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God's Will Changes (in Shariah Finance)

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This is big news, both in the world of finance and in that of, well  ... Islamic theology.

In May of this year, [I'm sorry I'm late to this table] a company headquartered in the United Arab Emirates, Dana Gas, declared that $700 million of its sukuk bonds were, simply, invalid. It obtained a preliminary injunction against creditor enforcement. That may have been an opening negotiation ploy in a sense -- Dana coupled this announcement with an exchange offer, proposing to give its creditors new bonds for the old, with a haircut of more than half the value of the old.

Jason Kilborn calls this an "existential crisis" for the whole field of Islamic finance, or Shariah-compliant finance, of which these bonds were an example.

Does Dana Gas propose to change the rules -- rules that supposedly represent God's will, by its own sayso?

Well, no. Not exactly. But kinda.

Here is Kilborn's take:

Here's a Reuters story: 

Islamic law prohibits lending money for interest or, what is the same, buying (conventional) bonds. Nonetheless, there are lots of "sukuk" bonds circulating in the world, that is, bonds that are marketed as Shariah compliant, using various structures approved by boards of experts in which that prohibition does and doesn't mean.

One of the structures behind sukuk issuance -- indeed, a very familiar one in the field -- is known as mudarabah. This means that a partnership interest lies beneath the issuance. The idea is that a loan isn't really a loan if one partner issues an IOU to another -- its incidental to the equity interest.

A somewhat different way of accepting a non-loan loan, that is, selling approved sukuk, is known as ijarah. If the sukuk is ijarah, then some asset has changed hands, and the quasi-interest payments are lawfully considered payments on the lease of that asset.

I'm sorry if your eyes are glazing over. But here is the audacity of what Dana Gas is pulling. They claim that the sukuk they issued in 2013 under a partnership agreement were invalid, in violation of Shariah, because ijarah has supplanted mudaradah in the development of Shariah finance. They were apparently behind that curve at time of issuance, and they regret it now, but  ... whatcha gonna do?

This is blatantly wrong. The two structures (and several others) have long been considered alternative ways of doing the same thing (laundering interest payments, to be blunt about it). Neither has supplanted the other in any sense but the imagination of Dana's advisors.

The bondholders seem determined to fight this in the courts of the region. Thus far (into the month of July) the issuer hasn't even been able to get the bondholders to return their calls. Literally. They keep trying to arrange a teleconference to discuss new terms of payment, and they have been repeatedly forced to reschedule.

With what tricks dost thou not endow the minds of men, oh accursed hunger for gold?
(Statius wrote that. Or something like that. I think.)


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