commands are incorporated into the secular law in some permissible manner, such as by incorporation in a contract that is enforceable under secular law. See, e.g., Beximco (2004), Musawi (2007), McMillen (2007 – CJIL), at 434-67, McMillen (2006 – CMLJ), at 151-66, Ballantyne (1987), especially at 12-18, Schacht (1959), Sloane (1988), and Sfeir (2000). In considering these concepts of incorporation, Ballantyne’s observation (at 18), made with due acknowledgement of its “risk of dangerous oversimplification”, is helpful and provocative: “occidental laws assume a fair degree of immorality and try to counteract it; the Shari’a, par excellence, having its roots in religion, assumes a high degree of religious rectitude, and legislates accordingly.” Consider, also, Collier (1994). 26 Schacht (1955-KL), at 28. Or, in the conception of Al-Ghazālī, as stated by Hurgronje (1957) as quoted in Fyzee (1963), at 262:

25 The extent to which the Sharīʻah constitutes secular law, enforceable as such in the secular legal system, varies considerably from one jurisdiction to another as a function of the extent to which the Sharīʻah is incorporated into the secular body of law of the specific jurisdiction. Thus, in the

VOLUME III

The law (Shari’a), according to Ghazali, is the indispensable daily bread of life for all Muslims because it contains the rules which are binding on every one. … The required measure of knowledge of the law varies from person to person; because it has value only as a guide to right living, the study of fine distinctions is in itself worthless. There must, it is true, be a class of scholars who make a study of law beyond their individual needs. … It is an error to believe that a preoccupation with law beyond the actual needs of the community, is pleasing to God. The fiqh is a science of this world, since a man who observes all its rules most meticulously may

SPRING 2009


91


give the outward impression of being a true Muslim; but what is within, whether he possesses the belief necessary for salvation, is another question. 27 With respect to ijtihād, a representative sampling of different views is Ali-Karamali & Dunne, al-Awani & El-Ansary (1998), Codd (1999), Hicks (1982), Hooker (1993), Johnstone (2004), Kamali (1996), Khan (2003-2004), Omar (1997 – I), Omar (1997 – II), Omar (1998), Wegner (1982), Weiss (1977-1978), Wiederhold (1996), and the other sources cited in this note. An interesting and helpful etymological and historical review of the development of the term “sunna” as an element of fiqh is Ansari (2004) at 215-38 (the term ḥadīth is treated at 211-15). Ansari notes the etymological root (SNN) as originally referring to the “flow and continuity of a thing with ease and smoothness”, such as the manner in which water flowed easily away when poured on a person’s face. The sense of a “way” or “course” that was easily tread and traversed arose from this usage and “derivatives of SNN were employed with reference to the course across which winds blew or along which water flowed”. (at 215) The connotations of ease and facility then gave rise to usage, most notably in ancient Arabic poetry, in reference to admirable aspects of the human face, particularly brightness and polish, smoothness and shape. Thereafter, there was an extension to human behavior: “’Sunna began to mean, therefore, ‘a way, course, rule, mode, or manner, of acting or conduct of life, and became an equivalent of sīra’”, while still retaining the concepts of ease and smoothness. (at 216-17, footnotes omitted) “Sunna therefore signified, inter alia, a mode of behavior which a person could adopt without difficulty. This seems to be the background in which the term sunna developed a nuance of moral appropriateness and normativeness.” (at 217) Ansari observes that there are sixteen references to sunna in the Qur’ān, most of which are references to the sunna of Allāh (which he notes to be literary innovation

92


of the Qur’ān) and none of which are references to the sunna of the Messenger of Allāh. However, the Qur’ān is clear that the conduct of the Prophet is conduct par excellance, thus supporting the concept of the sunna of the Prophet in the early years of Islām. A sampling of some of the more accessible introductions to the history and methodology of Islamic jurisprudence (and, in some cases, Islamic finance) includes: Vesey-Fitzgerald (1955), at 85112; Schacht (1955); Khadduri & Liebesny (1955); Zahraa (2000); Vogel & Hayes (1998), particularly at 23-70; Hallaq (2004); Coulson (1964), especially at 1-73; Schacht (1950); Goldziher (1910); Hallaq (2005); Obaidullah (2005); Hallaq (1997); Funk (1993); Williams (1994), especially at 7-108; Khadduri (1953-1954); Kamali (2003); Usmani (1998); Abdal-Haqq (1996); Abdal-Haqq (1997); Abdel-Wahab (1962-1963); Melchert (1998); Hallaq (2001); Morris & Ingram (2001); Hallaq (1985-86); Badr (1977-1978); Weiss (1977-78); Omar (1997); Omar (1997 – II); Omar (1998); Kourides (1970); Kourides (1972); Abdul Rauf (2005); Makdisi (1985); Souaiaia (2004-05); Hassan (1982); Khan (1983-1984); Liebesny (1953); Liebesny (1972); Liebesny (1985-1986); Abdul Rauf (2005); Fyzee (1949); Fyzee (2008); Ray (1997); El-Gamal (2006); and Lahlou & Tanega (2007 – II). Quraishi (2006) presents an interesting discussion of the “schools” of jurisprudence and their bases and modes of analysis of the Qur’ān and the United States Constitution, including summaries of how the different madhahib endeavor upon ijtihād. See also al-Hibri (1998-99) and Moghul (1999). The literature on Islamic project financing structures that do take cognizance of Sharīʻah concepts includes: Al-Omar (2000); Babai (1998); Duncan, Desai & Rieger (2004); Khan (1997); McMillen (2009 – CIPF); McMillen (2008 – PEI); McMillen (2008 – Davis); Marray (2003-2004); McMillen (1998 – SCER); McMillen (1998 – MEED); McMillen (2000 – FILJ); McMillen (2000 – THF); McMillen (2000 – MEED); McMillen (2001 – THR);



McMillen (2001 – MEER); McMillen (2003 – MEER I); McMillen (2003 – MEER II); McMillen (2003 – FHF); McMillen (2004 – AM); McMillen (2005); McMillen (2007 – IBHJ); McMillen (2007 – IF); McMillen (2007 – IFSB); McMillen (2008 – PGIF); McMillen (2008 – WILJ); McMillen (2008 – JIEF); McMillen (2008 – IFSB); McMillen (2009 - PEI); McMillen (2009 - CIPF); Obaidullah (2000); ElGamal (2006); and Richardson (2006-2007). 28 For examples of these legal principles and precepts, see Majelle: Hooper, Majelle: Tyser, and Al-Zuhayli (2003). 29 A historical summary of the development of the madhahib is Schacht (1955). With respect to the nature, composition and activities of Sharīʻah boards, see, e.g., DeLorenzo & McMillen (2006), at 139-47, DeLorenzo (2001), Yaquby (2001), DeLorenzo (2004), DeLorenzo (undated – GFC), DeLorenzo (undated – DJIMI), McMillen (2006 – CMLJ), at 138-43, McMillen & Kamalpour (2006), and Hegazy (2005). 30 Consider, for example, Fadel (2001), Dar, Harvey & Presley (1998), Warde (2000), Mirakhor & Zaidi (2007), Haneef (2005), and Moghul (2007). 31 The relationship of the tangible asset to the related debt is a fundamental issue addressed in the AAOIFI Sukūk Clarification, which is discussed in section 5 of this article. Derivatives are a particularly vexing, and strenuously debated, issue in the field of Islamic finance. Practitioners in the field of Islamic finance are currently focused on the development of Sharīʻah-compliant structures to achieve some of the economic benefits of derivatives, as well as to allow transactional integration with conventional Western derivatives markets. 32 See Coulson (1984); and see DeLorenzo & McMillen (2006), at 132-50. 33 See DeLorenzo & McMillen (2006), at 143-50.

