Doing Business in Saudi Arabia: Establising a Foreign Presence in the Lucrative Construction Sector

wassem amin saudi arabiaBy Wassem M. Amin, Esq., MBA

The Kingdom of Saudi Arabia is one of the fastest growing economies in the Middle East.  In 2013, the government increased its budget by more than 20% than the previous year, to approximately 820 Billion Saudi Riyals ($219 Billion).  Additionally, Saudi’s King Abdullah pledged more than $500 billion on social welfare and infrastructure projects over the next few years.  Saudi Arabia’s increased spending is part of its policy to create economic diversification and reform, in turn decreasing their dependence on oil revenue and creating new jobs for the local population.

A large proportion of the Government’s spending, approximately 300 billion Riyals, has been allocated to capital expenditures on investment projects and social infrastructure.  Ambitious plans include building 539 new schools and universities, as well as the development of several new cities in the sprawling desert kingdom.

The biggest beneficiary of this expansionary policy is the construction industry.  Demand in the construction and associated sectors, such as residential and commercial real estate development, will increase exponentially, representing an excellent market opportunity for foreign investors and international corporations seeking to enter the Saudi market.

Applicability of Islamic Finance

Construction projects in Saudi Arabia are typically either public or private.  The governing law which applies to all contracts, including construction, is Shari’a, or Islamic, law.  General principles of Islamic Finance are applicable, such as the duty to act reasonably, in good faith, and to mitigate losses.

In the private sector, within the construction sector specifically, the Islamic Finance principle that applies is the “istisna’a” contract, which is a contract for the sale of an asset that is yet to be constructed or manufactured.  Using this structure, the party providing capital, the financier, enters into a contract with the purchaser of the building to be constructed.  Usually the financier, whether a bank or investor, will then enter into a back-to-back construction contract with a general contractor for the project.   The financier realizes a profit from the spread between the cost of the construction contract and the price of the purchase contract.

Public Works Contracts

However, in the public sector, specific regulations and a complex legal framework govern bidding for public works, as well the interpretation and enforcement of underlying contracts.  While still generally subject to Islamic Law principles, public works contracts are considered administrative contracts and are subject to the Government Bids and Procurement Law, implemented with associated regulations.

Establishing a Foreign Presence in Saudi Arabia

Recent amendments in the law and a shift in policy by the government to attract foreign direct investment have made it easier than ever for a foreign company or investor to establish business operations in Saudi Arabia. Although there are a variety of business organizations in Saudi Arabia, the most commonly used by foreign companies in undertaking construction projects are Limited Liability Companies (LLCs).  That is due to the relative ease of incorporating an LLC (as opposed to, for example, a Joint Stock Company), minimal capitalization requirements, and the requirement of less corporate governance formalities.

The actual procedure of establishing an LLC in Saudi Arabia is typically a two-step process: (1) First, the foreign partner applies to the Saudi Arabian General Investment Authority (SAGIA) for a foreign investment license; (2) Second, once SAGIA issues the license, the partners in the proposed LLC apply to the Ministry of Commerce and Industry in order to incorporate the company.  Once approved, the Ministry will certify the formation documents of the LLC and issue a commercial registration certificate–which permits the LLC to begin operating in the Kingdom legally.

Saudi Arabia is a lucrative market for foreign companies and investors.  At a time when the market in the United Arab Emirates is beginning to get stagnant and saturated, Saudi Arabia remains ripe with opportunities.  However, the cultural, political, and legal landscape is complex and varies dramatically from that of countries such as the USA or in Europe.  Unaccustomed foreign companies or investors should seek out advisory or legal firms who are proficient and have expertise in Saudi Arabia.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA and is the Vice Chairman of the Middle East Committee as well as the Islamic Finance Committee of the American Bar Association’s International Law Section.  Wassem has extensive experience in the Middle East region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Business Immigration (EB-5 Regional Center and Investor Representation) and International Business Transactions.  For more information, please visit the About Us page or 

Doing Business in Saudi Arabia: Financing International Commercial Transactions

This Article was published in the Summer 2013 Newsletter of the International Commercial Transactions, Franchising, and Distribution Committee of the American Bar Association’s (ABA) International Law division.  The ABA is the largest association of attorneys and lawyers worldwide.

By: Wassem M. Amin, Esq.

