Table of ContentsIntroductionSharikat Mahassa Murabaha Financing the Middle East's First Diminishing MuharakaIntroductionMichael JT McMillen is a lawyer by profession. He currently works at the Curtis Law Firm, as an associate. His legal career focuses on project financing. He is also the managing director of a law firm called River Stone Capital. In addition to this, he taught Islamic finance to law and business students at the University of Pennsylvania. He was the first to introduce the idea of ​​Islamic finance to the American Bar Association, earning him the title of founding president. . He was also appointed chairman of the board of directors twice. Euromoney awarded him the distinction among the 19 best pioneers of modern Islamic finance. He has also been awarded twice by Euromoney as best legal advisor in the field of Islamic finance. Say no to plagiarism. Get a tailor-made essay on “Why Violent Video Games Should Not Be Banned”? Get the original essay Since his work was primarily focused on the Middle East, and particularly in Saudi Arabia, he was awarded the Sheikh Mohammad bin Rashid al Makhtoum Prize. This was to commemorate his efforts to introduce the first waning Musharakah and the first limited recourse project financing in Saudi Arabia. Regarding McMillen's academic background, he studied business administration at the University of Wisconsin. He then pursued law studies at the same university and graduated in 1976. He continued his education by studying medicine at Albert Einstein College. Throughout his academic career, he received accolades for his outstanding performance. Despite his medical studies, he limits his professional experience to the field of law. He has been practicing law since 1976. He is primarily known for his work in the area of ​​Islamic finance, with a focus on project financing, Shariah compliance and structuring Shariah-compliant financial products. Over the course of forty years, McMillen's law practice has focused on project financing for manufacturing companies, particularly in the energy and oil and gas industries. He is recognized for leading the first limited recourse financing project in Saudi Arabia's history, earning him numerous awards and titles such as the Deal of the Year Award. While working for an electricity company in the Kingdom of Saudi Arabia, he designed the first descending musharakah agreement. McMillen took note of the excess liquidity in the Middle East and realized that financial institutions lending a hand in the Middle East would not only be able to diversify in terms of identifying a new market but also to establish a long-term relationship and gain goodwill. Michael's main approach, as a lawyer, to drafting security documents is to start with the terms of the Sharia claim and then make adjustments to English law. This approach ensures that credit guarantees do not lose their effectiveness and allow financing at lower rates. Saudi Arabia has historically struggled to obtain funds for large-scale projects because the most commonly used financial products were not Sharia-compliant. This hindered their economic growth. The problem with mortgages and pledges was that they were not registered, that is, it was not known which lender had a right to the asset. The right, in the event of default, will be determined by thecourt by litigation. Therefore, financing was mainly provided by local banks, which was not an ideal asset allocation from a diversification perspective. It also meant limited options for housing financing. The mortgage law is inconsistent with Saudi Arabia's Sharia laws. It therefore became necessary to create Rahn outside of mortgage law. Rahn states that when a charge is created, it can either be a pari passu, where everyone has an equal right to the asset. or it may have tiers, where the first charge has first right or priority over the asset. McMillen was part of the legal counsel for the Saudi Chevron petrochemical financing project. This was the opportunity for Michael to carry out the first limited recourse financing project in the history of Saudi Arabia and was very quickly adopted by the entire Kingdom of Saudi Arabia and most of the Middle East. . The main participants were the project company Saudi Chevron. Petrochemical Company and Lenders. Major lenders included Chase Investment Bank Limited as lead banker, alongside Gulf International Bank and Industrial Bank of Japan. The financing structure included multi-tranche loans secured by future cash flows from the project and creating a charge on all present and future assets of the project and the project company. Agents were also appointed, one to look after assets located outside the country and the other for assets inside the country. In order to make the financing product Shariah compliant, it is necessary for investors to have some form of ownership over the physical asset. However, giving actual possession of assets poses a lot of risk and attempts to register assets in the past have failed. The Saudi government therefore believes that recourse through a third party is the most effective option available. In the case of the Chevron plant, a limited recourse option was included, which entitles investors to some but not all assets. Due to the reduced risk of credit default, the cost of financing has decreased and profitability has been higher. The Arab economy was in a growth phase and local and international banks took advantage of this to diversify their portfolios and increase their profitability. Bankers and legal advisors had to interpret a Sharia compliant security document, since Sharia is the governing law in the Kingdom of Saudi Arabia, in addition to the conditions satisfying the lenders and raising the required amount of funds. The general approach my banks have taken in the past has been to start with US or UK law and make adjustments to make it Sharia compliant. However, by then the final document had lost its effectiveness in raising funds. Therefore, Michael and his team reverse engineered the act. They started the act with Sharia law and made adjustments to it to satisfy American and British laws. This has proven more effective because UK law provides greater flexibility. To prepare a line of defense and protect real estate assets, in the event of insolvency, cash has been set as the first line collateral. Cash and other liquid/current assets arise from operations and the sale of merchandise. Non-current assets have been identified as ultimate collateral. The money was placed in a bank in an offshore third country, in the case of Chevron it was in England to insure creditors. In order to understand the different claims on an asset (marhun), Michael's teambegan its research with the same basic asset, used in the jurisdiction of Saudi Arabia, a camel. They then expanded their search to other assets such as intellectual property, current