34 See DeLorenzo & McMillen (2006), McMillen (2007 – WILJ), McMillen (2006 – CMLJ), McMillen & Kamalpour (2006), McMillen (2000 – FILJ), McMillen (2000 – THF), and, acknowledging some of the limitations on the growth of Sharīʻahcompliant project finance, Babai (1998). See also Ebrahim (1998), Obaidullah (2000), Siddiqi (2001), Husain (2002), Al Omar (2000) and the sources cited in note 3, supra. The breadth of practical interest is indicated by, among many other articles and publications, the vast range of articles contained in Second Harvard Forum (1998), Third Harvard Forum (2000), Fourth Harvard Forum (2002), Ali (2005) (which derives from the Sixth Harvard University Forum on Islamic Finance), Ali (2008) (which derives from the Seventh Harvard University Forum on Islamic Finance), IFSB (2008), Hassan & Lewis (2007), Archer & Abdel Karim (2007), Archer & Abdel Karim (2002), Jaffer (2004), and the articles cited in note 1, supra. As a small sampling of the many articles on Islamic finance in the popular press, see MEED Special Report: Islamic Finance (2008), Arnold (2007), Euromoney (2007 – Bond), Euromoney (2007 – Banks), Al-Hilal (2007 – Sukūk), Thomas (2007), Robinson (2007), Wright & Yuniar (2007), Roy (2007), Oakley (2007), Abdulmalik (2008), and the articles cited in notes 126 to 128, infra. See also Standard & Poor’s (2006), which estimated the size of Sharīʻah -compliant assets at US$400 billion and the potential market for Islamic financial services to be approximately US$4 trillion. 35 The DJIMI Fatwā and the various tests are discussed in Dow Jones (2008), Yaquby (2001), Siddiqui (2007), and Siddiqui (2004). See also Moran (2000). With respect to the evolution of those tests and their application in areas other than equity investing, see McMillen (2008 – Jaffer). 36 Among the primary factors that drove the emphasis on residential funds were the following: first, the Sharīʻah rules prohibiting tenants of Sharīʻah-compliant investments from engaging in prohibited business activities are not applicable

VOLUME III

SPRING 2009


93


to individual residential tenants; second, the development of workable Sharīʻah-compliant istisna’a (‘istisna`) – ijāra (construction – lease) financing structures in the United States; third, the flexibility of the United States legal system in accommodating financing and investment structures that were both Sharīʻah -compliant and used conventional interest-based financing in a manner that met the underwriting standards and criteria of conventional banks; fourth, the shortterm nature of construction financing was desirable to Middle Eastern investors; and fifth, the boom in the United States real estate markets during this period. See McMillen (2000 – FILJ), McMillen (2003 – FHF), McMillen (2003 – MEER II) and McMillen (2003 – MEER III). See, also, McMillen (2008 – Jaffer). 37 Consider, for example, the situations noted in the last paragraph of note 35, supra, and the text preceding and accompanying notes 38 and 39, infra. 38 See note 35, supra, and the text preceding and accompanying note 39, infra. See also McMillen (2008 – Jaffer) for a more extensive discussion of the application of the DJIMI Fatwā permissible variance and purification concepts. 39 See McMillen (2009 – Jaffer), McMillen (2007 – WILJ)), and Elgari (2002). 40 The DJIMI Fatwā discussed at note 35, supra, addressed the reasons for this prohibition. 41 See note 35, supra, and the text accompanying notes 35-40, supra. DJIMI commenced operations in 1999. See, also, McMillen (2008 – Jaffer) for a discussion of the Dow Jones Fatwā and the tests enunciated in therein, and the evolution of those tests and their expanding application, over the last decade. 42 Sukūk had been issued prior to 2001, but on an isolated and inconsistent basis; for example, Malaysian sukūk were issued in the mid-1980s.

94


See Adam & Thomas (2004) and Adam & Thomas (2005). See also McMillen (2009 – Jaffer), McMillen (2008 – IFSB), McMillen & DeLorenzo (2008), McMillen (2006 – CMLJ), McMillen (2008), McMillen (2007 – IFSB), McMillen (2007 – WILJ), McMillen & Kamalpur (2006), Haneef (2005), and Bloomberg: Sukūk Surge (2007). Contemporaneously, but not initially using sukūk instruments for financing, Islamic project financing was beginning; see the discussion in section 2.1 of this article and the sources cited therein. 43 Sukūk structures since 2003 have tended more and more to the “bond” structures, and have become increasingly indistinguishable from conventional bond structures, much to the consternation of the AAOIFI Sharīʻah Supervisory Board. On March 8, 2008 (the date of posting on the AAOIFI web site, although the web site attributes a date of February 2008), after long deliberation, the AAOIFI Sharīʻah Supervisory Board issued “resolutions” that “advise” the industry with respect to the AAOIFI Sukūk Standard (the author believes this to be in the nature of a clarification of the AAOIFI Sukūk Standard; other commentators have characterized this as “recommendations” in respect of the AAOIFI Sukūk Standard; the AAOIFI web site styles this issuance as “resolutions”; the text of the issuance itself states that “the Shari’ah Board — while re-affirming the rules provided in the AAOIFI Shari’ah Standards concerning Sukuk — advises Islamic financial institutions and Shari’ah Supervisory Boards to adhere to the following matters when issuing Sukuk:”): the “AAOIFI Sukūk Clarification”. See the discussion at section 5 of this article, and see McMillen (2009 – Jaffer) and McMillen (2008 – DJIMI). 44 The AAOIFI Sukūk Standard provides for 14 eligible asset classes. In broad summary, they are securitizations: (a) of an existing or to be acquired tangible asset (ijāra (lease)); (b) of an existing or to be acquired leasehold estate (ijāra); (c) of presales of services (ijāra); (d) of presales of the production of goods or commodities at a



future date (salam (forward sale)); (e) to fund construction (istisna’a (construction contract)); (f) to fund the acquisition of goods for future sale (murābaha (sale at a markup)); (g) to fund capital participation in a business of investment activity (muḍāraba or mushāraka (types of joint ventures that are hereinafter discussed)); and (h) to fund various asset acquisition and agency management (wakālah (agency)), agricultural land cultivation, land management and orchard management activities. The parenthetical in each of the foregoing indicates the relevant Sharīʻah structure. Consider, also, with respect to AAOIFI accounting standards generally, Archer & Abdel Karim (2007). With respect to various aspects of securities and capital markets laws, enforceability of the Sharīʻah , the application of trust concepts to sukūk issuances and sukūk as a backbone element of the Islamic capital markets, see McMillen (2008 – IFSB), McMillen & DeLorenzo (2008), McMillen (2007 – IFSB), McMillen (2006 – CMLJ), and McMillen (2007 – CJIL). An understanding of conventional asset securitization concepts is important to understanding asset securitization sukūk. While there is an extensive literature on asset securitizations, two compilations, each structured as practitioner’s guides, are particularly useful. Dolan & Davis (2006) addresses the primary substantive bodies of law of relevance to securitizations (such as laws relating to securities, bankruptcy, tax, ERISA, security interests, and related issues) and the primary accounting rules. It also discusses various types of securitization transactions (such as commercial paper conduits, commercial mortgage backed securities, collateralized bond obligations, collateralized loan obligations, cross-border future flow securitizations, credit card receivables and auto loan securitizations, lottery receivables securitizations, stranded cost securitizations, structured settlement securitizations, home equity loan securitizations, insurance securitizations, derivatives securitizations, and rating agency

issues and considerations. Other portions of Dolan & Davis (2006) address legal issues in Mexico, the United Kingdom, Ireland, Italy, Germany, Australia, and France. Arnholz & Gainor (2007) focuses on the legal framework pertaining to the public offering and issuance of ABS, but also includes discussions of tax, ERISA and other legal issues, as well as accounting issues. The literature analyzing the benefits of asset securitization is voluminous. See, e.g., Shenker & Colletta (1990-1991), especially at 1383-1405, Rosenthal & Ocampo (1992), Ellis (1998-1999), and Hill (1996). The foregoing, and Schwarcz (2002), provide readable introductions to securitization concepts, structures, and issues. Consider, also, Schwarcz (2003-2004). Although limited to commercial mortgage-backed securitizations, Standard & Poor’s CMBS Rating Criteria provides a comprehensive and detailed presentation of the many issues that must be considered, and resolved, if asset securitization sukūk are to be posited as a backbone of an Islamic capital market. See also Standard & Poor’s: Rating Sukūk (2007) and Standard & Poor’s: Islamic Finance (2008), which contains a summary discussion of rating sukūk at 12-18. Petersen (2006) provides a good overview of a wide range of conventional securitization issues and current European practice in the commercial mortgage-backed securities markets. Examples of the literature pertaining to specific types of securitizations include Dolan & Davis (2006) (with respect to a range of different types of securitizations), Croke (2004-2005) (with respect to different types of project financings), Dolan (1998) (with respect to commercial mortgage loans), Dolan (1999) (with respect to equipment leases), Dolan (1998 – LL) (with respect to lottery winnings and litigation settlement payments), Harrell, Rice & Shearer (1996-1997) (with respect to oil, gas and other natural resource assets), and Salathé (1994) (with respect to hospital and health care receivables).