If a company is exporting goods to Saudi Arabia, the Middle East, or anywhere else for that matter, a key consideration is how to collect payment from the importer or buyer.  A risk assessment of the underlying transaction and the buyer is necessary to determine what option to choose.  For the exporter, on the risk spectrum, the least risky is to request that the importer pay up front prior to shipment.  However, unless there is an established history between the parties involved, it is highly unlikely for the buyer to do so. On the other end of the spectrum is the option to sell on an open account – which involves simply shipping the goods to the foreign buyer along with an invoice.  Again, this method of payment is ill-advised, because the U.S. company may end up not getting paid and, instead, quickly finding out how difficult it is to collect debts in foreign jurisdictions.

An alternative to both these options is the use of a Letter of Credit (“LC”).  Frequently used in international transactions, LCs are a document issued by a bank in which the bank agrees to pay money upon the presentation of specified documents.  The transactional costs in obtaining LCs are miniscule compared to the risk of loss that comes with nonpayment.  The most basic LC transactional structure is one where the buyer-importer opens a LC with an agreed-upon bank (the issuing bank) in favor of the seller-exporter (the beneficiary).  The Letter of Credit is then transmitted to the seller’s bank (usually, the advising bank) which releases the funds to the seller upon the seller’s presentation of a bill of lading or any other agreed-upon documents.  In the event the issuing bank’s credit rating is low, a third bank, a confirming bank, can act as a surety for payment.

Terms for Letters of Credit are strictly defined in an internationally-agreed upon nomenclature.  In addition, an uniform set of rules are used to govern the interpretation of terms as well as the rights and obligations of each party involved.  Today, these payment instruments are used in complex financing transactions which may involve multiple banks, parties and stipulations.  There are two main types of LCs: a standby LC and a performance LC.  The standby LC is used to guarantee payment in the event of default or non-performance by a party; while a performance LC is used to guarantee payment for performance (usually the shipment or receipt of goods).

In some transactions I have structured, a combination of both types is used to ensure compliance by the buyer and the seller.  One example involved a U.S. manufacturer of custom-designed casework and a Saudi Arabian subcontractor who contracted for the supply and installation of laboratories in connection with the construction of a new hospital complex in the Kingdom’s Eastern Province.  The total value of the contract exceeded several million dollars.  Due to the highly technical and specialized nature of these goods, the challenge was to design a financing mechanism that protected the interests of both the buyer and the seller.  The U.S. manufacturer was hesitant to begin fabrication and manufacturing without an advance payment.  On the other hand, the Saudi subcontractor did not want to bear the risk of losing the down payment in the event of the manufacturer’s default.  In addition, there was still the need to secure payment for the remainder of the project.

First, to provide security for the down payment, the U.S. manufacturer was asked to issue a standby letter of credit through its U.S. issuing bank to the subcontractor’s bank in Saudi Arabia.  The bank in Saudi Arabia would in turn issue a guarantee against default only for the advance payment amount.  The standby letter of credit would be triggered in the event of the U.S. manufacturer’s non-performance.

Second, to ensure that the U.S. manufacturer would be paid, the subcontractor issued a (performance) letter of credit for the remaining amount through a Saudi Arabian issuing bank to the manufacturer’s bank in the United States.  The terms of the LC stipulated payment to the manufacturer against presentation of Bill of Lading documents, which allowed staggered payment for each phase of the project.  This structure allowed minimal risk exposure for all parties involved.

The following sketch illustrates the steps performed by each party, numbered in the order they were performed.


  1. U.S. supplier instructs its advising bank to issue a standby letter of credit to the importer’s bank in Saudi Arabia;
  2. Saudi bank, using the standby letter of credit of collateral, issues a bank guarantee to the importer for the advance payment;
  3. Saudi importer wires the advance payment to the U.S. supplier’s account;
  4. Saudi importer instructs its bank to issue a performance letter of credit for the outstanding amount;
  5. Saudi bank issues the letter of credit to the supplier’s U.S. bank;
  6. U.S. supplier ships goods to Saudi importer;
  7. U.S. supplier presents bill of lading to its bank for payment against the letter of credit;
  8. If documents presented conform to the letter of credit requirements, U.S. supplier’s bank releases funds, pro-rata, according to the bill of lading.

Disclaimer: These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.

Wassem M. Amin, Esq., MBA is an Associate Attorney at Dhar Law LLP in Boston, MA.  Wassem has extensive experience in the Middle Eastern region, having worked as a consultant in the area for over 9 years.  Wassem currently focuses his practice on Corporate Law and International Business Transactions.  For more information, please visit the About Us page or 

Record Growth Forecasted for Islamic Finance but Risks Remain

By: Wassem Amin

A new report published by Ernst & Young is forecasting a 17% annual growth in Islamic banking assets by the end of 2013, reaching nearly $1.8 trillion.  This confirms the recent trend of migrating from conventional finance to Shari’a compliant finance by many Middle Eastern markets.  In the beginning of January 2013, for example, the regulatory authority for Dubai’s financial markets published a proposed set of uniform standards for the securitization of sukuk (Islamic bonds) assets.  Sukuk represent, by far, the largest growing Islamic financial product globally.

