Islamic Finance Unravels
Dana Gas remains a stellar exploration business in Abu Dhabi, it remains stuck trying to recover nearly $800 million dollars worth of investment in Iraqi Kurdistan. Having underwritten heavy capital infrastructure with Egypt, it currently faces a liquidity problem, hence the lawsuit against its debtors seeking to restructure nearly $700 million dollar Islamic bonds maturing this October. Islamic bonds are called sukuk, they possess their own courts, lobbies and banks. Dana Gas is seeking to have its entire debt erased by declaring its interest bearding instruments non compliant with Sharia law.
Here’s how sukuk works; Islamic bonds are different from western bonds in that the borrower isn’t getting cash but a nominal share, a ratio of profit generated by investment. At maturity, the issuer must return the principal by buying the investor’s share in the agreed upon asset.
Here’s their problem: their is no global embodied standard for sharia compliance.
As Dana Gas remains squeezed, its seeing injunctions against other creditors seeking damages. This is happening in an environment of high volatility, low oil prices and globally restructured political economies in transition. Monarchies throughout the Gulf region are finding themselves having to float bonds from foreign investors to stay cash compliant. Moody’s and other global rating agencies are watching to see how Islamic finance breaches nearly insurmountable problems.
Watch for compressed yields from Gulf related central banks, risk discounts and multiple emerging sharia compliance authorities seeking wealth. This entire environment will only diminish the liquidity and growth of previously stable financial economies. What Islamic finance needs are indigenous institutions that provide stable norms, until that happens, remember Shakespeare: when the kind lay dying, the clowns cash in.
Originally published on William Holland’s website.