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Dana Gas and an Existential Crisis for Islamic Finance

posted by Jason Kilborn

IslamicartThe very foundations of the Islamic finance world were shaken a few weeks ago when Dana Gas declared that $700 million of its Islamic bonds (sukuk) were invalid and obtained a preliminary injunction against creditor enforcement from a court in the UAE emirate of Sharjah. Like Marblegate on steriods, Dana made this announcement as a prelude to an exchange offer, proposing that creditors accept new, compliant bonds with a return less than half that offered by the earlier issuance.

Dana shockingly claimed that evolving standards of Islamic finance had rendered its earlier bonds unlawful under current interpretation of the Islamic prohibition on interest and the techniques Dana had used to issue bonds carrying an interest-like investment return. I had expected to read that Dana had used an aggressive structure like tawarruq (sometimes called commodity murabahah) that pushed the boundaries of what the Islamic finance world generally countenanced, but no. The structure Dana had used was totally mainstream, a partnership structure called mudarabah. Dana asserted that the mudarabah structure had been superseded by other structures, such as a leasing arrangement called ijarah, though in Islamic law as in other legal families, there are often multiple permissible ways of achieving a goal, not just one. And when an issuer prepares an Islamic finance structure like this, it invariably gets a sign-off from a shariah-compliance board of respected Islamic law experts (sometimes several such boards). For Dana Gas to suggest that its earlier board was wrong to the tune of $700 million, or worse yet that Islamic law had somehow changed in a few years through an abrupt alteration of opinion by the world of respected Islamic scholars is ... troubling.

The case in the Sharjah court will take some time, but I predict that this exceptionally aggressive attempt by Dana Gas to evade its bond obligations will fail. The bonds are governed by English law, and I can hardly imagine that there is anything so shocking in their terms that would prompt a level-headed UAE court to declare as a matter of a core principle of overriding Islamic law that the mudarabah structure is "illegal." This will be a case to watch, though, and a real test of a respected Middle Eastern court system in the eyes of western investors. The Islamic finance industry has exploded in recent years, with nearly $50 billion per year in new issuances. If Dana Gas gets away with this shocking evasion of its sukuk obligations, it will strike a death blow to an industry that developed to allow investors to engage with the world of commerce while staying true to their moral and religious beliefs. It would be a terrible shame if Dana Gas's venal sharp practices laid low such a beautiful idea.

Hat tip to Jay Westbrook for bringing the story to my attention.


So, if I am following this, on the one hand there were a set of structures and principles that were generally accepted as compliant for a long time and hence there was a veneer of stability. Yet, the actions of Dana Gas indicate that there is always uncertainty lurking in the background, because an issuer of an instrument has the ability to try to convince a court that the instrument should be invalidated because a theological mistake was made. How in the world does that uncertainty get priced in?

stella, I hope you realize how shockingly ignorant your comment is. I considered deleting it, but I thought it better to post a sensitive response. First, Muslims as a group are among the most generous people in the world, with two distinct Islamic mandates to give alms to the poor (obligatory zakat and highly encouraged sadaqa). Second, judging hundreds of millions of Muslims by the actions of one venal multinational business conglomerate is just stunningly short-sighted. I would think you would resist being judged by the actions of Goldman Sachs, Enron, etc., etc. Not all Americans and not all Christians behave as the leaders of these companies did, and the same is clearly true of Muslims and Dana Gas. Sheesh!

FJP, this is why the case has so roiled the Islamic financing markets. It is NOT normally the case (or hasn't been) that there is "always uncertainty lurking in the background," as no issuer has been so bold as to try to subvert international consensus on basic structures like mudaraba. If the Sharjah court accepts this machination--as sometimes has been the case in the West in high-profile shock cases before English, American, and other courts going rogue on various issues (yes, I mean you, Rubin!)--I would hope the markets would shake if off as an isolated incident, but we just can't know how deep the rot will be if it goes the other way. Obviously, it will be better if the Sharjah court puts Dana Gas in its place, and the rule of (Islamic) law is confirmed.

Are you really Stella Geoffrey, or are you just trolling under her name to make her look bad.

Anyway. I think you're right about the ultimate result. The only thing that gives me pause is that Dana obviously shopped its venue. Sharjah is the most religiously conservative of the Emirates, and I don't think Dana would have gotten that preliminary injunction elsewhere, such as in Dubai.

This is an obvious ransom attempt by Dana. Does the Sharjah court have any ability to slap them around when it's all over?

Fascinating subject. My own question concerns the side issue of transliteration. Is there a consensus "right" way to wrote "Sharia" or "Shariah" or "Sharjah" in English?

Good question, Christopher, to which I'm afraid there isn't a clear best answer. First, though, Sharjah (the court where Dana lodged its challenge), with a "j", is a city, one of the United Arab Emirates (like Dubai, to its southwest). The pronunciation and transliteration of this emirate's name is another long story, but for another time ... As for sharia, or shariah, or shari'ah, I strongly suspect the first spelling is as close to a Western standard as one can get--sharia.

Because I spent so much time studying this stuff, and at the risk of sounding (reading) like Alex Trebek, I generally use a more technical but (excessively?) accurate transliteration, shari'ah. So why the apostrophe and why the "h"? The h stands for the letter "tied t" (taa marbuta) at the end of most feminine words in Arabic--it is an "h" (a round character, thus "tied") with two dots written above it (which otherwise would indicate a "t"), which together simply indicate that an unwritten, unstressed vowel "a" ends the word. It is pronounced "a" but transliterated "ah" to indicate the unwritten "a" with the written "tied-t h thingy". Confusing enough? Then just wait for the apostrophe. It stands for a full-blown letter, called "3ain." The "3" is often used instead of an apostrophe to indicate the 3ain, but a backwards apostrophe (or better yet, a small raised "c") is more common. The letter is generally not indicated in English transliteration (hence sharia) because very few English speakers can produce its sound--it's the sound you make if someone is choking you or you're gagging and you tried to say a following vowel, here it happens to be "a". So the word is pronounced "sha-ri-3ah" with the "3" standing for that choking/gagging sound--and it's quite hard to pronounce in this position. Bottom line, unless you're trying to be super technical (to respect and speak to an audience who knows and expects the word to be transliterated as technically accurately as possible), you're probably best off just sticking with "sharia."

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