Thursday, July 13, 2017

DANA GAS: WHERE CREDITORS ARE HIDING IN THE SUKUK?



DANA GAS: WHERE CREDITORS ARE HIDING IN THE SUKUK?



The latest issue surrounding Dana Gas Sukuk clearly shows that the market is still struggling to understand the true nature of sukuk. In reports published of late, many still talk about creditors taking steps to protect their interest related to payment of the so called dividend or profit as mentioned or provided for in the sukuk documents.



If the word “creditors” is to be understood conventionally referring to someone who has lent a certain sum of money, who for sure is entitled for a repayment at a certain future agreed date, then obviously the use of such word in the context of sukuk is totally unacceptable. The reason being true Shariah compliant sukuk are basically not debt instruments like conventional bonds where sums of money are borrowed or lent.



Sukuk if it is to be understood correctly have nothing to do with money lending (by sukuk holders) as they are basically investment securities and not debt ones. In the case of Dana Gas Sukuk which was structured on the basis of Mudarabah contract the investors/sukuk holders must have known from the outset that profit/dividend is not guaranteed as it will depend basically on actual performance of the underlying assets/projects that backed up the sukuk.


Although sukuk holders have no right to guaranteed profit they however enjoy a certain degree of protection in a different sense. If wrongdoing or negligence or breach of terms and conditions of mudarabah contract can be proven, they have the right to be fully indemnified by the issuer or Mudarabah Management Company. Notwithstanding, profit shall always be paid out of actual profit generated by the activities carried out by the issuer as agent for the sukuk holders in running the business.



In the above context sukuk documents and prospectus must make sure that the true nature of mudarabah investment is clearly stated, and sukuk holders owe to themselves to appreciate this fact properly. In the same connection, the issuer should be properly advised not to state anything that may mislead the potential sukuk holders about to the true nature of the investment in sukuk where returns are actually based on actual performance and not as per guaranteed fixed rate of return.



UAE is fortunate because it had enacted legislation governing commercial transactions including Islamic/Shariah based ones. The Civil Transaction Code of 1985 which is of general application in all the emirates provides for rules that need to be followed by all relevant parties lest their transactions can be declared null and void as per the law.



In this context, legal arguments can be put forward by all the involved parties in accordance with such established provisions of the relevant laws. In a broader context, with the presence of such provisions a certain degree of uncertainty related to legal status of transaction can be properly addressed within the ambit of the law.



What however remains to be answered in the case of Dana Gas Sukuk is this: if truly the sukuk is against the law, how come the legal advisors involved in the issuance of the sukuk several years ago were not aware of the so-called point of law related to the nature of Mudarabah Sukuk. This issue is as important as the question of shariah compliance of the sukuk since legal compliance is of no less important than the Shariah one. Although the issuer’s latest action was premised on the legal opinion it obtained from their legal advisor, it seems that such opinion if actually given was actually a belated one. It is unthinkable that the basic nature of mudarabah contract was overlooked when they structured and documented the sukuk in the first place given the fact Mudarabah as a contract/structure is not something of novelty in nature.



What ever that may happen to the parties involved, if Islamic law is to be used in settling the dispute, surely there is enough guidance from Shariah perspective to solve the problem. However the big question is: to what extent the parties are willing to resort to Shariah dispute settlement mechanisms? The indications are, as it was obvious in several other previous cases involving Islamic finance, that not everyone is giving due importance to Islamic ways of settling disputes via Islamic competent courts or arbitrators. As with this Dana Gas Sukuk, English court was given non-exclusive jurisdiction as per the sukuk documents besides Emirate’s court in certain matters as also provided in the same documents.



So the big question here is; will the English court be willing to consider the specificity of Shariah rules in their forthcoming judgment given that the sukuk holders had taken action in the English court. To answer this, one has to read about what had been decided in Shamil bank, the Blom bank and Symphony Gems cases. In all of these cases, the English judges had issued their judgements based on English law.



With the development such as the above is it worthy to talk about Shariah compliance in its honest sense. By right what is started with the so-called Shariah compliant investment needs to be ended or resolved with similar pronouncement. It remains to be seen whether the parties are serious about the Shariah compliance aspect or they are just like any other players in the bond market.


Friday, June 26, 2015

"WAAD" AND ISLAMIC CONTRACTUAL FRAMEWORK?


