5 Min Read
* Dana says $700 mln of sukuk have become sharia non-compliant
* But scholars say certified instruments can't be reinterpreted
* Problematic aspects don't invalidate entire document
* Nothing intrinsically wrong with mudaraba format
* Dana case may cause stronger implementation of AAOIFI standards
By Bernardo Vizcaino
June 22 (Reuters) - Some of the top scholars in Islamic finance say it is difficult to declare an Islamic contract invalid because it no longer meets sharia standards, as the United Arab Emirates' Dana Gas is trying to do with $700 million of sukuk.
Scholars decline to comment specifically on the case, which Dana has filed at a court in the emirate of Sharjah. The company argues it should no longer make payments on the sukuk because the interpretation of Islamic finance standards has changed since they were issued in 2013, making them "unlawful".
But many scholars say Islamic instruments are not subject to reinterpretation if they were originally certified by a competent authority.
"The matter of compliance is determined at the time of issue," Sheikh Yusuf Talal DeLorenzo, author of a 1996 textbook on Islamic banking that is an industry reference, told Reuters. "Once that bridge is crossed, the matter is closed."
Sharia compliance is embedded in a document and cannot be voided even if some parts of a deal turn out to be faulty, said Mohamad Akram Laldin, executive director of the Malaysia-based International Sharia Research Academy for Islamic Finance.
Such arguments may help to determine the result of a dispute that has stunned the Islamic finance industry and made some investors question whether sukuk are safe investments.
Dana said last week that since its sukuk were no longer valid, it would not redeem them upon maturity in October. It wants an agreement with creditors to exchange them for new, four-year Islamic instruments offering much lower profit.
Unlike other legal systems, sharia has not been codified. It relies on interpretation through a process known as ijtihad, or legal reasoning.
That means different views often exist, and over time the consensus among the scholars who certify financial instruments as sharia-compliant can change.
For many investors, Dana's case is alarming because it raises the prospect that other companies with Islamic debt could justify not honouring their obligations by claiming sharia standards had changed since the debt was issued.
Dana's existing sukuk were originally certified as sharia-compliant by Dar Al Sharia, a unit of Dubai Islamic Bank . The Dubai-based advisory firm did not respond to repeated requests for comment.
The sukuk use the mudaraba format, a common structure which resembles an investment management partnership. One party provides funds while the other supplies expertise and management services.
A source with direct knowledge of Dana's position said the company would argue its sukuk were invalid because the repurchase price was fixed in advance, while coupon payments were decided with an interest-based calculation and paid regardless of the firm's performance.
Several scholars said there was no intrinsic problem in the mudaraba format, however.
"With specific reference to mudaraba, there is no sharia authority in the world who would opine that it is a somehow faulty or suspect method of contracting and conducting business," DeLorenzo said.
A fixed repurchase price and coupon payments are common across the industry, said Laldin, who is also deputy chairman of the sharia advisory council of Malaysia's central bank.
"There is nothing unusual about the structure. I am not aware of any new ruling about mudaraba that comes from scholars or industry bodies."
Mudaraba is covered by a UAE law dating to 1985, which all the parties would have known when the sukuk was issued, Laldin said.
A by-product of the Dana case may be wider implementation around the world of standards issued by the Manama-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
AAOIFI's standards are followed wholly or in part by regulators across the globe, although only a handful of countries, including Bahrain and Sudan, make them mandatory.
AAOIFI declined to comment on the Dana case. But the dispute illustrates the need for harmonisation of industry practices, AAOIFI secretary-general Hamed Hassan Merah told Reuters.
"A lot of regulators are now contemplating whether to implement AAOIFI standards on a mandatory basis. This would eliminate many issues across the industry, especially in cross- border transactions and syndications."
AAOIFI is working on an overhaul of its sharia standard for sukuk, which was issued 15 years ago. A draft is expected this year and a final version in early 2018, Merah said. (Editing by Andrew Torchia, Larry King)