When Iraq regains political stability, major reconstruction projects will have to be funded and local businesses will need financing in order to gain a foothold in the new economy. In order to attract the necessary capital, the Iraqi law of secured transactions must be reformed to allow for lenders to take security in the assets of their borrowers. However, the challenge of reforming Iraqi commercial law is complicated by the requirement under the new Iraqi Constitution that any new statutes enacted by the Iraqi legislature comply with the principles of Islamic law. This Article sets forth proposals for reform that comply with Islamic law and explains how Islamic law, far from being inimical to the needs of international financial institutions, actually allows for each of the essential elements of a progressive law of secured transactions. This amenability of Islamic law to the requirements of the modern international economy holds great promise, not only for Iraq, but for all Islamic states that are seeking to invigorate their economies with the aid of foreign investment.
TABLE OF CONTENTS I. INTRODUCTION II. THE NEED FOR LEGAL REFORM IN IRAQ III. THE FIVE FEATURES OF A PROGRESSIVE LAW OF SECURED TRANSACTIONS IV. SECURED TRANSACTIONS UNDER ISLAMIC LAW A. Non-Possessory Security Interests B. Security Interests in Future Assets C. Securing Future Debts D. Priority over Competing Claimants E. Enforcement Without a Court Order V. AN OVERVIEW OF IRAQI COMMERCIAL LAW VI. SECURED TRANSACTIONS UNDER IRAQI LAW AND PROPOSED REFORMS A. Non-Possessory Security Interests B. Security Interests in Future Assets C. Securing Future Debts D. Priority over Competing Claimants E. Enforcement Without a Court Order VII. CONCLUSION: THE PROMISE OF ISLAMIC LAW "Islamic jurisprudence resembles an immense ocean on whose bottom one has to search, at the price of very great efforts, for the pearls which are hidden there."
--The Drafting Committee of the Majalla (1)
When security is restored in Iraq, reconstruction will proceed with renewed vigor. (2) A critical component of this reconstruction will be the modernization of Iraqi commercial law to ensure the efficient operation of the country's post-war economy. Of the many areas of Iraqi law that the U.S. Department of Commerce has identified as requiring reform, only one area falls within the scope of pure commercial law, namely, Iraq's law of secured transactions. (3) The adoption of a progressive, creditor-friendly law of secured transactions is essential for the success of Iraq's future economic stability since international lenders will be more likely to extend low-cost loans if they can be assured a first-priority security interest in the assets of their Iraqi debtors. The current Iraqi law contains several provisions that prevent the creation of an adequate security arrangement; therefore, absent significant legal reforms, international banks will be reluctant to provide funding for construction projects, new businesses, and other commercial enterprises that are essential to Iraq's economic recovery.
This Article takes a first step in assisting Iraq in reforming its law of secured transactions by proposing several amendments to existing Iraqi law. These amendments will enable Iraq to create a legal environment that will encourage the international banking system to fund the commercial projects that will propel Iraq into a new era of economic prosperity. The challenges faced in drafting such amendments were considerable due to the requirement under Article 2 of the new Iraqi Constitution that all new statutes must comply with Islamic law (shari'ah). (4) In light of this constitutional requirement, this project to reform Iraqi law began with a thorough examination of the Islamic law of secured transactions and then proceeded to an analysis of current Iraqi law. Against this background of study, the amendments proposed herein were carefully crafted to ensure compliance with Islamic law while still providing for the needs of a modern Iraq. Although this Article focuses on particular issues in Iraqi law, the concepts embodied in the proposals can also benefit other Islamic states around the world that are seeking to modernize their commercial laws. (5)
Part II of this Article explains in greater detail why Iraqi law must be reformed in the area of secured transactions. Part III identifies the five cardinal features of a progressive law of secured transactions, all of which should be adopted into Iraqi law. Part IV provides a detailed analysis of the Islamic law of secured transactions and examines the fundamental bases of these legal principles. This analysis will reveal that Islamic law, contrary to certain traditional views, allows for each of the five features of a progressive law of secured transactions. Part V provides an overview of Iraqi law and legal history. Finally, Part VI explains the current state of the law of secured transactions in Iraq, and sets forth a series of proposals for the amendment of Iraqi law that will serve to implement the legal reforms needed to attract the capital necessary for Iraq's successful reconstruction.