‘WAAD’ OR PROMISE: WHY IT IS INCONSISTENT WITH ISLAMIC CONTRACTUAL FRAMEWORK

In one of the previous posts, we raised up an issue pertaining to the use “waad” or promise in Islamic finance and how it seems that this concept has been widely employed to achieve some objectives aimed at helping one party but denying justice to the other side in a transaction. For a start, Islamic law right from the outset has recognized a distinction between a promise and a contract (‘aqd) where a contract has been viewed more important than a promise at least in the context of external binding effect. However even in the case of contracts, Islamic law does look at the nature of the contracts concerned when it comes to the question of their external binding effect  that will define whether the court will enforce the ensuing obligations or not.

Saturday, June 21, 2014

CHARGING FEES FOR FINANCIAL GUARANTEE: THE BASIC ISSUE

GUARANTEE FEES AND ISLAMIC FINANCE: WHAT IS THE BASIC ISSUE??

Islam prohibits charging of interest for money lending if such is contractually made compulsory on a borrower and as such has made it very clear that payment and receipt of interest made compulsory based on contracts between the two parties is prohibited. However the borrower is allowed out of his own accord without compulsion to pay more than what he had borrowed from the lender as a token of gratitude for the kindness rendered. Money lending must always be treated as a benevolent contract in Islam that its shall carry no interest charges.

Saturday, October 5, 2013

CRISIS IN ISLAMIC FINANCE EDUCATION

Islamic finance as practiced today is a new phenomenon that is very interesting to look at not because it is related to the so-called growth  rate that is so impressive according to many reports of late. True that to a certain extent,  the figure normally quoted to support this claim of impressive growth is there to be appreciated but the basic question to ask is whether such an achievement is truly an achievement worthy of celebration.

Saturday, January 19, 2013

THE EGYPTIAN DEBATE ON SUKUK LAW


THE EGYPTIAN DEBATE ON SUKUK LAW
The current Egyptian debate about the sukuk draft law that had been proposed by the government and tabled in the People Assembly and passed but rejected by some shows clearly that sukuk is such a topical topic in a country where Islamic finance was tested many decades ago even before many other countries started their Islamic finance movement. During the eighties of the last century, many would remember the controversy surrounding the so-called Islamic investment schemes that were mushrooming in the country including the famous case of al-Rayyan Investment  Scheme. The difference is that the government of the day at that time had a very different attitude toward Islamic finance and about anything Islamic generally.

Friday, October 26, 2012

SUKUK BACKED BY MIXED ASSET

SUKUK BACKED BY MIXED ASSET


Sukuk literally means “pieces of paper” or “documents that acknowledge something.” In a commercial sense it refers to instruments used in Islamic finance to allow one party to raise capital or funds in the capital market with the issuance of sukuk papers that list the rights and obligations of all parties involved in a transaction. Even though sukuk are sometimes referred to as Islamic bonds, they are not bonds in the conventional sense as holders of the former are not supposed to expect a fixed rate of returns from their purchase of these securities, as is the case with conventional bond holders. In the case of sukuk, what is important is that holders of the certificates must own the underlying assets to justify returns which are not fixed but are tied to actual returns/incomes generated by the assets owned. Hence, in the case of sukuk musharakah, for example, investors are sold portions of assets to be used in business. Returns to holders are in fact income or profit earned from the use of the assets in a manner specified in the sukuk contracts.

Friday, July 13, 2012

ISLAMIC BANKS AND HOUSES UNDER CONSTRUCTION

ISLAMIC BANKS AND THE SALE OF HOUSES UNDER CONSTRUCTION: WHERE IS THE FAULT?

Issues have been recently raised about the predicament faced by consumers who have to suffer due to houses they purchased using Islamic banking facilities provided by Islamic banks in Malaysia. According to one report by Islamic Consumer Association of Malaysia (PPIM) complaints received by the association from consumers about house financing   in the past couples of years run into thousands mostly related to non-delivery of the purchased houses due to abandoned housing projects. Many parties have voiced their displeasure at the way the relevant financing is done and called for an immediate review by competent Shariah authority to address injustice to the consumers. What is more damaging, it has been said, the good name of Islam has been compromised by such a banking practice resorted to by the so-called Islamic banks.