Islamic finance operators are scrambling to tighten the industry’s rules to make sure other companies cannot take the same path as Dana Gas, which this week forced a $700 million debt restructuring.
Global standards are likely to become more detailed and explicit and a shift to centralised regulation may accelerate after the United Arab Emirates firm reached a conditional deal with creditors over a contested sukuk issue.
Dana shook the $2.5 trillion global industry last June, saying it would not redeem its sukuk on maturity. It proposed swapping them for new sukuk with lower profit rates.
The original sukuk used a mudaraba structure, an investment management partnership, which Dana said had fallen into disuse, making the instruments invalid under UAE law.
Its creditors won some rounds in the legal battle that followed, but Dana got much of what it wanted in the settlement, which lets investors exchange their sukuk for new three-year instruments with a 4 percent profit rate.
Investors have been worried by the prospect of other issuers avoiding redeeming their sukuk by saying conditions have changed. Market players may be more wary of Islamic bonds issued in the UAE after one of its courts declined to enforce English court rulings favouring creditors in the Dana case.
“It will definitely alter international risk perception around UAE local law enforcement and sukuk in general, driving up pricing or reducing liquidity,” said Khalid Howladar, managing director of Islamic finance advisory firm Acreditus.
Sukuk deals have already begun changing partly in response to Dana’s case, said Mohamad Akram Laldin, executive director of the Malaysia-based International Sharia Research Academy for Islamic Finance.
Whereas sukuk previously relied on implied agreements that all parties were satisfied with endorsements by Islamic scholars, this is now being made explicit in contracts, and documents sometimes include clauses saying structures should not be disputed, he added.
Some regulators are now asking issuers to acknowledge annually that the structure of their sukuk remains sharia-compliant, said a Dubai-based partner at an international law firm.
Laldin, deputy chairman of the Malaysian central bank’s Sharia Advisory Council, said the Dana saga had strengthened the case for setting up centralised bodies that could approve Islamic contracts and rule on disputes, rather than leaving vetting of sukuk to scholars engaged by issuers and investors.
Meanwhile, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions, one of the industry’s top standard-setting bodies, is working on new guidance for sukuk.
JURISDICTION
Bashar Al Natoor, global head of Islamic Finance at Fitch Ratings, said Dana had not done visible damage to sukuk trade, with first-quarter issuance slightly higher than a year ago.
But the case underlined the dangers of competing legal jurisdictions. In February, a London High Court judge confirmed the Dana sukuk’s purchase undertaking was valid, and ordered the company to withdraw its lawsuits in the UAE.
But a court in the emirate of Sharjah then prohibited Dana from withdrawing its UAE suits, and directed enforcement of British court orders be suspended pending decisions by UAE courts on whether they were eligible for enforcement.
Patrick Drum, portfolio manager at U.S.-based Saturna Capital, said investor preferences had shifted to sukuk governed solely by English law and away from dual-jurisdiction deals like Dana’s.
The case appears to mean the end of the old mudaraba sukuk structure, criticised as un-Islamic by some scholars due to features such as guarantees on principal and fixed returns.
But a revised mudaraba structure with equity-like features, mainly used by Islamic banks to raise regulatory capital, has emerged in recent years and may persist, analysts said.
Although mudaraba comprised less than 3 percent of sukuk issued internationally last year, it accounted for around a quarter of sukuk issued by Islamic banks, Bahrain-based International Islamic Financial Market data shows.
