Britain has sought to make itself a hub for Islamic finance in the western world and, this week, investors will tune into a case in London’s high court with potentially wide ranging implications for the market.
Dana Gas, an energy company based in the United Arab Emirates, is pursuing its claim that a bond that was first sold to international investors, including Goldman Sachs and BlackRock, no longer complies with Islamic law due to shifting opinion among scholars. The dispute has reached the courts after Dana Gas last week rejected an offer by its creditors to restructure $700m of the debt.
The case is set to cut to the heart of a central tension in the sukuk market. While these debt instruments are designed to be incredibly similar to bonds, they have to generate regular returns for investors without infringing Islamic law’s prohibition on interest.
The market is largely dependent on the rulings of Islamic scholars and, while the consensus on which structures are compliant often changes, that has not in the past affected borrowers’ obligations to honour their debts. The Dana Gas dispute threatens to overturn that.
“Any judgment in favour of Dana Gas could have wide ranging implications on the sukuk market,” lawyers from White & Case said. “It could open the floodgates for issuers to use the argument that their instruments are not sharia-compliant as a precursor to force creditors into debt restructurings.”