Islamic Finance - ECON-UH 3511X

Project Presentation

Sukuk & the Dana Gas Issue

Abstract

Despite being around for a few decades, the Islamic finance industry is still in its infancy, with a

huge potential for growth which is yet to be realized. A popular Islamic finance product is sukuk,

a money market instrument that mostly serves the same purposes as a bond in conventional

financial markets. The global sukuk market continues to grow today, and is also gaining

popularity in regions that are not Muslim-majority areas. However, it faced a setback with the

Dana Gas controversy of 2017, which is discussed in detail in this paper along with its

implications for the Islamic finance industry. The paper outlines how the Dana Gas issue arose,

the actors involved, and resolution of the dispute. It also contains a list of recommendations for

the Islamic finance industry following this issue and emphasizes on the need for standardization

in the industry as a potential solution to prevent similar controversies from occurring in the

future.

Introduction to Sukuk & Types of Sukuk

and are compliant with Islamic law. AAOIFI (Accounting and Auditing Organisation for Islamic

Financial Institutions) has defined Sukuks as “Certificates of equal value representing undivided

shares in the ownership of tangible assets, usufructs, and services or (in the ownership of) the

assets of particular projects or special investment activities.” The criteria mandatory for the

Sukuk to be deemed Sharia-compliant is as follows:

● The certificate must be representative of ownership in intangible assets, revenue-generating

entities, etc.

● Payments to investors (purchasers of the certificate) have to come from profits that have been

taxed.

● Upon the date on which the Sukuk matures, the price paid should follow the current market

price of the underlying asset rather than the amount for which the Sukuk was purchased.

Sukuks have various forms, but the entities common within Sukuks are an obligor, SPV

(Special Purpose Vehicle), and investors that purchase the Sukuk. Notably, the SPV is a

bankruptcy-remote enterprise that is different from the originator (issuer of the Sukuk

certificate).

Sukuk may be regarded as equity; even when structured according to a debt-based model

such as Murabaha or Ijarah, the certificate holders, nonetheless, own the asset that is being

leased. The 2 types of Sukuk are ‘Asset Based’ and ‘Asset Backed’. Asset-based Sukuks entail

raising capital in the specific circumstance where the principal is covered by the assets’ capital

value but the repayments and returns are not covered by the asset(s). In contrast, asset-backed

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involves raising capital in the specific circumstance where the principal is covered by the assets’

capital value and the repayments and returns are covered by the asset(s).1

Global Sukuk Issuance

Pre-2016 Developments

In the FY 2016, Sukuks were acknowledged as a feasible alternative investment by many

investors in conjunction with increased confidence of sovereign Islamic Financial Institution

issuers. An increasing degree of issuance supplemented the trajectory of growth for Sukuks,

especially its demand in global markets which were affected by challenging economic

conditions. Therefore, an increasing investor base augmented the geographical reach of Sukuks

with the United Arab Emirates (UAE) emerging as a leader in terms of volume and value in the

international Sukuk market, a title it has held since 2001. Meanwhile, the GCC (Gulf

1https://www.jur.uu.se/digitalAssets/563/c_563862-l_3-k_wps2017-2.pdf
2 https://www.researchgate.net/figure/Asset-Backed-Sukuk-versus-Asset-Based-sukuk_tbl1_316712256 [accessed
13 Dec, 2021]

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Cooperation Council) had control over half of the market share. Sukuk issuances reached

USD 88.3B in 2016 which represented an increase of 44% relative to 2015’s issuance of Sukuks

worth USD 60.7B. Market activity was the highest in Malaysia, and the increase in volume was

led by issuances in emerging markets such as Pakistan, Turkey, and Indonesia since GCC Sukuk

issuance remained stable. Moreover, Sukuk issuance had been consistently increasing from 2008

to 2016 except a one-time decrease in 2015 caused, primarily, by adjustments to short-term

issuances.

Islamic Financial Institutions (IFIs) formed the largest proportion of investors in the

Sukuk market since its commencement, but following 2010 Sukuk issuance was largely aimed at

liquidity management especially satisfying the Basel Capital Adequacy requirements (a

minimum CAR of 8%). Since the need for liquidity management for IFIs increased, the issuance

of short-term Sukuks (with a maturity of 12 months or less) multiplied with the highest numbers

of global short-term Sukuks issued in 2012 worth USD 65B. However, short-term issuance

declined because of a policy change by Bank Negara Malaysia which halted Sukuk issuance

under its evaluation of liquidity in Islamic capital markets.

A significant proportion of Sukuks in the market in 2016 were based on the Murabaha

structure with the wakalah structure the next most popular choice. Over the years, the ijarah

structure was utilized lesser and Sukuk al murabaha and Sukuk al wakalah formed 34% of the

total issuances. A hypothesis attributed to this change is based on reducing the dependency on a

single structure which would, eventually, drive sustainable growth in the Sukuk markets. Sukuk

ul wakalah were marketed to satisfy the various needs of investors by adopting a hybrid structure

consisting of a combination of ijarah and murabaha.3

3 Haroon, Omair, Sameen Fatima Meenai, and Aun Raza Rizvi. "Dana Gas: The Sukuk Dispute." Asian Journal of
Management Cases 17.1_suppl (2020): S42-S54.