VOLUME III

SPRING 2009


95


Not all observers acclaim the benefits of securitizations. Consider, for example, Lupica (1998), Carlson (1998), Frost (1998), and Hill (1996). Obviously, subprime mortgage securitizations have received extensive attention in the last year: see, e.g., the sources cited at note 127, infra. 45 Since its inception in 2002, the IFSB had directed its efforts in respect of standardsetting for the Islamic finance industry to the implementation of Basle II, capital adequacy matters, prudential standards, and related matters. Consider, for example, the following standards of the IFSB: Guiding Principles of Risk Management for Institutions (Other Than Insurance Institutions) Offering Only Islamic Financial Services, (December 2005), Capital Adequacy Standard for Institutions (Other Than Insurance Institutions) Offering Only Islamic Financial Services, (December 2005), Guiding Principles on Corporate Governance for Institutions Offering Only Islamic Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual Funds), (December 2006), Exposure Draft No. 5: Guidance on Key Elements in the Supervisory Review Process of Institutions Offering Islamic Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual Funds, (December 2006), and Exposure Draft No. 4: Disclosures to Promote Transparency and Market Discipline for Institutions Offering Islamic Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual Funds), (December 2006). The foregoing IFSB publications are located at http://www.ifsb. org/index.php?ch=4&pg=140. One of the initial reports to the IFSB in respect of capital markets, McMillen (2007 – IFSB), addressed three (of five) matters: securities and capital markets laws; trust concepts in OIC jurisdictions; and enforceability of the Sharīʻah (two other matters, bankruptcy and Sharīʻah boards, were addressed in separate reports).

96


46 The author prepared the report on three of the five categories addressed in the initial reports of the IFSB: see, McMillen (2007 – IFSB). This report addressed (a) securities and capital markets laws; (b) the use of common law trust concepts in sukūk transactions; and (c) enforceability of Sharīʻah principles and precepts in both jurisdictions that incorporate the Sharīʻah in their secular law and jurisdictions that do not so incorporate the Sharīʻah. Two other authors prepared the two other reports, one on the role of Sharīʻah Supervisory Boards in capital markets transactions and the other on bankruptcy issues in these transactions. See also Lahlou & Tanega (2007 – I) and Lahlou & Tanega (2007 – II). And see the two leading English law cases, Beximco (2004) and Musawi (2007). 47 And issuances have included structures that are not entirely acceptable to the Sharīʻah scholars: see the discussion in section 5 of this article regarding the AAOIFI Sukūk Clarification. Issuances are down markedly to the time of this writing in 2008; see, e.g., Martin: Islamic Bonds (2008) and Bloomberg: AAOIFI Decree Cripples Sukūk (2008). 48 See McMillen (2007 – WILJ), McMillen (2006 – CMLJ), McMillen (2006 – CJIL), McMillen (2008), McMillen (2007 – IFSB), DeLorenzo & McMillen (2006), and Lahlou & Tanega (2007 – I) and Lahlou & Tanega (2007 – II). 49 East Cameron Gas Company US$182,000,000 Investment Trust Certificates (Sukuk) (which is described in SukukInsider, Issue 01, available at http://www.securities.com/ doc_pdf?pc=IG&sv=IFIS&doc_id=116285870&au to=1&query=east%3Acameron%3A&db=en_1y_ d&hlc=ar&range=365&sort_by=Date and http:// www.failaka.com/downloads/SukukInsider001.pdf; as a result of a professional engagement on behalf of the sukūk holders, the author is in possession of all documentation pertaining to this issuance). This transaction became involved in a bankruptcy filing by one of the primary parties, East Cameron



Partners, LP, on October 16, 2008, in the United States Bankruptcy Court for the Western District of Louisiana (Lafayette/Opelousas), Bankruptcy Petition Number 08-51207. To the author’s knowledge, this is the first sukūk transaction to become subject to a bankruptcy proceeding. 50 The Tamweel ABS Cl (1) Ltd, a RMBS sukūk, was issued on July 30, 2007, and is described in the Prospectus for Tamweel Residential ABS Cl (1) Ltd, US$210, 000,000 Floating Rate Secured Notes Due 2037, dated 19 July 2007, and the Moody’s Tamweel Report (2007). Moody’s Investors Service expressed no opinion as to the degree of Sharīʻah compliance, and considers Sharīʻah compliance only to the extent that such compliance affects the credit risk of the transaction. For the same reasons noted in connection with securitization sukūk, there have been very few (one?) true conventional asset securitizations from the Middle East. A conventional “CMBS” (commercial mortgage-backed security) achieved provisional ratings in June 2007: UAE CMBS Vehicle No. 1 Limited (“UAE CMBS No. 1”). A description of this CMBS is contained in Moody’s CMBS No. 1 Report (2007). 51 This data is presented in McMillen (2009 – Jaffer) and is analyzed in greater detail in McMillen & Crawford (2008). 52 Source: Zawya Sukuk Monitor, as of August 14, 2008; this is the source for the Figures noted in this section. All references to volume are determined in United States dollars. See also Alvi (2008), which is based upon somewhat different data and indicates that US$111,014 million of sukūk have been issued globally in the comparable (possibly not exactly the same, with data ending as of June 2008) period. The data used in Alvi (2008) indicate US$19,607 million of “sovereign” sukūk issuances in the data period. Various sources

indicate that approximately US$11-20 billion of sukūk were issued in the first three quarters of 2008, which is down markedly from the comparable period in 2007: see Martin: Islamic Bonds (2008), Bloomberg: AAOIFI Decree Cripples Sukūk (2008) and Bloomberg: Sukūk Surge (2007) and the data presented in this section. 53 Given government investment in corporate entities, particularly in the Middle East, it is difficult to definitively ascertain the dividing line between the sovereign and corporate categories. 54 Illustrative of the concentration of these markets, the next closest jurisdiction of issuance is the United Arab Emirates, with 32. 55 At the time of this writing, the author does not have information as to the percentages of sovereign and corporate issuances from different jurisdictions or of the extent to which issuances in the different industrial categories are sovereign issuances. 56 See section 5, which discusses the AAOIFI Sukūk Clarification. 57 This is not to say that every issuance other than the single “ijāra securitization” referenced in Table 2 was a “bond” structure within the contemplation of the AAOIFI Sukūk Clarification: that cannot be determined given the lack of clarity regarding, and the vagueness of, the classification system employed. However, it seems fair to take the general implication that bond structures, offensive and otherwise, are overwhelmingly predominant and that the number of offensive bond structures is likely significant. One report cites the AAOIFI Sharīʻah Board as indicating that 85% or more of the sukūk issuances failed to comply with the AAOIFI Sukūk Standard: see Bloomberg: AAOIFI Decree Cripples Sukūk (2008), National: Sukūk Reckoning (2008), and National: Fitch: Rules Stifling Market (2008). See also McMillen & Crawford (2008) and McMillen (2008 – DJIMIN).

VOLUME III

SPRING 2009


97


58 This article does not address in detail the Sharīʻah principles that are applicable to Islamic finance, including project finance transactions. For summaries of some of those principles, see the sources cited at note 1, supra, and sources cited therein. Suffice it to say that, at the most basic level, the Sharīʻah prohibits investments in, and the conduct of, businesses whose core activities: (a) include manufacture or distribution of alcoholic beverages or pork products for human consumption and, in the case of certain Sharīʻah boards, tobacco and firearms; (b) have a significant involvement in the businesses of gambling, brokerage, interestbased financing or impermissible insurance; (c) include certain types of entertainment elements (particularly pornography); or (d) have impermissible amounts of interest-based indebtedness or interest income (i.e., prohibited business activities). Some Sharīʻah boards interpret the entertainment exclusion more broadly and include essentially all cinema and music because of pornography elements of these industries. Hotels are often included in prohibited business activities because of the presence of alcohol in the bars and minibars. These prohibitions have a fundamental influence on the nature of a Sharīʻah-compliant fund or product and the types of business objectives it may pursue. And, of course, the Sharīʻah prohibits ribā, which will generally be interpreted to mean, in the transactional context, the payment or receipt of interest, the guarantee of an interest-bearing obligation, or the provision of security for an interestbearing obligation. Specific rules in the leasing context relate to the requirement that the lessor of property must maintain the integrity of the leased property. Thus, the lessor may not pass structural maintenance (and correlative obligations such as the maintenance of casualty insurance) to the lessee in a lease (ijāra), which precludes the use of “triple net leases” that are standard in Western project financings. In the area of partnerships and joint ventures, there are numerous principles that address allocation of work, profits and losses as among the partners and joint venturers. For example, as general statements: all distributions of

