One year after the Dana Gas verdict: Where does the Sukuk market stand today?

Transcription

1. IFN SECTOR CORRESPONDENT One year after the Dana Gas verdict : Where does the Sukuk market stand today? LAW By Dr Nicolas Bremer The first significant contemporary Sukuk facility was issued in 1990 by Shell MDS (M). While no relevant Sukuk-issuing followed, the Sukuk markets in Malaysia and later Bahrain took up speed in the early 2000s. Sukuk quickly became a widely accepted financial product in the international Islamic finance market and remain popular with Islamic corporations as well as state-owned institutions making up a significant share of the global bond market. Still, Sukuk have been subject to criticism. Specifically, the doctrine continues to be critical of (some) Sukuk too closely mimicking conventional — interest-based — bonds and, thereby, violating Islamic law principles. In his 2007 paper titled ‘Sukuk and their Contemporary Applications’, Sheikh Muhammad Taqi Usmani identified three key characteristics which distinguish Sukuk from conventional bonds. Sheikh Muhammad Taqi established that Sukuk must (1) represent shares of ownership in assets or commercial enterprises aimed to produce revenue, (2) payments to Sukukholders must be made based on the revenue incurred by the underlying assets or business and (3) Sukuk should be bought back at the maturity current market value. Sheikh Muhammad Taqi found that the vast majority of Sukuk issued failed to comply with these standards. In fact, contemporary Sukuk effectively took on characteristics of conventional interestbearing bonds, as investors received a fixed percentage of the principal as a return and were guaranteed the return of the principal invested at maturity rather than the actual market value. In early 2008, the scholar board of AAOIFI — of which Sheikh Muhammad Taqi was a member — followed his findings and said that as much as 85% of Sukuk issued until 2008 were not Shariah compliant. © More recently, Sukuk were subject to criticism again in the wake of the Dana Gas case. In 2017, Dana Gas shocked the market when it announced that its US$700 million Sukuk had been found to not be Shariah compliant due to its return structure. This announcement struck a market that had grown accustomed to treating Sukuk just like conventional bonds. The realization that Sukuk could not be treated this way and had to be structured as an independent financial product led some western investors to retreat from the Sukuk market. Further reservations toward Sukuk were caused by the complex legal battle that unfolded between Dana Gas and investors, which included litigation in the UAE and UK courts which was finally settled amicably in May 2018. However, while the Dana Gas case may have caused some investors to shy away from Sukuk in the short term, this incident does not appear to have perpetuated a long-term trend. Investors quickly realized that the legal dispute did not evolve due to the fact that the investment was — and intended to be — structured as an Islamic investment but rather was based on Dana Gas’s reluctance to pay its investors, an issue that could arise in Islamic and conventional finance alike. IFN Sector Correspondents CROWDFUNDING: Craig Moore CEO, Beehive DEBT CAPITAL MARKETS: Imran Mufti partner, Hogan Lovells EDUCATION: Dr Kamola Bayram, project director for training and research at the International Council of Islamic Finance Educators ISLAMIC LEASING: Shoeb Sharieff president, ijara CDC, ijara Community Development Corp LAW: Dr Nicolas Bremer partner, Alexander & Partner LIQUIDITY MANAGEMENT: Raghu Mandagolathur managing director, Marmore MENA Intelligence MERGERS & ACQUISITIONS: Burak Gencoglu partner, Gencoglu & Ergun Law Firm MICROFINANCE: Mohammed R Kroessin head of Islamic microfinance, Islamic Relief Worldwide PRIVATE EQUITY & VENTURE CAPITAL: James R Stull, partner, King & Spalding REAL ESTATE: Philip Churchill founder partner, 90 North Real Estate Partners RETAIL ASSET MANAGEMENT: Muzzammil Dhedhy, chief operating officer, Hejaz Financial Services RISK MANAGEMENT: Ali Khokha senior manager PwC Luxembourg SHARIAH & CORPORATE GOVERNANCE: Prof Dr Mohamad Akram Laldin executive director, International Shariah Research Academy for Islamic Finance SRI ETHICAL & GREEN: Dr Mohamed Wail Aaminou, general manager, Al Maali Consulting Group TAKAFUL & RE-TAKAFUL (ASIA): Marcel Omar Papp head of Retakaful, Swiss Re Retakaful TAKAFUL & RE-TAKAFUL (EUROPE): Ezzedine Ghlamallah director, Solutions Insurance and Islamic Finance (SAAFI) TAKAFUL & RE-TAKAFUL (MIDDLE EAST): Dr Sutan Emir Hidayat assistant professor, head of Business Administration and Humanities Department, University College of Bahrain TAX: Dhana Pillai head, real estate, tax and project finance, Al Hashmi Law Firm IFN Correspondents are experts in their respective fields and are selected by Islamic Finance news to contribute designated short sector reports. For more information about becoming an IFN Correspondent, please contact sasikala. thiagaraja@redmoneygroup.com Today — a year after the Dana Gas case was settled — the industry widely considers the case as a wake-up call. Until 2017, the Islamic finance industry had been lacking in responding to the warnings formulated by AAOIFI in 2008. the key characteristics identified by Sheikh Muhammad Taqi and Shariah boards must diligently review such documentation with respect to their adherence to these characteristics when certifying Sukuk. It remains to be seen what the long-term effect of the Dana Gas case will be. To increase trust and re-establish Sukuk as a principal financial product, the legal foundations that make up Sukuk need to be diligently applied. In particular, the profit-sharing nature of the Sukuk — as opposed to the interest-based structure of conventional bonds — has to be pronounced in legal Sukuk structuring. However, it does provide an opportunity for the Islamic finance industry to further establish Sukuk as an independent financial product and convince investors of its specific characteristics and benefits. Hence, legal advisors need to ensure that Sukuk documentation follows 17 Dr Nicolas Bremer is a partner at Alexander & Partner. He can be contacted at nb@ alexander-partner.com. 15th May 2019