Dana Gas saga has highlighted complexities within the industry
UAE Sharia board aimed at strengthening consistency
A new central Sharia board for banking and finance in the UAE will be a boon to the US$2 trillion Islamic finance industry, which has been rattled by a declaration by Dana Gas’ that its US$700 million sukuk is no longer Sharia-compliant.
Four years after issuing the Sharia-compliant bonds, the Sharjah-based energy firm said last month it is restructuring its sukuk maturing in October because it is no longer lawful under UAE legislation owing to the “evolution and continual development of Islamic financial instruments and their interpretation”.
The Dana Gas saga is now entangled in the courts, but it has revived a debate about the need for standardisation in the complex world of Islamic finance, where different scholars issue fatwas or religious edicts for products.
But the UAE Cabinet decision in May to appoint members for a central board called the Higher Sharia Board for Banking and Finance “to strengthen consistency of the Islamic finance industry across the UAE”, according to a statement on state-run Wam news agency, could help to tackle issues such as lawfulness of sukuk, experts said.
“As we have seen with the recent Dana Gas sukuk restructuring, there is uncertainty regarding the Sharia compliance of various sukuk structures, which impacts the growth and trust in the market from international investors,” says Khalid Howladar, the managing director of the risk and ratings Islamic finance advisory Acreditus. “A central Sharia board would help to remove these types of dispute and bring more efficiency, transparency and confidence to the sukuk market and will help to support the UAE’s role as a key centre for Islamic capital markets.”
The UAE Cabinet statement did not provide many details about the remit of the new central board, except for saying it would be “responsible for setting rules, standards and general principles for banking and financial activities that comply with Islamic laws as well as setting a general framework for Islamic governance and fatwa issuance on matters highlighted by the Central Bank or other financial institutions in the country”.
The UAE’s sukuk issuance, which is dwarfed by the conventional bond market, could increase if the board helps to streamline the process of selling Sharia-compliant instruments.
For example, last year the UAE sold $6.75 billion worth of international sukuk, a third of $18.42bn of conventional bonds issued, according to data provider dealogic. Already Nasdaq Dubai is a major hub for sukuk listings and will benefit from any increase in domestic sukuk issuance. Nasdaq Dubai has a total of 63 listings, with a value of $51.4 billion, one of the biggest in the world. The listings include sukuk from international companies such the Islamic Development Bank and the government of Indonesia.
“The impact on the industry [from the formation of a Higher Sharia Board for Banking and Finance] will be positive as it will now have a final authority for matters related to Sharia compliance,” says Mohamed Damak, a Dubai-based analyst with the credit rating agency Standard & Poor’s. “It may also help to ease the process for sukuk issuance by having a set of pre-approved structures or fatwas.”
Finding the right structure for sukuk could be time-consuming and costly. Sometimes a premium is imposed on sukuk issuances if they are more complex than conventional bonds.
Islamic products, in general, will benefit from lower costs.
“Standardisation of ?products should lead to a growth in the market as the costs of establishing new products and their time to market should fall,” says Farmida Bi, a London-based lawyer with the NortonRoseFullbright law firm. “A national Sharia board will also ensure that minority views will find it more difficult to gain traction in the market.”
Many Islamic bodies, such as Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and scholars have been calling for the creation of central Sharia board in countries that seek to bolster their Islamic finance industry.
One country that has benefited from having such a mechanism is Malaysia. Its Sharia board is the arbiter for all Islamic financial transactions.
The creation of the central board, however, was just one element that helped Malaysia to become a major centre of Islamic finance and a prolific issuer of sukuk .
“Malaysia has a market which favours sukuk being issued because domestically certain government entities must issue an amount of sukuk and insurance and pension funds must invest in a certain amount of Islamic assets,” says Debashis Dey, a Dubai-based partner at the White & Case law firm.
To have a vibrant sukuk market, the industry will need to have a greater variety of investors buying sukuk, rather than just financial institutions holding on the instruments.
But not all experts agree that a central Sharia board is needed to create harmonisation in the industry.
“Some would argue that such a board would create consistency,” says Abradat Kamalpour, a London-based partner with the Ashurst law firm. “The counter argument is that it could lead to stifling innovation and limiting the hands of banks to develop new products.”
With countries such as Bahrain and Malaysia having their own Sharia boards and a different set of fatwas, the battle to become the global hub of Islamic economy could heat up, particularly since Dubai is positioning itself to take on that role.
“I think any model adopted needs to be flexible to accommodate Sharia standards from different markets,” says Mr Kamalpour. “This is particularly important for the UAE because Dubai is a global financial centre and needs to allow for transactions to happen from countries that may have different Islamic banking models.”