98


profits and losses must be pro rata; and preferred stock, preferential returns, and fixed or guaranteed returns are not permissible. With respect to principles applicable to muḍāraba arrangements, see section 4.7 of this article, and with respect to those applicable to mushāraka arrangements, see section 4.8 of this article. The Sharīʻah developed in Middle Eastern societies that were heavily focused on trading activities. As a result, the Sharīʻah principles applicable to all types of sales, as well as partnerships and joint ventures, are especially well refined and demarcated. Leasing, in fact, is treated as a type of sale – sale of the usufruct of property. With only limited exceptions, one can sell only tangible assets. Debt cannot be sold above or below par if it does not represent an interest in a defined tangible asset or intellectual property and there are numerous other limitations on the sale of debt quite apart from the preclusive ribā elements. Sales of financial instruments that do not represent an ownership interest in tangible assets or intellectual property are also precluded or strictly limited. Further, one cannot sell property that one does not own. In addition, there are very particular rules addressing delivery, receipt, ownership, allocation of risk, downpayments and virtually all other aspects of sales transactions that must be considered in operating Sharīʻahcompliant businesses. In the view of many Sharīʻah scholars, the Sharīʻah also precludes the provision of guarantees for compensation; a guarantee must be a nonfinancial charitable transaction in the strictest sense. Obviously, these principles significantly affect financing structures. 59 One of the earliest non-real estate transactions of this type was the Equate petrochemical project in Kuwait, which is summarized in Al Omar (2000). 60 Most of the real estate development, construction and acquisition transactions in the United States, Europe and other Western jurisdictions, of which there are many, make use of ijāra, istisna’a-ijāra or “quadratic partnership”



structures that also include conventional debt. See Husain (2002), at 143, McMillen (2000 – FILJ), and McMillen (2000 – THF), for discussions of some of the reasons and some of the earliest transactions. 61 See Majelle: Hooper, at articles 404611, Majelle: Tyser, at 60-90 (articles 404-611); Al-Zuhayli (2003), at 381-434. Standards of the AAOIFI Sharīʻah Board with respect to applicable Sharīʻah principles and precepts. 62 Al-Zuhayli (2003), at 386-88, summarizes the positions of some of the different madhahib. 63 Majelle: Hooper, at articles 466-79; Majelle: Tyser, at 68-70 (articles 466-79); Al-Zuhayli (2003), at 289-409; and AAOIFI Ijāra Standard, at § 5/2. 64 See Majelle : Hooper, at articles 450, 454, 464, and 484-96; Majelle: Tyser, at 66, 68, and 71-72 (articles 450, 454, 464, and 484-96); and AAOIFI Ijāra Standard, at § 5/2. 65 Variable rate leasing arrangements are now widely accepted if properly structured. See McMillen (2000 – FILJ), at 1254 and footnote 100, with respect to a methodology by which periodic rate adjustments are incorporated in a Sharīʻahcompliant ijāra. Benchmark-based variable lease arrangements are expressly authorized in see, e.g., AAOIFI Ijāra Standard, § 5/2/3. See also AlZuhayli (2003), at 386-7. Ijāra transactions prior to the effective date of the see, e.g., AAOIFI Ijāra Standard (i.e., 1 Muharram 1424 H or January 1, 2003) used a “sequential series of leases” concept as the analytical foundation for the variable rate leasing arrangements, and that concept remains embodied in the predominant structures; see, e.g., AAOIFI Ijāra Standard, at § 5/2. The rent may not increase as a result of delays in payment of the rent (see, e.g., AAOIFI Ijāra Standard, at § 6/3) although an “interest” or “late payment” charge

may be imposed if it is donated to charity (see, e.g., AAOIFI Ijāra Standard, at § 6/4). 66 See Majelle: Hooper, at articles 513-21 and Majelle: Tyser, at 75-76 (articles 512-21) (option for defect), and Al-Zuhayli (2003), at 416-7, and AAOIFI Ijāra Standard, at §§ 5/1/5 to 5/1/8. 67 Consider Ijāra Standard.

§

8/8

of

the

AAOIFI

68 In the discussions that follow, capitalized terms that are not otherwise defined are defined by reference to the Figures set forth in the text of this article. 69 The structure is also a base for private equity transactions. In acquisition transactions of different types, it is often used without supplementation by other Sharīʻah-compliant elements. See McMillen (2000 – FILJ), McMillen (2000 – THF), McMillen (2003 – FHF), McMillen (2003 – MEER III), McMillen (2003 – MEER III), and McMillen (2002 – MEER) for more complete descriptions of early versions of this structure. 70 The attendant infusion structure, which is often a fund established in a tax-efficient jurisdiction, is not shown. 71 Frequently, and particularly in transactions into the United States and other jurisdictions allowing for the repayment of loans without withholding or other taxation, the cash contributions are partially pure equity and partially loans. 72 A related issue pertains to payment of rent during the construction period, when the asset has not yet been completed. This is addressed in connection with the Bahrain Financial Harbour Sukūk. For the moment, the discussion assumes away this issue, focusing on fully completed assets.

VOLUME III

SPRING 2009


99


73 This article presents summaries of the main documents and a few of the relevant issues. The specifics of the Lease (Ijāra) and the related documents and relevant structuring issues are discussed in more detail in McMillen (2000 – FILJ), McMillen (2000 – THF), McMillen (2003 – MEER III), McMillen (MEER II), and McMillen (2002 – MEER). The lease of the project assets will include improvements and other “movable” assets. How it addresses land issues varies from transaction to transaction. Customarily, the Lease (Ijāra) will also include either (a) a lease of the land from the Funding Company to the Project Company (if title to the land is held in the Funding Company) or (b) a sublease or license of the land from the Funding Company to the Project Company (where title to the land is held in the Project Company (or a third party) and then leased or licensed to the Funding Company). The latter situation is a lease-leaseback with respect to the land rights. See AAOIFI Ijāra Standard, § 3. 74 As a practical matter, most project financings make use of complex account structures and lock-box structures. In such cases, the Tenants (and Off-takers in a non-real estate project) and the Project Company will pay rent (and amounts due under the Understanding to Purchase and the Understanding to Sell, which are discussed below) into defined accounts, and a range of agreements (that are not here discussed) will direct the application of amounts from each of the accounts to the appropriate party. 75 This assumes that the Funding Company is a disregarded entity or is not to have any income in excess of its expenses, and subject to the various considerations previously referenced. If that assumption is not correct (e.g., in European jurisdictions), the amount of basic rent is increased over the debt service amount.

100


76 The methodology was akin to that used in fractional undivided interest leveraged leases where one lease could not cross default to the others, but it was imperative that all leases defaulted simultaneously (just as it is imperative that the Loan Agreement and the Lease (Ijāra) and related arrangements default simultaneously). 77 As discussed below in the discussion of the Managing Contractor Agreement and the collateral security arrangements, the decision to exercise rights under the Understanding to Purchase is made, directly, indirectly or implicitly, by the Bank rather than the Funding Company, and is given effect by the Funding Company. 78 Consider, for example, the matters in respect of rent readjustments that are described in the text associated with notes 62-65, supra. 79 But, see, note 72, supra. Partial purchases (the characterization for Sharīʻah purposes) are problematic under, and often directly conflict with, secular tax, asset transfer and collateral security and recordation laws and regulations, and require careful structuring. Most often, a partial purchase will entail no immediate transfer of title in respect of the underlying assets. 80 But, see, note 72, supra. The conflict between the partial purchase, for Sharīʻah purposes, and secular tax, asset transfer and collateral security and recordation laws and regulations is not necessarily as great under the Understanding to Sell as it is with respect to the Understanding to Purchase. In certain circumstances where the Understanding to Sell is exercised, there is usually an immediate transfer of title in respect of the underlying assets (the transfer is often to a third party). This is the case, for example, where individual condominium units or houses or lots are sold to third parties before the financing is retired in full. If there is no third-party sale of assets, the conflict may be as great as it is with respect to the Understanding to Purchase. The conflict will persist where there is no immediate asset transfer.



