A Blending Of East And West

Monday, May 3, 2010 - 01:00

Editor: Mr. Ali, as managing partner of King & Spalding's offices in Saudi Arabia, Dubai and Abu Dhabi and deputy global head of the firm's award winning Islamic Finance practice group, please describe your practice.

Ali: My practice places heavy emphasis on advising Middle Eastern ultra high-net-worth individuals, investment banks and private equity firms on structuring their investments on a Shari'ah compliant basis in the MENA region (predominately in the GCC (Gulf Cooperation Council) as well as in Europe and the United States. The investments are usually either private equity or real estate investments. Where there is leverage in the financing, the debt usually would be structured on a Shari'ah compliant basis, not a conventional loan.

I started my practice with King & Spalding in 1999 in the New York office where I was solely advising Middle Eastern clients who were making investments in the United States. Then I moved to London at the request of the firm and my practice group along with five other K&S lawyers opened the London office at the end of 2002. I continued to work with the same set of clients but focused on advising them on making similar investments throughout Western Europe, later Eastern Europe, Russia, and the CIS region. I relocated to Dubai in 2007 to help establish our Middle East offices, and since then started advising clients on private equity and real estate investments in the Middle East, Asia and Europe. Because of the strength of our team in New York led by my partner and mentor, Isam Salah, who is the global head of our practice group, I tend to now focus on advising Middle Eastern clients on European and Asian investments as opposed to the U.S.

The majority of our practice today starts with setting up a fund on behalf of either a private equity client or an investment bank. We handle the structuring of the fund, the fund documentation, and then after the fund is set up and successfully placed, customarily in the Middle East, we then represent the fund on its investment strategy - whether it is a real estate or private equity fund.

Editor: Your legal education was at Liverpool University with an LLM from Boston University. Did you study Shari'ah law at either of these institutions?

Ali: I had conventional legal training. I went to Liverpool University School of Law, chose not to qualify in the UK, and went to Boston University where I took an LLM, specializing in cross-border lending and finance. I qualified in New York and started my career as a conventional finance lawyer. While I was working on a project in Kuwait between '94 and '97, one of the financing tranches was Shari'ah compliant. The partner with whom I was working asked me to look into how the the Shari'ah compliant tranche would impact the conventional tranches and how the intercreditor arrangements would be affected. I suddenly discovered that there was this whole new industry that was in its infancy in which few Western lawyers could claim expertise. This deal had the first ever Shari'ah compliant tranche in a non-recourse project financing! I was intrigued and decided to focus on the Islamic finance industry and make it my specialty. I also had a leg up because I am bilingual.

This actually coincided very nicely with what was happening at King & Spalding. Isam Salah had started doing some work on behalf of Middle Eastern clients in the United States. He was looking to expand that expertise within the firm and form a group dedicated to this practice, so he recruited me.

Editor: How do you distinguish yourself from other Islamic finance lawyers?

Ali: I'm probably one of a very few New York-qualified finance lawyers who are bilingual and have practiced an equal number of years in the United States, the Middle East and Europe and done cross-border lending, along with a heavy dose of structuring Shari'ah compliant financings in all parts of the world - the U.S., Europe, the UK, France, Germany, the Netherlands, Poland, Sweden, Czech Republic, Turkey, Russia, Kazakhstan, as well as throughout the Middle East in Saudi Arabia, Dubai, Abu Dhabi, Bahrain, Kuwait and various parts of Asia like Cambodia, China and India.

Editor: How do lease financings, for instance, differ under Shari'ah law from our conventional system of law?

Ali: Leasing lends itself very well to Islamic Shari'ah because it is an asset- based instrument. How is a Shari'ah compliant lease different from a leverage lease? There are very, very subtle differences. As with any leverage lease, basically a lessee is trying to finance the acquisition of an asset through a lease with an option to buy later. Under Islamic Shari'ah, a lease with an option to purchase, known as an "Ijara wa-iqtina," cannot be a triple net lease; you cannot pass to the lessee in the lease document itself all of the expenses or ownership attributes of the lessor. For example, under a conventional triple net lease the lessee is required to perform structural and operational maintenance, insure the leased asset, and perform other attributes of ownership since he is the tenant in possession of the property. The lessee pays rent and at the end of the lease he has the option to buy the asset, having amortized the purchase price through the rental payments. In a Shari'ah compliant lease the lessor has to retain those ownership attributes. He must provide structural maintenance, retain risk of total destruction, maintain insurance against these risks. So that is the stark difference between a conventional lease and a Shari'ah compliant lease. Through other structuring we can get to the same end point as with a conventional leverage lease. There is nothing to prevent the lessor from contracting out to a third party (even if that third party happens to be the lessee, though not in its capacity as lessee) some of those attributes that a conventional lessor would have otherwise disposed of with the lease - like hiring somebody to acquire insurance, hiring somebody to perform the structural maintenance, etc.

