Lending & Taking Security

In KSA it’s essential that taking in consideration in financing dealings to be complying with Shari’ah for instance the prohibited interest (Riba) and any uncertainty (gharar), which includes any speculative activities, options, futures, economic loss or liquidated damages, are strictly prohibited care needs to be taken in documenting any finance arrangement where enforcement may be required in KSA.

Security

Security can be taken over land, receivables, intellectual property, shares and contractual rights, subject to various conditions. Guarantees and indemnities are also available and enforceable, again subject to some conditions.

The most common form of security in KSA is a pledge. Pledges are regulated under the Commercial Mortgage Law (“CML”). For pledges to be effective they have to be notarized. Notary, the competent authority will not notaries pledges in respect of real estate for banks or financiers on the presumption that the pledge secures an interest obligation.

This has limited the availability of housing finance to Islamic finance products such as the Ijara and Murabaha. Under both these products the financiers to take security over real estate and effectively execute the mortgage by court supervision

Security over Receivables

Assignments of rights require the consent of the assignor to be effective between the parties.

However it doubtful whether they create any rights against liquidators for amounts actually received.

In respect of bank accounts there is a further issue that under the Shari’ah for an assignment to be effective, the asset, in this case the deposit, must be capable of being sold. under the Sharia’h money cannot be sold and accordingly this throws doubt on the enforceability of an assignment of a deposit by way of security in KSA

a further difficulty that arises from a purported assignment of deposit or pledge over deposit is that neither can apply to fluctuating accounts as the Sharia’h prohibits taking security over future assets, or uncertainty as to which assets, the pledge or assignment, applies. However set off’s is recognized under the Sharia’h and can be effectively used by banks against deposits.

Share Pledges

Security can be created over joint stock company shares by way of a pledge regulated under the CML

The pledge can be registered with the Centre for Depositing Securities pursuant to the CML and its implementing regulations. Registration of the pledge gives the pledge priority over third parties from the time of registration.

Priorities

With the exception of joint stock company shares and some intellectual property there are no registries available in KSA to create real estate registers and a system of priorities for mortgages if passed. Priority will apply from the time of registration.

Enforcement of securities can only be carried out by application to, and under the supervision of, the courts. In commercial matters the Board of Grievances would have jurisdiction other than in matters covered by competent authorities , such as in banking dispute matters where the SAMA Banking Disputes Resolution Committee has jurisdiction.

From the commencement of action to completion of enforcement can take up to three years depending on the courts’ the complexity of the matter and exercise of the court’s discretion, which is broad. Quasi judicial committees are usually more expedient. The court can order an attachment and sale of the secured assets, generally by auction.