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Recent Developments

During 2021’s first 9 months, the issuance of sukuks globally hit USD 147B with an expected

value of USD 180B as per Refinitiv’s 2021 Sukuk Perception and Forecast study. The growth of

Sukuk issuance is expected to continue at a 10% Compounded Annual Growth Rate (CAGR)

over the following 5 years (a projected issuance of USD 290B in 2026). Over 90% of issuance

has been done by Saudi Arabia, Malaysia, Indonesia, Turkey, and Kuwait in 2021’s third quarter.

Sovereign issuance has dominated the market with 58% of sukuks. Sukuks in international

markets (primarily Eurobond) grew to USD 42B (by Q3 2021) compared to USD 40B in 2020.

Such an increase is attributable to investor appetite for higher returns from debt in emerging

markets since lower interest rates are observable throughout the pandemic. As per Refinitiv’s (a

global provider of financial data) Head of Islamic Finance, during Q3 2021 the global secondary

Sukuk market reached USD 699B in value outstanding. Furthermore, by Q3 2021, approximately

USD 15B of Sukuk issuance has been attributable to ESG which is significantly higher than last

year's ESG issuance of USD 5B. This phenomenal growth in Sukuk issuance has, primarily, been

driven by the pandemic’s effects on many countrys’ finances, especially deficits in fiscal

budgets. Accordingly, the GCC set a record for the highest GCC sovereign Sukuks issued at

USD 41.2B which accounted for over 39% of the total sovereign debt issued.4

Dana Gas: Company Profile

4 https://timesofoman.com/article/108700-global-sukuk-issuance-to-hit-180-billion-by-end-of-2021

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Dana Gas is the first and largest private-sector natural gas company in the Middle East. It was

first established in 2005 and subsequently listed on the Abu Dhabi Securities Exchange (ADX:

DANA) 16 days later. As of Dec 7, 2021Dana Gas trades at a share price of AED 1.10, with an

issued and fully paid-up share capital of 6.99 billion shares, arriving at a market capitalization of

AED 7.7 Billion. Dana Gas has exploration and production, as well as processing and

transportation assets in the Kurdistan Region of Iraq (KRI) and Egypt.

➢ KRI: Dana Gas is engaged in and has interests in upstream, midstream, and downstream

activities, including the exploration, production, and processing of natural gas, gas

transmission, and the sale of petroleum products.

➢ Egypt: Dana Gas has high-quality gas assets and our principal operations are focused on

developing and producing from 15 fields in the Onshore Nile Delta. It also has potentially

three independent prospects with resource potential in the Eastern Mediterranean basin

offshore.

As of 2019, Dana Gas has proven and probable (2P) reserves exceeding 1 billion barrels of oil

equivalent and group production averaging over 66,200 boepd (barrels of oil equivalent per

day).5 Dana Gas aims to play an important role in the rapidly growing natural gas sector of the

MENASA (Middle East, North Africa, & South Asia) region, utilizing its considerable portfolio

of assets in the UAE, Egypt, and KRI.

Background for the Dana Gas Sukuk Issuance

5 https://www.danagas.com/investors/key-financials/

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Shortly after Dana Gas was established, it was in search of investors to fund its expansion

programs. Potential projects included those in KRI and Egypt and required substantial

investment to fund its ambitious goals. Sukuks are Islamic Sharia-compliant financial

instruments (replacing the role of bonds in conventional finance) and have been used in the past

decade or so in corporate and project finance transactions. Sukuk issuance has historically grown

since 2008 (add figure details here) and offers an investment solution that complies with Islamic

Faith and is perceived as less risky than conventional bonds due to its asset-backed nature. This

still does not take away from the fact that Sukuk issuances are still sparse in numbers and

volume compared to conventional bonds due to a lack of standardization and other reasons, as

discussed earlier. The Sukuk, structured as Sukuk al-mudarabah, was made possible by a SPV

(Special Purpose Vehicle) established by Dana in the island-country of Jersey. As mentioned

before, the trust certificates are issued to the investors by the SPV and the proceeds were used to

enter into a Mudarabah Agreement with the Obligor (Dana Gas) where the SPV would have the

acquired rights to clearly-specified business assets. The investors are therefore paid by profit

distribution at regular intervals and the structure dissolves at maturity as the obligor (Dana Gas)

would now buy back the rights to the assets by paying a predetermined price (Figure 1).

