IndexIntroductionSharikat Mahassa Murabaha FinancingThe First Diminishing Musharaka of the Middle EastIntroductionMichael JT McMillen is a lawyer by profession. He currently serves Curtis, a law firm, as a partner. His legal career is focused on project financing. He is also the CEO of a law firm called River Stone Capital. In addition to this, he has taught Islamic finance to law and economics majors at the University of Pennsylvania. He was the first to introduce the idea of ​​Islamic finance to the American Bar Association and this earned him the title of founding president. . He was also appointed prime minister twice. Euromoney awarded him the recognition of being one of the 19 best pioneers of modern Islamic finance. He has also been awarded twice as best legal advisor in the field of Islamic finance by Euromoney. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay Because his work was primarily concentrated in the Middle East, and particularly Saudi Arabia, he was awarded the Sheikh Mohammad bin Rashid al Makhtoum Prize. This is to commemorate his efforts in introducing the first diminishing Musharaka and the first limited recourse project financing in Saudi Arabia. As for McMillen's academic background, he studied business administration at the University of Wisconsin. He then earned a law degree from the same university and graduated in 1976. He furthered his studies by studying medicine at Albert Einstein College. Throughout his academic career, he has received recognition for outstanding performance. Despite his medical studies, he limited his professional experience to the areas of law. He has been practicing law since 1976. He is primarily known for his work in the field of Islamic finance with a focus on project financing, Sharia compliance and the structuring of Sharia compliant financial products. Over the course of four decades, McMillen's legal practice has focused on project financing for manufacturing businesses, particularly in the energy, oil and gas industries. He is credited with leading the first limited recourse financing project in Saudi Arabia's history and this has earned him numerous awards and titles such as the "Deal of the Year Award". While working for an electric utility company in the Kingdom of Saudi Arabia, he designed the first decreasing musharaka arrangement. McMillen took note of the excess liquidity in the Middle East and realized that financial institutions lending a helping hand to the Middle East not only be able to diversify in terms of identifying a new market but also establish long-term relationships term and to earn goodwill. Michael's main approach, as a lawyer, to drafting security documents is to start with the Shariah claim terms first and then make changes to English law. This approach ensures that credit guarantees do not lose their effectiveness and produce financing at lower rates. Saudi Arabia has always had difficulty obtaining funding for large-scale projects because the most commonly used financial products were not Shariah compliant. This was hindering their economic growth. The problem with mortgages and pledges was that they were not registered, i.e. it was not known which creditor had the right to the property. The right, in case of non-compliance, will be determined by the court through litigation. Therefore, the financing was mainly done through local banks and this did notprovided the ideal asset allocation from a diversification perspective. This also meant limited options for home financing. Mortgage law is inconsistent with Saudi Arabia's Shariah laws. Therefore, the need arose to create Rahn outside of the mortgage law. Rahn says that when a tax is created, it can be pari passu, where everyone has the same right to the good. or it can have levels, where the first charge has a right of first refusal or priority on the asset. McMillen was legal counsel on Saudi Chevron's petrochemical financing project. This was an opportunity for Michael to implement the first limited recourse financing project in the history of Saudi Arabia and very quickly it was 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 credit institutions. Major lenders included Chase Investment Bank Limited as lead banker along with Gulf International Bank and Industrial Bank of Japan. The financing structure included multi-tranche loans that were secured against the future cash flows of the project and created a charge on all present and future assets of the project and the Project Company. Agents were also appointed, one to deal with assets located abroad and the other to deal with assets within the country. To make the financial product Shariah compliant, investors need to have some form of ownership over the physical asset. However, giving up actual possession of assets involves significant risks, so attempts to register assets in the past have been unsuccessful. The Saudi government, therefore, believes that third-party redress is the most effective option available. In the case of the Chevron plant, a limited recourse option was included, giving investors the right to some assets but not all assets. Due to the decreased risk of credit default, the cost of financing fell and profitability would be higher. The Arab economy was in a growth phase and therefore local and international banks took this as an opportunity to diversify their portfolios and increase their profitability. Bankers and legal advisors had to interpret a Shariah-compliant security document, as Shariah is the applicable law in the Kingdom of Saudi Arabia, as well as the terms that satisfied the lenders and raised the required amount of funds. The general approach my banks took in the past was that they would start with American or British law and start making changes to it to make it Shariah compliant. However, the final document by this point had lost its effectiveness in raising funds. Therefore, Michael and his team reverse-engineered the act. They started the act with Shariah and modified it to suit American and British laws. This has proven to be more effective as UK law offers more flexibility. To prepare a line of defense and protect real estate in the event of insolvency, cash was placed as first line collateral. Cash and other liquid/current assets arise from operations and sales of assets. Non-current assets have been identified as final collateral. The money was deposited at a bank in a third offshore country, in Chevron's case, it was in England to insure creditors. To understand the different claims on an asset (marhun), Michael's team began their research with the same basic asset, used in the jurisdiction of Saudi Arabia, a camel. They then extended the search to other assetssuch