However, interestingly, the E&Y report is forecasting that the majority of the growth in the Islamic finance to come from countries other than those in the Arabian Gulf and South East Asian region.  That indicates that conventional financial institutions are beginning to offer Shari’a-compliant financial products in an attempt to capture a share of the rapidly-expanding market.  China, in particular, has been noted as a strong prospect for future expansion of Islamic banking.  Numbering over 150 million, Chinese Muslims account for nearly 10.3% of the country’s population.

To support this growth, the report highlighted the need for reform in three areas: Regulatory reform, Risk reform, and Retail banking reform.  Regulatory oversight of Islamic banking institutions remains fragmented and lacks integrated compliance and capital optimization.  Shari’a governance, in particular, represents an important, yet widely unacknowledged risk.  As discussed in in my comparative analysis of Saudi Arabian and Malaysian markets, there are relatively few Shari’a scholars who specialize in Islamic banking.  That results in significant conflicts of interests when the same scholar sits on the board of several, if not dozens, of Islamic banks.

In order to support the future infrastructure of Islamic finance, universities in the Middle East and globally need to develop degrees focused on educating the future generation of Shari’a scholars that are well-versed in global finance.  Islamic finance is unlike conventional finance in that its identity its tightly woven with religious principles.  Islamic finance scholars need, in essence, to study two concurrent areas: Islamic law & theology and banking & finance.  There are relatively few universities that teach courses on Islamic finance and even fewer ones that offer degrees specializing in that area.

Demystifying the Saudi Arabian Market: Key Features of Various Business Entities (Part 3)

By: Wassem M. Amin, Esq.

In Part 2, the various business entities that may be used in Saudi Arabia were discussed.  This post outlines, in greater detail, the key features of the most popular entities used by foreign investors.

Limited Liability Companies (LLCs)

100% Foreign Management and Ownership – Unlike many other business entities, Saudi law does not require a minimum level of Saudi participation nor does it require that any manager be a Saudi national or a member of the LLC. Foreign management is only allowed if the LLC has a foreign capital investment license from SAGIA.

Board Members; Number of LLC Members – Under Saudi law, LLCs must have at least 2, but not more than 50, members.  The law provides for automatic dissolution if the number of members falls below 2.  The LLC may have either a manager or a board of managers.  However, if the LLC has more than 20 members, it must have a separate advisory board to oversee and advise management.

Limited Liability – The personal liability is generally limited to the individual member’s contribution to the company’s capital.  However, liability may extend to the shareholders, individually, in the event that the company’s losses exceed 50% of capital and no action has been taken to rectify losses.

Preemptive Rights – There are no shares issues in an LLC.  Investors hold a proportion of the uniform nominal value.  Further, equity transfers of a member’s ownership are permitted, but subject to the preemptive rights of other LLC members.  That means, a member wishing to dispose of his ownership must offer it to the other members first.

Minimum Capital Requirement – Minimum capital for an LLC with only foreign investors is 500,000 Saudi Riyals (SR).  There is no minimum capital requirement for LLCs wholly owned by members from the Gulf Cooperative Council countries.  Further, the Saudi Arabian General Investment Authority has the discretion to increase or decrease the capital requirement for an LLC.

Joint Stock Company (JSC)

A JSC is most analogous in structure to that of a C Corporation in the United States.  A JSC is often used when the company anticipates a public offering of shares on the Saudi Stock Exchange (Tadawul).

100% Foreign Ownership – As with an LLC, foreign ownership of all issued shares are allowed.

Board Members and Shareholders – The minimum number of shareholders allowed is 5.  The minimum number of directors required is three, including a chairman and a managing director.  Directors of the corporation are required to own shares in the corporation with a nominal value of at least SR10,000.

Preemptive Rights – Unlike LLCs, shares in a JSC are freely transferable.  Preemptive rights must be expressly added in the JSC’s organizational documents to be enforceable.

Minimum Capital – JSCs must have a minimum capital of SR2 Million.  In the event the JSC decides to issue public shares, the minimum capital requirement is SR10 Million.  Regulation of public offerings is under the auspices of the Capital Market Authority.

US Citizenship Through Islamic Finance Compliant Investments: The EB-5 Investor Visa Program

By: Wassem M. Amin, Esq.

