Overview
Islamic finance forms differ in legal structure from conventional financing. Murabaha rests on selling a commodity for known profit, while ijara rests on leasing an asset, and each form needs documentation reflecting its actual legal nature, not just a Sharia label applied to a conventional structure.
Any Islamic finance structure is subject to approval by the financing entity's Sharia board, and legal documents need drafting that accounts for this approval's requirements alongside general Saudi regulatory requirements.
Regulatory Basis
These transactions fall under general contract provisions in Saudi law, with consideration for compliance with Sharia standards set by the financing or issuing entity's Sharia board.
How We Structure These Transactions
We begin by determining the most suitable Islamic finance form for the company's need, murabaha, ijara, musharaka, or another form, based on the nature of the asset or purpose of the financing.
We review the draft structure with the financing entity's Sharia board to confirm their approval before finalizing drafting the final documents.
Who Needs This Service
A company preferring Sharia-compliant financing that needs legal structuring precisely reflecting this compliance, not just renaming a conventional structure.
A company planning to issue sukuk that needs legal structuring compliant with both Sharia and Saudi regulations.
We notice that some companies requesting Islamic finance structuring retain documents drafted in a conventional financing style with only the terminology changed, which risks the structure being rejected by the Sharia board on review if the actual documentation doesn't reflect the genuine nature of the Sharia transaction, such as an actual transfer of commodity ownership in a murabaha rather than merely a theoretical reference to that transfer.
Additional Considerations
This work connects with the general framework under our banking and finance law service, with an added layer of Sharia review on top of general regulatory requirements.
For companies planning sukuk issuances, this connects with our capital markets and securities service.
Common Questions
What's the legal difference between murabaha and conventional financing?
Murabaha rests on selling a commodity for known profit rather than lending an amount with interest, a fundamental difference in the transaction's legal structure, not just a different name.
Do you review Sharia compliance yourselves or coordinate with a Sharia board?
We coordinate with the financing or issuing entity's Sharia board, since final Sharia approval remains the responsibility of that board rather than the lawyer.