Credit Support

Credit Support

Traditionally, the area of credit support for financings in Saudi Arabia has been problematic for lenders and other financiers. Strict interpretations of Sharia law requirements for valid security to be created has led to considerable uncertainty as to the enforceability of many common credit support structures in international financings. For example, it was not certain that security could be validly taken over receivables or fluctuating bank accounts. Further, even if a valid pledge was created, the priority created by registering the security at the Saudi Arabian General Investment Authority’s Unified Lien Centre was also unclear.

In the area of real estate security, further issues arose because of the reluctance of notaries to register mortgages over real estate in favour of banks due to concerns with Sharia compliance. This situation led to unwieldy ifragh structures, with the transfer of the actual title in the relevant real estate to a subsidiary of the bank illustrating the common method of financiers taking security over real estate.

Z&Co.’s experts on Sharia law, led by Monaji Zamakhchary, H.E. Abdullatif Alharthi and Sarah Gonem, are on the front lines of navigating how these issues affect future financing (including real estate development) deals in the Kingdom of Saudi Arabia.

Vision 2030 specifically refers to the need to give a wide range of sectors in the economy improved access to financing options, in particular for small- and medium-sized enterprises (“SMEs”). This objective has been reflected in a range of legislative developments designed to improve the ability of both individuals and corporations to obtain finance. In the areas of credit support, this legislation includes:

  • Moveable Assets Security Law, relating to the creation of a wide range of security (including security assignments) over an extensive list of assets. This law also provides for a new register with a clear order of priority for registered security.
  • Commercial Pledge Law, confirming the ability to create valid pledges over a wide range of assets, including future assets and inventory.
  • Real Estate Mortgage Law, providing for a registered mortgage to be created over real estate and combined with a circular from the Saudi Arabian Monetary Authority (SAMA, the Kingdom of Saudi Arabia’s bank regulator), which requires financiers to use registered mortgages rather than ifragh structures to registered mortgages.

Z&Co., working with Linklaters, has experience drafting, negotiating, and perfecting the full range of possible credit support in the Kingdom of Saudi Arabia. This includes:

  • Promissory notes;
  • Guarantees;
  • Pledges over a range of assets, including receivables;
  • Real estate mortgages; and
  • Security assignments.