81 See, Majelle: Hooper, at articles 51321 and Majelle: Tyser, at 75-76 (articles 512-21) (option for defect), and Al-Zuhayli (2003), at 416-7, and AAOIFI Ijāra Standard, at §§ 5/1/5 to 5/1/8. 82 The Bank should not and will not make decisions or determinations with respect to (a) the Understanding to Sell or (b) the Managing Contractor Agreement itself. The Understanding to Sell allows the Project Company to purchase all or a portion of the project in the enumerated circumstances. Functionally, it is the equivalent of the voluntary prepayment provisions of the Loan Agreement, and it is in fact constructed to mirror those provisions. In a conventional loan, the right of the borrower to pay the loan in accordance with the provisions of the loan agreement is self-stating and self-evident as unencumbered except by those terms. Achieving the same risk allocated positions for the parties in the Islamic financing means the right should be similarly stated and effected and not artificially modified by the fact that a Sharīʻah structure has been implemented. The terms of the Managing Contractor Agreement are selfeffecting and address the making of decisions and determinations by the respective parties in the full continuum of situations from no default through incipient defaults to events of default to final foreclosure. 83 There may be a limited group of “excepted payments” and “excepted rights” that are not so pledged. Those exceptions are the subject of precise and detailed negotiations with the financing parties. The exceptions are mirrored (with structural adjustments) in the security agreements between the Funding Company and the Bank. The “excepted payments” and, particularly, “excepted rights” provisions will be somewhat different than they are in conventional transactions to acknowledge different aspects of the Sharīʻah structure, particularly the decision making provisions of the Managing Contractor Agreement.

84 The exact terms of these grants of security interests (the term “pledge” is used generally, and imprecisely, in this article, in deference to its relationship to the Arabic term “rahn”, which means both “mortgage” and “pledge”) are tailored in many details and are subject to the nature of the assets, including such matters as restrictions contained in the underlying contracts and agreements and the precise nature of, and limitations on, any granted rights. Certain “excepted payments” and “excepted rights”, as negotiated, are carved out of the assignments to effect the foregoing and other factors, and are also mirrored (with structural adjustments) in the security package provided by the Project Company to the Funding Company. 85

See, also, note 82, supra.

86 An important and fundamental observation (worthy of much more discussion than is provided in this article) is that the remedies provisions of the Lease (Ijāra) and the various security documents should be quite clear that the Lease (Ijāra), the Understanding to Sell and the Managing Contractor Agreement should in no event terminate prior to completion of all foreclosure remedies (even though a lease might be terminable at an earlier default point in other types of lease financings) because the Lease (Ijāra) is really the evidence of ownership by the Project Company and the only tie the Project Company has to its asset. Recall that raw legal title, but not tax or other ownership, is placed in the Funding Company for Sharīʻah reasons (to allow the use of the ijāra). 87 Of course, mandatory account and lockbox structures are designed to minimize disruption of disharmonies such as these. The operation of secular laws in respect of mortgage or deed of trust remedies (which may wipe out the ijāra) and subordination provisions may also reduce or eliminate some such disharmonies. However, the foregoing may not be total palliatives and the Bank may be precluded from removing the Project Company (the real party in interest) from

VOLUME III

SPRING 2009


101


the transaction, particularly under the laws of OIC jurisdictions. This is a most unsatisfactory result from the vantage of the Bank. And it undermines one of the two key elements of the definition of conventional project financing. 88 To the author’s knowledge, this structure was first used in the United States in 2000. The original structure has since been simplified and modified so as to substantially reduce transactional costs. The development and structure of the initial United States transactions are discussed in detail in McMillen (2000 – FILJ), at 1237-60, McMillen (2004 – AM), at 214-23, McMillen (2003 – FHF), McMillen (2003 – MEER III), McMillen (2003 – MEER II), McMillen (2002 – MEER), and McMillen (2000 – MEED). 89 The term “istisna’a” (‘istisna`) (rather than, for example, “bina”) is commonly used for construction contracts in modern Islamic finance, although a more literal usage of the term “istisna’a” would be limited to manufacturing contracts. For a summary of some of the salient principles of the istisna’a as enunciated by the AAOIFI Sharīʻah Board for modern Islamic finance transactions, see AAOIFI Istisna’a Standard. 90 Majelle: Hooper, at articles 338-92; Majelle: Tyser, at 49-57 (articles 338-92), Al-Zuhayli (2003), at 165-231, and AAOIFI Istisna’a Standard, at § 2/2/1. Of course, the type of asset must itself be permissible under the Sharīʻah. Thus, it may not fall within any of the categories of prohibited business activities. 91 There are a variety of Sharīʻah principles applicable to the specification of type, quality and quantity. The purpose of these principles is to avoid unknown elements (jahala) and deceit or uncertainty (gharar). See, e.g., article 390 of the Majelle: Hooper, Majelle: Tyser, at 57 (article 390), and AAOIFI Istisna’a Standard, at §§ 2/2, 3/2 and 3/3.

102


92 See, e.g., AAOIFI Istisna’a Standard, at § 3/1. 93 Such a back-to-back arrangement is customarily referred to as an “istisna’a – parallel istisna’a” transaction and is discussed below. The terms of the istisna’a and the parallel istisna’a are usually identical, except for the amount and timing of payment. This, of course, is a long-accepted purely Sharīʻah-compliant transaction. See AAOIFI Istisna’a Standard. 94 This is an important principle in considering the structuring of change orders. Consider AAOIFI Istisna’a Standard, at § 4. 95 See note 97, infra, as to the need for the istisna’a. 96 The presence of the istisna’a in the structure illustrated in Figure 7 is a bit anomalous given that the Funding Company is already party to a noncompliant interest-bearing loan. Its presence was, and often remains, a preference of the Sharīʻah board involved in the initial transactions. 97 Strict construction of the Sharīʻah , particularly in the first years of this century, precluded leasing of project assets until the assets were constructed to a point where they had “economic sufficiency”. In transactions subject to that construction, an Agreement to Lease is also executed. In such a case, the Lease (Ijāra) is also executed at the inception (commencement of construction) and is operative with respect to all provisions except the rent payment provisions. The Agreement to Lease has the effect of activating the rent provisions of the Lease (Ijāra) when the project as the requisite degree of economic sufficiency so as to allow for the payment of rent. Recent transactions, such as the Bahrain Financial Harbour Sukūk discussed in section 6 of this article, have included a “forward lease” concept to address this issue in a different manner. The rents



payable under the forward ijāra may be refundable (at least to some extent) if there are difficulties in achieving completion and rent adjustments may be necessitated by change orders. Consider, also, AAOIFI Ijāra Standard, § 3/5. 98

But, see, note 72, supra.

99 See, e.g., Al Omar (2000) and Duncan, Desai & Rieger (2004), referencing early singletranche transactions. 100 The Equate petrochemical transaction, discussed in Al Omar (2000), is one such example. The Islamic component of the transaction itself consisted of two tranches. 101 Consider, for example, the issue of late payment interest and similar costs and penalties. In the Equate petrochemical project, it was recognized that “if payment is not duly made on time the credit standing deteriorates and hence a higher spread may be charged on subsequent facility period to compensate for the implied higher risk.” Al Omar (2000), at 263. In that transaction, loss of profit to the provider of the Sharīʻah-compliant tranches as a result of late or delayed payment was addressed by building that element of lost profit into subsequent rent payments. 102 Such was the case in the Equate petrochemical project, where the assets relating to the Sharīʻah-compliant ijāra were assigned to the common collateral pool and were made available to both the conventional and the Sharīʻah-compliant financiers. However, those assets were only allowed to secure principal due to the conventional financiers, not interest due to such financiers. See Al Omar (2000), at 262. Conversely, insurance on the entirety of the project was made available to all financiers, including those providing the Sharīʻahcompliant tranches. See, Al Omar (2000), at 263 and 264.

103 Collateral security structures are not shown. Conceptually, they are not significantly different from that illustrated in Figure 6 or from those used in other Sharīʻah-compliant or conventional interest-based financings (although it will secure a different type of obligation). The Banks will have direct rights to the construction arrangements by virtue of being a party signatory to the istisna’a and the parallel istisna’a. They will have a mortgage and security interest over the project and over the cash flows, accounts and personal property of the Project Company. There may also be environmental indemnities, construction and completion guarantees and other similar collateral security as is customary in project financings. The collateral security package will secure the obligations of the original mustasne’ (the Developer) to make payments and perform its obligations under the istisna’a agreement. As to istisna’a – parallel istisna’a arrangements, see AAOIFI Istisna’a Standard, particularly § 7. 104 The drafting of the Parallel Istisna’a Agreement will then incorporate funding conditions and similar “draw request” provisions similar to those in a conventional financing. 105

Consider AAOIFI Istisn’a Standard, § 6.