and non-current assets. The concept of adl (administrator) is known in both Western law and Sharia law. The person is mutually decided by the parties involved. As Chevron owned both onshore and onshore assets, two ahls/trustees were each appointed to look after the assets in their respective jurisdictions. An issue arose regarding the applicable law that would be used to monitor and enforce security agreements. It was agreed that English law would be used for offshore assets and Arab law would be used for onshore assets. As a result, two security documents emerged. The second question concerns the appointment of the adl/agent and the power of attorney. Even though Arab laws are revocable at the discretion of either party to the agreement, contract but the powers of the principal prevail over those of the others. This puts the bank at risk and so it was decided that the marhun documents and assets would be placed with the adl, but the adl could not sell them without the permission of the principal. The Saudi government was not in favor of registering the mortgage in the name of banks as it assumes that payments in this regard are based on interest. The idea was that possession was at the heart of a Shariah-compliant mortgage transaction. This is why a pari passu tax was created. A deed of possession was created for each Adl, then a common agreement was drawn up by bringing together the two individual deeds of possession. The Chevron deal and the Rhan Adl structure are now used as a standard agreement and have opened new avenues for companies based in the Arab world. to exhaust for loans. In the past, businesses relied heavily on personal and professional guarantees. The use of Rahn Adl is now extended to real estate financing and encourages banks to engage in loans over longer durations. Sharikat Mahassa Murabaha Financing Through this project, Michael used his legal experience to find a Shariah-acceptable means of debt financing an electric utility project in Saudi Arabia. The project mainly aimed to expand the current electricity production capacity of the plant and to set up a transmission system. The legal advisor used sharikat mahasa, which is essentially an Islamic method of financing joint ventures. In order to ensure that the third party has no or limited recourse to the assets, it is imperative that the third party is unaware of the identity of the contracting parties. There were essentially five parties: the utility company, three banks and the engineering, procurement and construction (EPC) company. Under a murabaha agreement, the bank buys the asset, for its client, from a third party and resells it at a profit. The profit is declared at the start of the contract. For the Murabaha to work, the bank could not sell the asset back to the utility company until it had obtained ownership of the asset and made payment to the EPC. The EPC was not required to know the parties to the joint venture, i.e. the banks. In sharikat, banks or investors own a part or hissa (share) in the joint venture. They identify certain stages of project construction and purchase shares, based on their share of the loan, from the EPC. By not revealing their identity to the EPC, the banks were able to limit their losses. The major problem that resulted centered on Sharia law. Some interpretations of Sharia say that limitingthe banks' liability in not disclosing their identity would void the murabaha. However, the Arabic interpretation of Sharia law permitted this. If this had not been permitted, at the stage where the bank has ownership of the asset, it is exposed to a significant risk of price fluctuation and the Murabaha does not allow the bank to change the price or its profits once once the agreement is signed. Another possible disagreement with the Sharia Council concerned the identification of key milestones and the partial sale of assets. While some boards agreed with this practice, others said it was advisable to sell the asset once it was fully completed. However, this exposed banks to immeasurable risks. The reimbursement system has been designed in such a way that during the first two years, the part corresponding to the construction of the factory, no reimbursement will be made. By the end of the second year, the factory was expected to be commercially operational and able to repay its loan. During these five years, sixty consecutive payments were to be made. The Middle East's First Diminishing Musharakah Michael McMillen, while working in Saudi Arabia, first introduced diminishing Musharakah funding in Saudi Arabia. The project focused on the Saudi power sector and was later modified and expanded for application in other sectors. His views were valued in Islamic countries and became popular in many Islamic economies. His subsequent work and research on housing construction financing laid the founding pillars of modern Islamic financing contracts. All of Oman has adopted the diminishing musharaka structure designed by Michael for housing finance. The main features that distinguish a diminishing musharakah contract are: The bank and the customer jointly own the property. The bank gives its share to the customer and the bank receives the rental payments in return. The customer has the obligation to repurchase these shares from the bank over time. The unit redemption rate varies from one contract to another. As more units are purchased, the risk is transferred from the bank to the customer. Therefore, the rent is adjusted. Under such an agreement, the first step involves the purchase of the asset by the Bank Client. The property belongs jointly (Shirkat ul Mulk) to the customer and the bank. The bank assumes the financing part of the agreement. Several banks may be involved in the financing. This type of transaction is necessary for a diminishing Musharakah to take place and is permitted in accordance with Islamic Sharia law. Once the property has been acquired jointly in the name of the customer and the bank, the bank will then proceed to lease the entire property to the customer and charge rent on the entire property. Some researchers have expressed concerns about selling the property to a third party. However, legal experts agree that as long as the undivided property has been sold, this is acceptable. This is to ensure that the ownership aspect of the asset is satisfied. In the third stage, the customer starts purchasing the undivided units of the property from the bank timely and hence the overall share of the customer in the ownership of the property increases. over time. Generally, prices for undivided units are decided by mutual agreement and payments for purchases are made according to an amortization schedule (used by the financier, i.e. the bank). Each month, a payment is made to the Bank by the Client which includes part of the principal amount as well as the rent of the property.