Rahn Concepts in Saudi Arabia: Formalization and a Registration and Prioritization System

Abstract

The inability to register mortgage liens and other security interests in Saudi Arabia has served as an impediment to economic expansion by, among other things, rendering project financing alternatives unavailable, enhancing the reluctance of foreign banks and financial institutions to provide financing in Saudi Arabia, and precluding local banks and financial institutions from providing home ownership financing. Mortgage and pledge (rahn) arrangements exist under Islamic Shari`ah, which is the paramount law of the land in Saudi Arabia and is enforced in Saudi Arabian courts. Sophisticated modern rahn structures were developed only in the late 1990s, when the first limited recourse project financing was effected in Saudi Arabia. Those structures are cumbersome and expensive, and, as a general statement, have been applied only in large commercial and industrial transactions. After many years of consideration, Saudi Arabia is now taking the first steps toward adoption and implementation of a collateral security regime that embodies registration of mortgage and pledge interests and a system of lien priorities applicable to real estate and certain movable assets. Draft legislation has been prepared, and approved by the Shura Council. It is likely that the essential substantive elements of that legislation, when finally adopted as law, will be interpreted and enforced by courts applying the Shari`ah. Thus, the legislation will have to embody rahn principles as interpreted by the Hanbalī madhhab (school of Islamic jurisprudence; plural: madhahib), which is the predominant madhhab in Saudi Arabia. This paper analyzes the proposed recordation and prioritization legislation in terms of classical rahn principles. The conclusions of the analysis are that, despite the laudable progress, the regime needs greater internal consistency as to applicable rahn principles, the scope of the legislation should be expanded to cover a broader range of rahn concepts, the scope of the regime, in terms of asset and lien coverage, should be expanded and clarified, and most of the provisions of the legislation need more detailed elucidation.

Keywords: Rahn, Collateral Security, Mortgage, Pledge, Security Interest, Lien, Priority, Islamic Finance, Islamic Banking, Finance, Saudi Arabia, Shari`Ah

JEL Classification: E61, E62, F02, F34, G15, G21, K11