Published: November 2017Contents
i) What are the hot topics?
Dana Gas’ (an issuer based in the UAE) attempts to render its mudarabah sukuk unenforceable on a number of grounds, one of which was that the sukuk were not shariah-compliant, has been the cause of great concern in the Islamic finance industry. Whilst Dana Gas has sought to bring proceedings to adjudicate on this matter in the Sharjah Federal Court of First Instance, a number of the sukuk documents are governed by English law, and so Dana Gas has also sought and obtained an interim injunction in the English courts preventing the sukuk holders from declaring an event of default or dissolution event in relation to the sukuk. At the time of publication, it was not clear whether there will be a full hearing of this matter before the English courts, but it was clear that a judgment in favour of Dana Gas could have wide ranging implications for the sukuk market, in terms of how such transactions are structured, and increase the likelihood of investors and rating agencies coming to the view that certain types of sukuk present a higher risk relative to corresponding conventional instruments, and offer issuers another ground to seek to declare their sukuk instrument as being not shariah-compliant.
ii) Tell us about any key legal developments – recent or pending – and their international impact.
The Dana Gas case (referred to above) is a key pending legal development, but the case is yet be heard, and the world of Islamic finance will watch this carefully given that it could have wide ranging implications for the sukuk market.
In the UK, the Financial Conduct Authority announced in July 2017 that it would no longer sustain LIBOR, the primary reference rate used in floating rate commercial financing arrangements (and many other financial transactions including Islamic finance transaction), as a benchmark beyond 2021. This announcement has
generated uncertainty in affected markets about existing transactions and the structuring of future floating rate transactions, or where LIBOR is used as a benchmark to calculate rent under an ijarah, for example. While there have been suggestions made by numerous market participants in the UK and US about new rates to replace LIBOR, it is too early for the financial industry to coalesce around one or more replacement rates. A decision will likely be made over the coming few years.
iii) What are the biggest opportunities and challenges for practitioners and clients?
Islamic finance development in Africa has been growing steadily, with more countries in Africa offering shariah-compliant banking and issuing sukuk. With almost 60% of the world’s uncultivated land and vast natural resources such as oil, gas and mineral deposits, Africa, dubbed Islamic finance’s “new frontier”, has proven itself to be an area of vast opportunity. Despite some high barriers to entry, such as regulatory setbacks, the issue of double taxation, and a lack of assets, there is clear demand for Islamic financing in Africa. In June 2017, the Africa Finance Corporation, a pan-African multilateral lender, was the first African government-backed entity to issue a three-year $150m sukuk. Islamic financing has also featured significantly as part of Egypt’s landmark solar Feed-in-Tariff programme.
Also growing is the demand for socially responsible investing (SRIs). Countries such as the UAE are promoting growth through investment in green projects through programmes such as its Green Agenda’s Green Finance and Investment Support Scheme. Among the financial vehicles being considered are “green sukuk”, the first of which was recently issued by Malaysia’s Tadau Energy.
In terms of commercial and transactional development, fintech is another focus areas in finance and Islamic finance is not immune to this trend. Peer-to-peer financing and crowd funding would appear to capture the very essence of Islamic finance and the introduction of shariah-compliant platforms such a Beehive should be the first of a number of similar initiatives.