106 The financing could include construction financing. In such a scenario, istisna’a arrangements could be introduced into the structure for construction of the project. For simplicity, this example assumes that construction is complete and that the financing being discussed is a takeout of the construction financing and introduction of long-term financing. 107 In some transactions of this type, the investors in the Project Company will have contributed the land to the Project Company as an equity contribution, the value of the land will have appreciated during the development

VOLUME III

SPRING 2009


103


and construction period, and the investors in the Project Company will desire to realize on the increased value of the land. In such a case, title to the land may be transferred to the Funding Company despite the incurrence of transfer taxes. The example described in the Figure assumes that title is retained in the Project Company, and not transferred to the Funding Company, in order to illustrate the Site Lease (lease and leaseback) issues that are frequently encountered in transactions of this type. 108 More complex structures may be used to secure effective use of tax benefits (as where the Project Company is the intended tax owner of the project). See section 6 of this article which discusses the Bahrain Financial Harbour Sukūk and some of its primary structural features, such as investment of the proceeds of the sukūk issuance pending periodic application to construction payments. 109 With respect to the Sharīʻah principles applicable to the muḍāraba, see Majelle: Hooper, at articles 1404-30, Majelle: Tyser, at 233-36 (articles 1404-30), Al-Zuhayli (2003), at 497-521, and AAOIFI Muḍāraba Standard. See, also, Usmani (1999 – ALQ), at 212-17. The muḍāraba is quite similar to the Roman commend and may have been derived from the early Islamic version, the qirâd. See Udovitch (1969 – OC). 110 The debt might include, for example, debt owed by a third party to the rabb ul-maal, or it might be debt owed by the muḍārib to the rabb ul-maal. Use of debt capital is not discussed in this article. 111 The Sharīʻah principles applicable to bad debts, valuation of debts, write-offs of bad debts, allocation of surplus upon collection of a debt formerly written off, and ultimate attribution of bad debts (to the rabb ul-maal) are not discussed in this article but will be a significant factor in drafting the documentation for a muḍāraba transaction.

104


112 These principles find application in many Sharīʻah-compliant financings with non-Muslim Western investors where partnership and operating agreements include “hurdles” and preferences with varying rates and allocations between and among the joint venturers. 113 Under AAOIFI Muḍāraba Standard, many allocations of this type render the contract void; see, e.g., § 8/5. 114 See, e.g., Fadeel (2007), at 98. The application of this principle is difficult in practice as clawbacks that are effected some time (say, years, or in a different tax year) after a distribution raise significant tax (and other) issues and may be inconsistent with global market practices. This matter was clarified to some considerable extent in the sukūk context in the AAOIFI Sukūk Clarification: see the discussion in section 5 of this article. 115 Consider the reports of the muḍāraba agreements of Abbas Bin Abdul Muttaleb as an example: His agreements stipulated, with respect to travel, that the muḍārib would not be permitted to “travel by sea, nor through valleys, nor by a riding animal” and violation would make the muḍārib liable for repayment of the entire capital. 116 Consider, for example, AAOIFI Muḍāraba Standard, at § 9/3. 117 While many, if not most, covenant requirements will be the same in a conventional and a Sharīʻah-compliant transaction, there are many important differences as a result of applicable Sharīʻah principles. For example, a muḍāraba agreement would not be able to require return of capital or a specified return or amount of profit within a specified period. 118 Majelle: Hooper, at articles 1045-1403, Majelle: Tyser et al., at 166-232 (articles 10451403), Al-Zuhayli (2003), at 447-81, and AAOIFI Mushāraka Standard set forth various Sharīʻah principles applicable to the sharikāt (mushāraka).



The mushāraka and the various types of sharikāt are discussed in Usmani (1999 – ALQ), at 20312. The general rules in respect of partnership profit and loss under Hanafī jurisprudence are summarized in Udovitch (1969 – CT), at 5: “To summarize: According to Hanafī law, liability in partnership corresponds to investment in all cases; profit follows any ratio stipulated in the contract, except in the case of credit partnership where it, too, follows the investment.” Udovitch’s discussion of the credit partnerships, in Udovitch (1969 – CT), is particularly interesting. He discusses various long-accepted credit devices, such as al-bay’ bitta’-khīr (deferred payment for goods sold), salam (advances for future delivery), hawāla (transfer of debt, novation), and suftaja (letters of credit). He also speaks to the credit partnerships accepted by the Hanafī madhab in which the capital of the partnership consists of only credit, not of cash or merchandise. These partnerships are the sharikāt al-mafāls (partnership of the penniless) and sharikāt al-wujūh (partnership of those with good reputations). This “diminishing mushāraka” structure is one of the two primary structures used for residential home financing, particularly in the United States and the United Kingdom (the other being the ijāra). 119 This structure was used in a 1997-98 financing in the Saudi Arabian electric sector. See, McMillen (2000 – FILJ), at 1232-1236. Applicable Sharīʻah principles with respect to a sharikat are set forth in the Majelle: Hooper, at articles 10451403, Majelle: Tyser, at 166-232 (articles 10451403), and Al-Zuhayli (2003), at 447-81, and the AAOIFI Mushāraka Standard expressly treats of mushāraka variations. In many transactions, there is no separate Murābaha Agreement and the purchase provisions are embodied in the Mushāraka Agreement. The Figures in this article (and textual discussion) incorporate a Murābaha Agreement to enhance conceptual clarity. 120 See, e.g., AAOIFI Mushāraka Standard, § 3/1/3.

121 Contrast the classical formulation on this point with respect to a mudāraba in which the property is deemed owned by the rabb ul-maal. 122 See section 5 of this article; and consider the pricing discussion in that section 5 in connection with the hissa pricing discussion in the next paragraph of this section. The discussion in this section focuses on the timing of execution of the Murābaha Agreements. If the provisions for purchase and sale of the hissas are incorporated in the Mushāraka Agreement (and, thus, there are no Murābaha Agreements, the discussion presented in this article will be extrapolated to agreements pertaining to, and pricing of, the hissa sale and purchase arrangements). 123 The Sharīʻah scholars also have differing views on what constitutes a valid “milestone” that may give rise to a permissible purchase of hissas. Some scholars require completion of the entire project; others are at the other end of the spectrum and allow discretionary groupings of construction activities. 124 Although the AAOIFI Sukūk Clarification does not expressly address these precise issues in the context here discussed, the reasoning of the AAOIFI Sukūk Clarification is clearly pertinent. See the discussion in section 5 of this article. The position cited (in the next sentence) as the majority position should be considered in this context. 125 See the text of the AAOIFI Sukūk Clarification. This article uses “March 2008” as the issuance date because the AAOIFI Sukūk Clarification was posted on the AAOIFI web site on or about March 8, 2008. The last meeting at which the AAOIFI Sukūk Clarification was considered, before its issuance, was February 13-14, 2008 (8 Safar 1429 AH). See also Usmani (2007), written by Justice Mohammed Taqi Usmani, the Chairman of the AAOIFI Sharīʻah Board, which examined the Sharīʻah compliance of sukūk issuances over the past decade. This paper provides insight into the reasoning behind the AAOIFI Sukūk Clarification.

VOLUME III

SPRING 2009


105


See Bloomberg: AAOIFI Usmani (2008), which is said to be based upon emailed responses from Justice Usmani for further explication of the application of the AAOIFI Sukūk Clarification and National: Bonds Treated As Equity (2008) also quoting Justice Usmani and noting the appropriate differentiation of sukūk al-ijāra with respect to fixed returns. 126 See Bloomberg: AAOIFI Decree Cripples Sukūk (2008), which notes that sukūk issuances have fallen by 50% in 2008 and sukūk prices have dropped by 1.51% (citing HSBC Holdings Plc index data). This article presents no analysis of economic factors that may have affected demand for sukūk. The article was repeated, with local additions, in National: Sukūk Reckoning (2008). See also National: Fitch: Rules Stifling Market (2008). See also National: Lack of Standards Dampens (2008) and Martin: Islamic Bonds (2008). McMillen & Crawford (2008) and some of the sources cited in Martin: Islamic Bonds (2008) note that, as yet, there has been no substantiation of the cause and effect relationship between the AAOIFI Sukūk Clarification and market behavior and suggest that further study should be undertaken of all possible causative factors, particularly in the context of the current global market conditions (where, for example, all securitization and all debt issuances are substantially diminished). See also McMillen (2008 – DJIMIN) which takes the position that the AAOIFI Sukūk Clarification is just that, a “clarification” of the AAOIFI Sukūk Standard and its underlying principles and does not introduce “new rules” with respect to sukūk standards. Standard & Poor’s: Sukūk Report (2008) indicates that the sukūk market continues to grow, albeit more slowly, and that non-Muslim issuers are a factor in that growth; it also implies that larger market factors have influenced the slowdown in the sukūk markets and that the AAOIFI Sukūk Clarification is having an effect on the types of sukūk being issued (i.e., more sukūk al-ijāra). To provide market context, consider a representative sampling of articles on market developments at