THE NEED FOR LEGAL REFORM IN IRAQ
In the coming years, hundreds of billions of dollars will be needed to rebuild the Iraqi infrastructure and economy. A considerable portion of these funds will be provided by donor countries in the form of grants and low-interest loans. (6) However, Iraq will also depend upon the private international banking system for the capital needed to finance oil and electricity projects, to fund construction projects, and to provide financing to a host of businesses that will need to gain stability in a post-war environment. However, international banks will be reluctant to provide financing without an adequate security package that grants a first-priority security interest in the debtor's assets. (7) This need for reliable asset-backed financing is of particular importance in a post-war environment, where businesses and their lenders face a variety of risks. The ability of lenders to acquire an easily enforceable security interest in a debtor's assets depends on the legal regime in place in the country where those assets are located. Therefore, it is imperative that Iraq take the necessary steps to ensure that its commercial laws allow for the creation of security interests that meet the needs of the international banking community.
The need for a progressive law of secured transactions in Islamic countries, such as Iraq, has been highlighted in Michael McMillen's article describing a project-finance transaction for the construction of a Chevron petrochemical plant in Saudi Arabia. (8) An international syndicate of banks provided the financing for the project, and--as is typical of a project-finance transaction that limits the lender's recourse to the project revenues and assets--the banks required a first-priority security interest in the project assets. (9) Although the transaction was successful and the plant was built, the article describes in detail the many obstacles that Saudi Arabia's conservative interpretation of Islamic law presented to the creation of an enforceable security interest in the project assets. (10)
A number of other articles have described project financings in Saudi Arabia, Kuwait, the United Arab Emirates, and other Islamic countries where there is a growing need for private financing of large-scale projects in order to reduce the spending of public monies and spread the risk among private investors. (11) All of these articles describe successful transactions in that all of the transactions managed to attract the funding needed for the project. However, these transactions highlight the central tensions in the intersection of western and Islamic finance: the reluctance of western investors to accept Islamic structures and the legal obstacles in Islamic countries to using structures familiar to western investors (although these obstacles vary from state to state). The initial need of any commercial project is always the same, namely, to raise capital. In the best of worlds, a project company--whether located in an Islamic or a western state--would have access to the capital of investors around the globe, including Islamic and western investors. However, this dream may be deferred due to the reluctance of western banks to invest in projects that use Islamic financial structures rather than structures familiar to the banks based on the Uniform Commercial Code (U.C.C.) and other western commercial laws. As a result, Islamic projects can be cut off from western funding. Likewise, western projects can be denied funding from Islamic investors if the financial structure of the project violates the strictures of Islamic law.
The solution to this problem is two-fold. First, western banks must be educated about Islamic finance in order to overcome their reluctance to invest in projects that make use of Islamic financial instruments. This must be accompanied by the ongoing efforts of the creative Islamic lawyers who are constructing financial mechanisms that both comply with Islam and satisfy the needs of western investors. (12) Second, Islamic scholars must continue to examine and interpret Islamic law in an effort to accommodate western financial structures to the extent possible. With this two-pronged approach, both Islamic and western project companies will find it easier to tap into the liquidity of capital--wherever that capital may be. Failing these efforts, commercial projects will not be able to reach the entire pool of global funding or may only receive funding at a higher cost. For example, if a syndicate of western banks believes that the structures employed in a certain Islamic project do not provide the same level of security that can be achieved under a western project-finance structure that relies on a progressive law of secured transactions, such as...