Islamic finance was set to be the wave of the future after the global financial crisis because it concerned real, asset-backed financial products. Shariah-compliant banking was seen as less risky than conventional finance and was hailed by the ethical lobby as the way forward at a time when banks and bankers were generally regarded with suspicion, if not outright hostility.
Western financial institutions woke up to the fact that here was a rich new vein of business to mine, and before you knew it all the major banks in the world had Islamic finance departments. Sometimes, these amounted to little more than one highly-paid scholar with a fatwa stamp in an office in Wall Street, but all were agreed there was great potential in Islamic finance, worth an estimated $2 trillion of assets globally.
Economic policymakers in the Arabian Gulf were quick to seize the opportunity. As the birthplace of Islam, where could be better to base the new financial industry? In 2013, Sheikh Mohammed bin Rashid Al-Maktoum, vice president and prime minister of the UAE and ruler of Dubai, declared his emirate would be the “capital of the Islamic economy” within three years.
It was an ambitious target, but by 2016 one leading policymaker said that the emirate was “80 percent” of the way toward it, pointing to Dubai’s position as the top global listings market for sukuk (Islamic bonds), an increasingly important halal food industry and its role as a center for family-oriented tourism, lifestyle and entertainment.
Other Gulf countries also claimed pre-eminence. Saudi Arabia, of course, was the leader in Islamic tourism as the location of the holy mosques of Makkah and Madinah; Bahrain pointed to its historic role as a center for scholars of Islamic finance and fatwa issuance. It looked as though the Middle East was about to overtake Malaysia as the global center for Shariah-compliant economic and financial products.
But that momentum now appears to have stalled. A recent report from Standard & Poor’s, the global ratings agency, said that Islamic financial assets had accelerated toward the end of 2016, but that such progress was “unsustainable” in the long term.
The agency said that economic worries in core Islamic markets, and currency fears, had made the Islamic economy less attractive; and it pointed out too that a lack of standardization was a barrier to creating a truly global industry based in the Middle East. The Islamic economy would continue to grow but at much lower rates than in the boom years from 2007 onward.
It is against this background that recent events at Dana Gas, an energy company based in Sharjah in the UAE, should be seen. In 2013, the company issued sukuk totaling $700 million. Dana, which does a lot of its business in Egypt and Iraq, had problems getting paid in those countries and the cash was a necessary bridge for it as it went about the process of enforcing payment terms.
Many of the UAE’s biggest companies have outstanding sukuk similar to Dana Gas’, running into many billions of dollars. Will they too be suddenly regarded as non-Shariah-compliant?
It did this with some success, winning arbitration awards against the two countries totaling $900 million, while simultaneously paying down the sukuk obligations, its Chief Executive Patrick Allman-Ward recently announced.
All of which makes its most recent actions puzzling for investors and worrying for advocates of the Islamic financial system. Earlier this month, Dana said it had received new legal advice which meant its sukuk were no longer to be considered Shariah-compliant “due to the evolution and continual development of Islamic financial products and their interpretation.”
Dana said it was proposing to replace the existing sukuk with new bonds, but in the meantime would not be making payments on the old sukuk and was seeking an injunction from the Sharjah courts to stop sukuk holders taking any action to enforce their claims against Dana.
Of course, circumstances change, and so do legal opinions. The advisers on the original sukuk may have slipped up, and only realized their mistake recently in light of new interpretations. But regardless of that, the Dana move has shocked some in the Islamic financial community who argue that, regardless of the changed interpretation, there is a legal and moral imperative to meet the terms of the obligations which were deemed Shariah-compliant when they were first drawn up.
There are much wider implications too. Many of the UAE’s biggest companies have outstanding sukuk similar to Dana’s, running into many billions of dollars. Will they too be suddenly regarded as non-Shariah-compliant?
Dana’s actions also appear to go against one of the basic precepts of UAE finance since the crisis in 2008: That bond repayments (including sukuk) will be regarded as a top priority in the event of a liquidity squeeze, above ordinary equity and bank obligations. This was the principle that saw Dubai World through the potentially life-threatening events of 2009 and 2010 when global investor patience with Dubai was being sorely tested.
Finally, the Dana debacle appears to confirm the belief that what is really needed is a much more standardized regulatory approach in the Islamic finance market. This will be difficult, with Islamic authorities strung out around the world, from Kuala Lumpur to the Gulf.
But the Gulf countries — led by Saudi Arabia, the UAE and Bahrain — could make a good start by urgently agreeing on a central Shariah financial regulatory agency to agree on the unification of existing standards.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai