Securing and collateralizing debts has been a significant legal issue in the Kingdom of Saudi-Arabia (KSA) for a long time. Covered by more prominent topics, due to the current COVID Crisis, the Kingdom has enacted a far reaching reform based on Royal Decree M/94 dated 15/08/1441 H. (08 April 2020) with deep implications on a number of businesses from banking and financial services to trade and commerce. It has opened doors to tackle one of the major problems of doing business and investing in the Kingdom and can be expected to have a significant impact on the country's economic structures.
1. What has been the Issue with Securing Claims in the Kingdom yet?
KSA's legal system is founded on direct application of Islamic Law (Sharīʿa). This is complemented by a number of written laws enacted by Royal Decree, which formally are derogated by overruling Sharīʿa law and dogmatically specify and interpret Islamic Law. Sharīʿa principles are largely restrictive to speculative elements in contractual arrangements. Due to this restriction, securing and collateralizing debt obligations has been problematic. Whereas Sharīʿa acknowledges the concepts of guarantees and pledges (the first one being personal, the second one related to real property), these have been subject to strict conditions and have proven largely inflexible and not suitable for the demands of a modern economy and society.
The legislator has been tackling this challenge over time by issuing several laws regulating collaterals in the Kingdom, most notably the Law on the Pledge of Registered Real Estate (REPL) enacted by Royal Decree M/49 dated 13/8/1433 H. and the Law on the Commercial Pledge (CPL) M/86 dated 8/8/1439 H.
2. What are the Major Changes to Collaterals in the Kingdom and what Implications do they cause?
On 10 April 2020 the Royal Decree M/94 dated 15/08/1441 H. (Decree) was published in the Official Gazette. This Decree does not only enact new legislation, i.e. the Law on Guaranteeing Rights by movable Property (LGMP) but also significantly amended the CPL (following another amendment to the CPL just six months earlier). This recent legislative activity opens the door for securing and collateralizing debt more flexibly and gives KSA a more modern collateral structure in order to align with international needs and standards.
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