as intellectual property, current and non-current assets. The concept of adl (trustee) is known to both Western law and Shariah. The person is decided by mutual agreement between the parties involved. Since Chevron had both onshore and offshore assets, two ahl/trustees were appointed, each dealing with the assets in their respective jurisdiction. An issue arose over the applicable law that would be used to monitor and enforce the security agreements. It was agreed to use English law for offshore assets and Arabic law for onshore assets. As a result, two security documents were born. The second question arose regarding the appointment of the managing director/agent and the power of attorney. While Arab law is revocable at the will of one of the parties to the contract but the powers of the Client prevail over those of the others. This puts the bank at risk and therefore it was decided to deposit both the marhun's documents and the goods 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 central to a Shariah-compliant mortgage-based transaction. Therefore a pari passu tariff was created. A Bill of Possession was created for each ADL and then a joint agreement was drawn up bringing together the two individual Bills of Possession. The Chevron case and the Rhan Adl structure are now used as a standard agreement and have opened new avenues for Saudi-based companies. to run out for loans. In the past, businesses relied heavily on personal and corporate guarantees. The use of Rahn Adl is now being extended to home financing and is encouraging banks to engage with loans for longer tenors. Sharikat Mahassa Murabaha Financing Through this project Michael used his legal experience to find a sharia acceptable way to debt finance an electric utility project in Saudi Arabia. The project essentially consisted of expanding the power plant's current energy production capacity and creating a transmission system. The legal advisor used sharikat mahassa, which is essentially an Islamic way of financing a joint venture. To ensure that the third party does not have access to or has limited recourse to the assets, it is imperative that the third party does not have knowledge 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 beginning of the contract. For the murabaha to work, the bank could not resell the asset to the utility company until the bank obtained ownership of the asset and made payment to the EPC. The EPC had to remain in the dark about the parties involved in the joint venture, i.e. the banks. In sharikat, banks or investors hold a share or hissa (share) in the joint venture. They identify certain milestones during the construction of the project and purchase shares, based on their loan share, from the EPC. By not disclosing their identity to the EPC, the banks were able to limit their losses. The main issue that arose centered on Shariah. Some interpretations of sharia state that limiting the liability of banks by not disclosing their identity will render the murabaha null and void. However, the Arabic interpretation of Shariah allowed this. If it had not been allowed, at the stage in which the bank holds ownership of the asset, the bank would be exposed to a largerisk of price fluctuation and Murabaha does not allow the bank to change the price or profit once the agreement is signed. another possible disagreement with the Shariah Board was over the identification of milestones and the sale of assets in parts. 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 repayment plan has been designed in such a way that during the first two years, the part corresponding to the construction of the plant, no reimbursements will be made. By the end of the second year, the plant was expected to be commercially operational and capable of repaying the loan. During these five years, sixty consecutive payments were to be made. The Middle East's First Declining Musharaka Michael McMillen, while working in Saudi Arabia, introduced decreasing Musharaka financing for the first time in Saudi Arabia. The project was focused on Saudi Arabia's electricity sector, and was subsequently modified and extended for application in other sectors. His views were appreciated in Islamic countries and became popular in many Islamic economies. His further work and research on housing finance establishes the founding pillars of modern Islamic financing contracts. All of Oman has adopted Michael's designed structure of decreasing musharaka for home financing. The main features that distinguish a decreasing Musharaka contract are as follows: The bank and the customer jointly own the property The bank gives its share to the customer and the bank receives the rent payments in return The customer has the obligation to buy back these shares from the bank as time passes. The rate at which units are repurchased varies from contract to contract. As more units are purchased, the risk is transferred from the bank to the customer. Therefore, the rent is adjusted. According to this agreement, the first step involves the purchase of the asset by the Bank Customer. The property is jointly owned (Shirkat ul Mulk) by the customer and the bank. The bank takes care of the financial part of the agreement. Multiple banks may be involved in the financing. This type of transaction is necessary for a decreasing Musharaka to take place and is permitted according to Islamic Shariah. Once the property has been acquired jointly in the name of the customer and the bank, the bank will then proceed to rent the entire property to the customer and charge rent on the entire property. Some scholars have raised concerns about selling the property to third parties. However, jurists agree that as long as the undivided property has been sold, this is acceptable. This is to ensure that the possession aspect of the asset is satisfied. In the third stage, the Client begins to promptly purchase the undivided units of the property from the Bank and thus the Client's overall share in the ownership of the property increases as time passes. Typically the price of the undivided shares is decided by mutual agreement and the payments for the purchases are made according to an amortization plan (used by the financier i.e. by the Bank). Every month the Customer makes a payment to the Bank which includes a part of the principal sum as well as the rent of the property as the Customer resides there during the duration of the contract. The amortization schedule is almost identical to the typical amortization schedule of a conventional 10- or 15-year mortgage loan. However, the terms are decided under the supervision of renowned Muslim jurists and the Fatwas of jurists belonging to different sects are.