106


the time of this writing is the following, all from two days, one at the beginning and one at the end or an eight-day period: Wall Street Journal: Crisis on Wall Street (2008); Wall Street Journal: Ultimatum Sparked End (2008); Wall Street Journal: $70 Billion Loan Program (2008); NY Times: Banks Shaken, Market Falters (2008); NY Times: European Shares Fall (2008); Economist: Nightmare on Wall Street (2008); FT: Wall Street Crisis (2008); FT: ECB and Bank of England Funds Injection (2008); NY Times: Mortgage Finance Rescue (2008); NY Times: Mortgage Giants Takeover (2008); Wall Street Journal: Mortgage Giants Seized (2008); Bloomberg: Fannie-Freddie Takeover (2008); Economist: Suffering a Seizure (2008); Bloomberg: Fannie-Freddie Credit-Default Swaps (2008); Wall Street Journal: Mounting Woes (2008); Wall Street Journal: No Longer Preferred (2008); Wall Street Journal: Fannie-Freddie Plan (2008); NY Times: Crisis Grew, Options Shrank (2008); NY Times: Fannie, Freddie Dilemma (2008); NY Times: Crises Public Aid (2008); NY Times: Bailout Losses and Gains (2008); Wall Street Journal: Fannie-Freddie Winners-Losers (2008); NY Times: Fannie-Freddie and You (2008); Wall Street Journal: U.S. – Bigger Role (2008); US Treasury: Paulson Statement (2008); US Housing Finance Agency: Lockart Statement (2008); US Federal Reserve: Bernanke Statement (2008); US Housing Finance Agency: Fact Sheet – Conservatorship (2008); US Treasury: Fact Sheet – Senior Preferred Stock Purchases; US Treasury: Fact Sheet – GSE MBS Purchases (2008); and US Treasury: Fact Sheet – GSE Credit Facility. Causative factors were presaged, and, subsequently, have been more extensively discussed, including debt elements and aspects of securitizations and securitization-related factors, have been discussed in articles such as (note, in particular, the publication dates): Al Jazeera: How Financial Bubble Burst (2008); Barron’s: Credit Crunch (2008); Business Week: Hedge Funds Implode (2007); Economist: Alchemists of Finance (2007); Economist: All Fall Down (2008); Economist: All’s Fair (2008); Economist: America’s Vulnerable



Economy (2007); Economist: Black Boxes (2007); Economist: Capitalism at Bay (2008); Economist: Fate Worse Than Debt (2008); Economist: Game is Up (2007); Economist: History of Modern Finance (2008); Economist: Housing Hangover (2007); Economist: Nuclear Winter? (2008); Economist: Spreading the Muck (2007); Einhorn: Private Profits and Socialized Risk (2008); Guardian: Haunted by History (2008); Grant: Confidence Game (2008); Kornfield Subprime Testimony (2007); Mian & Sufi (2008); New Yorker: Trust Crunch (2008); NPR: Financial Giants Falling (2008); NY Times: 36 Hours (2008); NY Times: Agency ’04 Rule (2008); NY Times: Banks Hold Bailout Money (2008); NY Times: Bernanke’s Education (2008); NY Times: British Central Bank Criticizes Cash Infusions (2007); NY Times: Building Flawed Dreams (2008); NY Times: End of Wall Street Era (2008); NY Times: Fannie Tipping Point (2008); NY Times: Greenspan Legacy (2008); NY Times: Housing Busts (2007); NY Times: Reports Suggest Broader Mortgage Losses (2007); NY Times: Wall Street Lied to Computers (2008); NY Times: Insurer Crisis (2008); NY Times: Mortgage Crisis Plea (2007); NY Times: Tax Break and Housing Bubble (2008); Peterson Subprime Testimony (2007); Sherr Subprime Testimony (2007); Spiegel: Broken Pact (2008); Spiegel: Köhler Interview (2008); Spiegel: Yunus Interview (2008); Time: End of Prosperity? (2008); Time: Great Depression 2 (2008); Time: Stiglitz (2008); Wall Street Journal: Capitalism’s New Course (2008); Wall Street Journal: Mortgage Fable (2008); and Wall Street Journal: Worst Crisis Since ‘30s (2008). Further noteworthy articles include: FT: Big Freeze (2008); NY Times: Bonuses Not Profits (2008); NY Times: Citigroup Saw No Red Flags (2008); NY Times: Debt Watchdogs (2008); NY Times: Deregulator Looks Back (2008); NY Times: Global Gamble (2008); NY Times: Struggling to Keep UP; NY Times: Thundering Herd (2008); and NY Times: Wall Street Champion Reaps Benefits (2008). The massive global crisis, initiated in the United States, has lead to a reconsideration of US-UK

capitalism and regulatory roles. Exemplary articles on these aspects of the crisis and its impact include: Al Jazeera: End of US Capitalism? (2008); Economist: Big Bear (2008); Economist: Fortune Frowned (2008); Economist: Is There A Future? (2008); Economist: State Capitalism (2008); Guardian: FSA Regulation (2008); Guardian: Turner Interview (2008); NY Times: How Free Markets? (2008); NY Times: Perils of Government in Banking (2008); and Spiegel: Broken Pact (2008). Articles focusing on the Middle East have presented conflicting views: see, e.g., MEED: Gulf Defies Slowdown (2008), MEED: Islamic Banks Exploit Misfortunes (2008), MEED: Saudi and UAE Rescue Packages (2008), Wall Street Journal: Dubai’s Debt (2008), and Wall Street Journal: Gulf Country Measures (2008). See also MEED Special Report: Saudi Arabia Family Firms (2008) and MEED Special Report: Industrial (2008). 127 See Usmani (2007). Notably, some of the repurchase obligations contained in contemporary sukūk also would be sufficient to disallow “true sale” characterization under a bankruptcy and/or tax analysis in jurisdictions such as the United States. Consider Malaysia as an example of a jurisdiction that recognizes both bond and securitization structures. Malaysia distinguishes, as a matter of law and regulation, between “bond” structures and “ABS” structures. See, the Guidelines on the Offering of Islamic Securities, 26 July 2004, of the Securities Commission (the English language version is located at http://www.sc.com.my/eng/ html/resources/guidelines/Guidelines-Islamic%2 0Securities260704.pdf. There are also various “Practice Notes” of the Securities Commission pertaining to Islamic securities (and most other laws, regulations and guidelines) at http://www. sc.com.my under the tab “Guidelines, Codes and Practice Notes”. Of particular interest in light of the desire of Malaysia to expand its role as an international Islamic finance hub are: Practice Note 1 Issued Pursuant to the Guidelines on the

VOLUME III

SPRING 2009


107


Offering of Islamic Securities, Revised Edition: 15 September 2005, Application of the Guidelines on the Offering of Islamic Securities to the Issue of, Offer for Subscription or Purchase, or Invitation to Subscribe for or Purchase, Foreign Currency Denominated Islamic Securities, issued by the Securities Commission and located at http://www. sc.com.my/eng/html/resources/guidelines/PN1IS.pdf; Practice Note 1A Issued Pursuant to the Guidelines on the Offering of Islamic Securities, Date Issued: 27 March 2007, Issuance of Foreign Currency-Denominated Islamic Securities or Sukuk by Qualified Issuers, issued by the Securities Commission and located at http:// www.sc.com.my/eng/html/resources/guidelines/ bondmkt/SC_PN1A(IS%20GLs)_270307.pdf; and Joint Information Note on the Issuance of Foreign Currency-Denominated Bonds and Sukuk in Malaysia, 27 March 2007, issued jointly by the Securities Commission and Bank Negara Malaysia, Central Bank of Malaysia, and located at http:// www.sc.com.my/eng/html/resources/guidelines/ bondmkt/JointInfoNote_foreign%20currency%20 bonds.pdf. See also, Malaysian Capital Markets According to Islamic Jurisprudence, at http://www. sc.com.my/eng/html/icm/MsianICM.pdf. See Selamat (2007) for an overview of development of the Islamic Securities Guidelines and the regulation of Islamic securities in the context of the securities regulatory system of Malaysia. In particular, it notes how “Islamic securities” were decoupled from the “debenture” definition to be regulated as “securities” but not regulated within the “unit trust” framework. The result is that sukūk are subject to a two-tier regulatory format: at the first tier, sukūk are subject to the same regulatory requirements as all bonds; at the second tier are Shari’ah-specific requirements applicable to sukūk as Islamic securities. (For an informative history of the progression here referenced, see the consultative papers and related minutes and other materials located at the web site of Suruhanjaya Sekuriti, Securities Commission of Malaysia, at http://www.sc.com.my/eng/html/resources/ discussion_present2003.html#ICP2003; such

