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International markets reassured as London court throws out bid to void Islamic bonds

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Jack Barton

Jack Barton

"Hi Thibagaran, I'm glad you enjoyed t..."
Thibagaran Baskaran

Thibagaran Baskaran

"Very interesting article! I'd love to..."

In a case with implications for the $2 trillion world of Islamic finance, a judge in London dismissed a move from a Middle Eastern energy group to invalidate $700 million of Shari’a-compliant debt.

High Court Justice George Leggatt on Friday brushed aside in his written judgment the argument put forward by energy group Dana Gas of the United Arab Emirates: that changes to Islamic law mean its debt is voided.

The case has been closely watched by investors in Islamic finance because of the precedent that could be set by a successful argument.

Mohieddine Kronfol, chief investment officer specializing in Islamic lending at financial group Templeton Investments, told WikiTribune that his company is pleased with the outcome.

“The English courts have preserved the rights of sukuk holders and can only hope the company desists from its ridiculous treatment of creditors,” he said, referring to a type of bond designed to meet Shari’a law.

Such lending is certified by an Islamic scholar, and the bonds are structured to provide a return to investors while conforming to Shari’a law’s prohibition on interest.

The first private-sector Middle Eastern gas company, Dana Gas was founded in 2005 and has operations in Egypt, Iraqi-Kurdistan and the UAE.

In May this year, the company announced that it was having cash-flow difficulties and would negotiate with lenders to restructure $700 million of $1 billion in bonds it issued in 2007.

It went even further in a June 13 press release:

“Due to the evolution and continual development of Islamic financial instruments and their interpretation, the Company has recently received legal advice that the Sukuk in its present form is not Shari’a compliant and is therefore unlawful under UAE law.”

Lenders, represented by investment bank Deutsche Bank and global fund manager BlackRock, objected to a lawsuit the company subsequently filed in London.

The governing law of the contracts is English law, the judge found. Even if a UAE court upholds the company’s argument and finds that the bonds have become invalid under shari’a law, that should not have a bearing on whether they are valid in the UK, he found.

Companies operating internationally often choose English law to govern their contracts because it is widely perceived as among the most reliable and predictable legal systems.

While the case drew a lot of attention, Kronfol said he did not expect it to have implications for international markets.

“The global sukuk market remains on a healthy trajectory with over $400 billion in issuance so that no one transaction can derail the important role it plays in the shari’a compliant financial ecosystem,” Kronfol said.

The Islamic finance market is among the fastest growing global markets and is expected to grow to $3.5 trillion by 2021, according to lobby group Islamic Finance Council UK. London’s reputation as a global center for Islamic finance has grown rapidly in recent years, according to lobby group TheCityUK.

Dana Gas did not immediately respond to WikiTribune’s emailed request for comment. Reuters reports that the company announced it would appeal the decision and continue separate proceedings in a court in Sharjah over the same matter, which is due for judgment on December 25.

The company could also choose to settle with lenders, especially if its financial situation improves as a result of a rise in gas prices or success in other ongoing legal cases.

 


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Jack Barton is a staff journalist at WikiTribune where he writes about international law, human rights and finance, whilst covering daily news. He was previously a senior reporter at Law Business Research and has experience covering law and international development, with credits in the Sunday Times, the New Indian Express, and New Statesman online among others. He has an LLM in Human Rights and worked on a UN-funded research project, looking at peace processes.

History for stories "International markets reassured as London court throws out bid to void Islamic bonds"

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17 November 2017

17:57:07, 17 Nov 2017 . .‎ Steve Beatty (Updated → final pre-pub review)
17:52:46, 17 Nov 2017 . .‎ Jack Barton (Updated → BlackRock)
17:42:21, 17 Nov 2017 . .‎ Steve Beatty (Updated → )
16:34:03, 17 Nov 2017 . .‎ Jack Barton (Updated → Created)

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  1. Other

    Very interesting article! I’d love to know more about how financial instruments can provide any kind of return on investment when there’s an apparent ‘prohibition on interest’.

    Where does this added value come from? Are the financial instruments controversial in the Muslim world? What’s the line between innovative instruments and blasphemous ones?

    1. Rewrite

      Hi Thibagaran, I’m glad you enjoyed the article. My understanding is that sukuks are created by a very complicated combination of several different contracts, which together add value without any individual breaching Shari’a. I’m not sure that answers your query, but I am looking into a more in-depth piece about the world of Islamic finance and London’s place in that so stay tuned!

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