Islamic Project Finance in Saudi Arabia: Regulatory and Legal Challenges

The study set out to explore the concept of Islamic Project Finance (IPF) and to examine its main legal and regulatory challenges in Saudi Arabia (KSA). Having as a primary objective the development and improvement of IPF in the project finance market in KSA, the thesis consists of a theoretical, conceptual study of Islamic project finance, before examining the current performance of IFIs in project finance, and eventually identifying the most prominent legal and regulatory challenges of IPF. The theoretical part, which spreads in the first three chapters, examines the concept of conventional project finance and how close it is to the principle and philosophy of Islamic finance. It is argued that the project finance mechanism is the most suitable financial tool for the objectives of Islamic finance. It is established that not only both mechanisms share similar underlying philosophies in different aspects, for instance the risk-sharing and profit generation methods, but also, in terms of principle, none of the rules of Islamic finance would be breached or violated by project finance, and most of its rules could be easily adapted. In the examination of the current performance of IPF and its regulatory and legal challenges in KSA, this study argues that the absence of sound regulation and standardisation for the Islamic finance industry has been having a detrimental impact on the efficiency and productivity of Islamic finance in the project finance market. The legal limbo the industry has found itself into not only creates a number of serious challenges, including sharia-compliance, inconsistency among SSBs, and sharia governance over IFI products in the event of dispute, but also hinders any ambition to operate in the highest level, while holding its principles and philosophy. From the analysis emerges the conclusion that three essential strategies will allow the IPF industry to develop and thrive in the project finance market: the increase of equity finance investments, the reconsideration of the traditional project finance structure, and the standardisation and regulation of the Islamic finance industry.