Editor: How does a mortgage differ under Shari'ah law? Ali: The concept of mortgage is recognized under Islamic Shari'ah since you can pledge an asset. It is a question of what you are securing this asset for - if you are pledging it to secure a conventional interest bearing loan, qthat is prohibited because you can't make money off of money. If you are creating this mortgage as a security for a Shari'ah compliant obligation, such as a deferred payment for which you have pledged an asset, it is allowed. It just cannot function as security for a loan of money. In an Islamic mortgage transaction, instead of loaning the buyer money to purchase an item, a bank might buy the item itself and re-sell it to the buyer at a profit, while allowing the buyer to pay the purchase price in installments.

Editor: Is it customary for lawyers in Muslim countries to practice in both areas of law? How useful is this knowledge in terms of dealing with transactions between parties in the West and Middle East?

Ali: No, it is not customary for lawyers in Muslim countries to practice or be Islamic finance or investment specialist. It is definitely a specialty. You are either an Islamic finance lawyer or not. However, most Shari'ah compliant financings have a conventional aspect because we're doing these deals with banks in the West. The bank is actually booking a loan to a special purpose vehicle (SPV) and the SPV uses the proceeds drawn from the loan to act as a creditor on a Shari'ah compliant basis to a Shari'ah compliant borrower/investor.

I would say that you cannot be an Islamic finance lawyer if you are not a conventional finance lawyer who is very, very comfortable with conventional Western finance instruments. This is because the terms of the Shari'ah compliant financing will depend on the terms of the conventional financing

Editor: Do you have two sets of documents? Are they cross-referenced?

Ali: Yes, we do have two sets of documents. However, they are completely separate; there is usually the conventional loan and security documents between a conventional bank and an SPV holding title to the asset, and then there is the Shari'ah compliant lease and related documents between the SPV and the Shari'ah compliant entity. The two sets of documents are almost a back to back financing. However, there is no cross default between the two.

Editor: In such transactions is there an early agreement as to what system of laws shall prevail?

Ali: The documents are governed by the relevant law of the jurisdiction in which the property is located. If outside the United States, the majority of the transactions that we work on are governed by English law. Security documents are governed by the law of the jurisdiction where the property is located. All of the documents on the Shari'ah side would be compliant as per the determination of the Shari'ah board of the Shari'ah compliant investor. Typically, a fatwa (religious opinion) is issued, stating that the structure and the documentation are Shari'ah compliant. The principles of Islamic Shari'ah or (Shari'ah law as it is sometimes incorrectly referred to) should not be referenced in the governing law clause. These transactions should be governed by the law of a sovereign country, not the principals of Islamic Shari'ah. The compliance issue should be handled by the Shari'ah compliant investor through the fatwa process.

Editor: As a resident of Dubai you have witnessed a recent near collapse of Dubai World, endangering the financial viability of the Emirate. Fortunately, rescue funds were made available and the most recent information is that the Emirate's restructuring may set it on a viable course for the future. What are your views as to what effects the restructuring will bring about?

Ali: I think that the recent plan that was announced a month ago has been well received by the international banks and the region in general. While it is much better than the worst case scenario that people feared, it remains to be seen if it will be approved. It definitely has boosted the morale in the United Arab Emirates and the region as a whole. Obviously, a restructuring that would be done in an orderly and consensual fashion with the blessing and involvement of the banks is better than the alternative.

Editor: What legal terms are needed in financing documents to mitigate risks in financings in the Middle East?

Ali: Special attention is required when drafting the security documents, which need to be customized for each country. For example Saudi Arabia, the largest market in the GCC, still does not have a mortgage law; there is now a draft in circulation but we don't know if it will be enacted. Until recently the UAE did not have a land registry where you could determine with certainty who owns the land. Furthermore, it is difficult, if not impossible, to perfect a pledge over the shares of a limited liability company in all the GCC countries. The bottom line - a lender needs to understand the quality of its security package and whether or not it will be enforceable in the particular jurisdiction.

Editor: What is your long-term outlook for the economies of the Middle East?

Ali: I'm very bullish about the Middle East in general, but specifically the GCC. Obviously it is an oil-driven economy. While Dubai doesn't depend on oil, it is the financial center in the Middle East and always benefits from the economic growth in the region. Most would agree that the oil price will not dip below a certain level, which will produce a healthy surplus for most of these countries. The growth in the population in some of these countries, especially Saudi Arabia, dictates that a number of infrastructure projects be undertaken. The downturn will make Dubai in the long-term stronger and even a better place to do business because the inflation that was rampant last year and the year before literally affected the ability of a lot of companies to do business in the Middle East through Dubai. Now it's back to reality with operational costs lower, making it once again an attractive destination for business as a place to cover the Middle East as well as a link between East and West.

Please email the interviewee at jali@kslaw.com with question about this interview.