108


a review is a useful educational exercise in the process of reconstituting capital markets regulation to adapt to evolution of the Islamic capital markets). This presentation also includes a summary of the Malaysian sukūk and bond market offerings before and after the issuance of the Islamic Securities Guidelines in 2004. The English language version of the Guidelines on the Offering of Asset-Backed Securities, 26 July 2004, of the Suruhanjaya Sekuriti Securities Commission is located at http:// www.sc.com.my/eng/html/resources/guidelines/ guidelines_assetbacked260704.pdf. See also the related “Practice Notes”. See, also, Report on Asset Securitisation in Malaysia, at http:// www.sc.com.my/eng/html/resources/Asset%20 Securitisation%20Report%20Nov%202002%20 Ver%202.pdf. The web site of the Securities Commission has a section on Islamic capital markets in Malaysia, located at http://www.sc.com.my. This site contains links to a broad range of information pertaining to the Islamic capital markets, including lists of approved and registered Sharīʻah advisors. Information is also referenced in Anwar (2005). Expansion of the Malaysian Islamic finance markets from a domestic perspective to a global perspective is highlighted in Anwar (2007). 128 Consider, in this regard, the listing in Table 2 to the effect that 112 issuances have included murābaha elements. It is not possible, without further information, to determine the number of transactions in which no asset was present. A preliminary analysis of the data from the last decade lead the author to believe that the murābaha structure is used with the greatest frequency in Malaysian issuances; see McMillen & Crawford (2008). 129 This matter was not specifically considered in the AAOIFI Sukūk Clarification as issued. However, it was raised by Justice Usmani in his preparatory paper, Usmani (2007). His points are of particular relevance to investment fund structures incorporating muḍārabah, mushārakah and sharikāt concepts.



130 The AAOIFI Sukūk Clarification seems to refer to the outstanding principal amount of the sukūk as the “nominal” amount. See, e.g., AAOIFI Sukūk Clarification, clauses Fourth and Fifth. 131

AAOIFI Sukūk Clarificaton, clause First.

132

AAOIFI Sukūk Clarification, clause First.

133 In most cases, a transfer on the books of the originator, and a true sale, will be desired. 134 Usmani (2007) implies a negative answer; the AAOIFI Sukūk Clarification is silent on this point. 135

AAOIFI Sukūk Clarification, clause Second.

136 The practices in the sukūk field since 2003 are discussed in Usmani (2007). Consider, also, the information presented in section 3.3 with respect to the overwhelming predominance of bond structures in the sukūk markets over the last decade. 137

AAOIFI Sukūk Clarification, clause Third.

138


139


140 AAOIFI Sukūk Fourth and Fifth. 141

Clarification,

clauses

AAOIFI Sukūk Clarification, clause Fourth.

142 AAOIFI Sukūk Clarification, clause Fifth. Presumably, the term “nominal value” here means “stated value”, which, based upon the financial structuring, would likely be equal to the remaining outstanding principal amount of the sukūk from time to time. Interestingly, and as would be expected, most sukūk issuances since the release of the AAOIFI Sukūk Clarification have been sukūk al-ijāra: see Standard & Poor’s: Sukūk Report (2008).

143 AAOIFI Sukūk Clarification, clause Sixth. The closing paragraph (which is not a numerically designated clause) of the AAOIFI Sukūk Clarification reads: “Furthermore, the Shari’ah Board advises Islamic Financial Institutions to decrease their involvements in debt-related operations and to increase true partnerships based on profit and loss sharing in order to achieve the objectives of the Shari’ah.” See note 126, supra, the sources referenced therein, and the associated text, with respect to surmise regarding the market effects of the AAOIFI Sukūk Clarification. 144 See, McMillen: Sukūk and Secondary Markets, supra note 1; and see Offering Circular, BMA International Sukuk Company (SPC), US$250,000,000 Trust Certificates due 2009, dated 7th June 2004. 145 As noted above (notes 56 and 81), a number of issues arise during the early stages of construction with respect to rent payments on the ijāra where physical assets have not yet been constructed to the point of economic sufficiency. In the istisna’a - ijāra structure, this issue is addressed through the Agreement to Lease. The advance rent under a forward lease speaks to this issue, but also raises other Sharīʻah issues, most notably whether the sukūk may trade above or below par value prior to construction of the physical assets to the state of required economic sufficiency. Many, if not most, Sharīʻah scholars take the position that trading of the sukūk certificates is not permissible prior to that time. This issue was addressed in the Bahrain Financial Harbour Sukūk offering by noting the issue and leaving the Sharīʻah determination to the individual certificate holders.

VOLUME III

SPRING 2009


109

Fulbright & Jaworski L.L.P.: Global Infrastructure Group

Fulbright & Jaworski L.L.P.: Global Infrastructure Group Attorneys in Fulbright & Jaworski’s Global Infrastructure Group focus on infrastructure as an asset class with an emphasis on industry sector expertise, including transportation, energy, water, communications, healthcare and education. The group brings together an interdisciplinary team of professionals with extensive successful experience in supporting the planning, development, acquisition, financing, refinancing, management, operation and sale of a wide variety of infrastructure assets across the United States and around the world. Following is the contact information for the leadership council of Fulbright’s Global Infrastructure Group:

Jeffrey A. Blount

+852 2283 1008 [email protected] http://www.fulbright.com/jblount Beijing, Hong Kong

Joy R. Bode

+1 512 536 4511 [email protected] http://www.fulbright.com/jbode Austin

John C. Boehm, Jr.

+971 4 329 5677 ext 21 [email protected] http://www.fulbright.com/jboehm Dubai, Riyadh

Brian Bradshaw

+1 713 651 8227 [email protected] http://www.fulbright.com/bbradshaw Houston

110


Henry G. Burnett

+1 212 318 3324 [email protected] http://www.fulbright.com/hburnett New York

Robert D. Dransfield

+1 214 855 8068 [email protected] http://www.fulbright.com/rdransfield Dallas

David A. Gillespie

+1 212 318 3073 [email protected] http://www.fulbright.com/dgillespie New York

Jeffrey H. Goodman

+1 202 662 4730 [email protected] http://www.fulbright.com/jgoodman Washington, D.C.

Gregg W. Harris

+1 202 662 4694 [email protected] http://www.fulbright.com/gharris Washington, D.C.

Andrew Hart

+44 0 20 7832 3660 [email protected] http://www.fulbright.com/ahart London

Victor Hsu

+1 213 892 9326 [email protected] http://www.fulbright.com/vhsu Los Angeles


Fulbright & Jaworski L.L.P.: Global Infrastructure Group (continued)

Don Hunt

+1 213 892 9316 [email protected] http://www.fulbright.com/mirvin Los Angeles

Michael P. Irvin

+1 713 651 3705 [email protected] http://www.fulbright.com/mirvin Houston, London

W. Jeffrey Kuhn

+1 210 270 7131 [email protected] http://www.fulbright.com/wkuhn San Antonio

L. Poe Leggette

+1 303 801 2746 [email protected] http://www.fulbright.com/pleggette Denver

MICHAEL J.T. McMILLEN

+1 212 318 3382 + 971 4 293 2222 [email protected] http://fulbright.com/mmcmillen New York, Dubai, Riyadh, London

Girard Miller

+1 612 321 2252 [email protected] http://www.fulbright.com/gmiller Minneapolis

Joel H. Moser

Co-Chair of Global Infrastructure Group +1 212 318 3312 [email protected] http://www.fulbright.com/jmoser New York

SteveN B. Pfeiffer

Chair of Fulbright Executive Committee +1 202 662 4585 [email protected] http://www.fulbright.com/spfeiffer Washington, D.C., Houston, London

David Silver

+971 4 293 2105 [email protected] http://www.fulbright.com/dsilver Dubai, Riyadh

Neil Thomas

+1 713 651 3613 [email protected] http://www.fulbright.com/nthomas Houston

James D. Tussing

Co-Chair of Global Infrastructure Group +1 212 318 3024 [email protected] http://www.fulbright.com/jtussing New York

Fredric A. Weber

+1 713 651 3628 [email protected] http://www.fulbright.com/fweber Houston

VOLUME III

SPRING 2009


111

TM

01/09 2.5m mo