ImageThe United States is one of the largest recipients of foreign direct investment from the Middle East, particularly from Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates.  Despite the economic recession, investors from these countries continue to diversify within the U.S. financial and real estate markets.

Unbeknownst to many foreign investors, however, is that a collateral, or perhaps primary, benefit of investing in the United States may be the ability to obtain permanent residency and eventual citizenship.  A foreign investor who makes a qualifying investment can apply to obtain a green card (permanent resident card) and, eventually, United States citizenship if they meet all the criteria of the EB-5 immigrant visa program.

However, a challenge for many Middle Eastern investors is the ability to procure an EB-5 qualifying investment that will also adhere to the principles of Islamic Finance.  There are several methods to structure an EB-5 investment to be Islamic-finance compliant, one of which is discussed in this post.

The EB-5 Program

The United States Congress created the employment-based EB-5 immigrant visa category in 1990 for immigrants who invest in and manage U.S. commercial enterprises that benefit the economy.  To qualify, investments must create at least 10 full time jobs for U.S. workers.  The minimum investment required is $1 million, although that amount is reduced to $500,000 if the investment is made in a high unemployment area or a qualifying rural area.  Immigrant investors who successfully qualify would obtain a permanent resident card with the opportunity to apply for citizenship after 2 years.

In 1992, to stimulate interest, Congress enacted the EB-5 Regional Center Pilot Program.  The program allowed public and private entities to apply to the United States Citizenship and Immigration Services (“USCIS”) to be designated as a regional center.  The regional center would, in turn, develop qualifying investments for foreign investors under the EB-5 program.  Regional centers provide a structure for focusing foreign investment in a specific U.S. geographic area and for promoting economic growth in such area through increased export sales, creation of new jobs, and increased domestic capital investment.  For an immigrant investor, the benefits of investing through a regional center are numerous.  Typically, a regional center investment has already been evaluated for feasibility.  Similarly to a real estate developer who is raising capital, a regional center would already have prepared business plans, private placement memorandums, feasibility studies, and other offering documents.  In the case of an EB-5 investment, the regional center would have also completed economic impact studies to demonstrate to USCIS that it meets the job-creation criterion. In addition, most regional centers hold an immigrant investor’s funds in an escrow account pending USCIS approval of the investor’s EB-5 application.   Therefore, if the application is denied for any reason, the investor recovers his or her principal investment.

Most Regional Center investments are in large real estate development projects.  For example, a recent example of a regional center I have advised was structured as a partnership to invest in the expansion of an established ski resort in the state of New Hampshire.  The partnership was structured as a limited partnership, with the foreign investors designated as the limited partners and the real estate developer as the general partner.  Such a partnership can also comply with Islamic finance principles, subject to the requirements discussed below.

Structuring the Investment to be Islamic Finance (Shari’a) Compliant

Islamic Finance products and instruments set out to achieve the same business goals as conventional finance products and instruments, but within the constraints of Islamic rulings.  Islamic-compliant financial solutions range from profit-and-loss sharing mechanisms, consumer finance, trade finance, working capital finance, and project finance.  Broadly speaking, Islamic finance prohibits excessive risk or speculative investments and the payment or receipt of interest.  In addition, risks in any transaction must be shared between the parties, so that the provider of capital (investor) and the entrepreneur share the business risk in return for a share in the profits.

A Regional Center may qualify as an Islamic-finance compliant investment by structuring the entity as a partnership.  A permissible method of Islamic financing is a musharaka, which, in Arabic, literally means “sharing.”  A musharaka is a joint enterprise formed for a business purpose in which all partners share profits according to a predetermined ratio.  However, the key difference is that losses must be divided exactly in accordance with the pro rata share of capital invested by each partner.  In the context of real estate and project financing, the foreign investor, as a limited partner, would contribute capital while the real estate developer, as the general partner, would contribute either real estate assets or additional capital.

To ensure compliance with Islamic finance principles, the agreement between the partners would need to describe the capital contributions and the allocation of profits and losses, as well as the management responsibilities (which would normally be undertaken by the real estate developer as general partner).  The real estate developer would then undertake the project using the capital and other contributed assets in the construction and operation of the project.

Disclaimer: This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. None of the information or analyses presented are intended to form the basis for any investment decision, and no specific recommendations are intended. This article does not constitute investment advice or counsel or solicitation for investment in any security.  These materials have been prepared by Wassem M. Amin, Esq. for informational purposes only and are not legal advice.  The material posted on this web site is not intended to create, and receipt of it does not constitute, a lawyer-client relationship, and readers should not act upon it without seeking professional counsel.