In October 2007, the Dana Group arranged to issue convertible Sukuk-al-Mudarabah (the

“Sukuk”) for a total value of USD 1 billion in the form of Trust Certificates through a special

purpose company (the “Issuer”). The Sukuk, which were drawn up to conform to the principles

of Islamic Sharia, were approved by the Company’s shareholders at an Extraordinary General

Meeting held in July 2007. As per the conditions of the Sukuk, the proceeds were used for the

acquisition and development of assets (the “Mudarabah Assets”) owned by Dana LNG Ventures

Limited. The Sukuk matured on 31 October 2012 and had a profit rate of up to 7.5% payable

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quarterly from profits of the Mudarabah Assets. In 2008, Dana Gas purchased some of the Sukuk

from the market with a nominal value of USD 80 million. 6 Despite the turbulence in the financial

markets after the 2007-08 financial crisis, Dana Gas continued its upward trend of reporting

increases in YoY (Year-on-Year) growth in revenues and earnings, as well as cash flows. The

surplus cash balances were used to repurchase the convertible Sukuk and funded further

expansion projects.

The bad news arrived in 2011 as Dana Gas reported a 24% decrease in cash flow from

operations due to low collections in Egypt.7 As the Sukuk maturity date grew closer, this was a

warning bell towards the need for restructuring the cash management strategy. As feared, the

trend followed in 2012 and as a result of cash flow issues and cash shortages, Dana Gas was

unable to pay the USD 920 million outstanding. This was a historical occurrence, making Dana

Gas the first UAE company that failed to repay its Sukuk holders on time. It was agreed in

November 2012 that the Sukuk would then be restructured and the maturity extended by another

five years.

In 2013, Dana Gas issued a two-tranche Sukuk (also known as a dual tranche Sukuk)

with a principal amount of approximately USD 950 million, listed on the Irish Stock Exchange

which is popular for the listing of Sukuk. The Exchange is a leading global exchange for the

listing of structured bonds and has been promoting its listing services in the Gulf and other

regions, for both Sukuk and conventional financing. The Sukuk which are listed on the Irish

Stock Exchange are technical listings and any trading in the underlying securities are carried out

on an over-the-counter basis off the exchange. 8 One of the tranches was regular (with a 9%

annual profit rate) and the other was convertible (7% annual profit rate). Each of the two

6 Dana Gas PJSC Annual Report and Accounts 2012

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tranches of the Dana Gas Sukuk was reduced to USD 350 million, following subsequent buyback

and conversion, and the outstanding principal amount was then brought to USD 700 million in

October 2017. As history repeated itself, Dana Gas once again called for restructuring to be

done, this time citing the Sukuk issuance as non-Shariah compliant. Dana Gas CEO Patrick

Allman-Ward stated that Dana Gas has transformed since the earlier Sukuk issuance and cited

that USD 900 million worth of receivables and a positively-changing risk profile positions Dana

Gas to pay back its obligations in an extended time frame. 9 This undoubtedly caused a dispute,

which will now be discussed in the following section.

Figure 1: Structure of the Dana Gas Sukuk (Source: Dana Gas Sukuk Prospectus)

The Dispute

In June 2017, Dana Gas PJSC (the Company) made an announcement that threw the global

Sukuk market into turmoil. The Company announced a refusal to redeem its outstanding
9 Dana Gas Outlines Broad Terms For Sukuk Discussions - 13 June

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Mudaraba Sukuk tranches – entered during 2013 and consisting of 9% ordinary certificates

worth USD 350m and 7% exchangeable certificates worth USD 350m, both due to mature in

October 2017. It contended that the previously issued Sukuk were no longer compliant with

Shariah law, and instead proposed a restructuring option. The proposal was rejected by the

creditors, the Sukuk was not redeemed in October, and a legal battle between Dana Gas PJSC

and Dana Gas Sukuk Limited (the issuer and acting Trustee of the Sukuk for investors) ensued.

Dana Gas PJSC – which had declared itself to be a Shariah compliant company in 2006 –

contended that continual development and evolution of practices, principles, and instruments in

the Islamic finance industry over the past years had resulted in the previously issued Sukuk now

being invalid under the rules of Shariah. The executed Mudaraba agreement was such that profits

from the Shariah-compliant Mudaraba assets would be “distributed quarterly in a ratio of 99% to

Dana Gas Sukuk Ltd (the Trustee acting for investors) and 1% to Dana Gas (as Mudarib).”10

Moreover, a Purchase Agreement was also executed, which would oblige Dana Gas PJSC to

repurchase the Trustee’s rights to the business assets by paying the relevant exercise price at the

time of redemption or at an earlier time provided the existence of extenuating circumstances. The

Company highlighted two major issues with its current Mudaraba Sukuk: it guaranteed fixed

rates of return to the Sukuk holders, and it assigned responsibility for the loss of capital to the

Company.11 Dana Gas PJSC argued that the former was unlawful as profit cannot be assured,

while the latter was unlawful as the Shariah prohibits holding the Mudarib liable for losses

associated with Mudaraba assets (provided that the losses do not result from negligence). The

Company also emphasized that there were numerous ancillary issues with the Sukuk, such as the

fact that the Sukuk did not enable reconciliation of amounts paid to Sukuk holders against profits
10 https://www.lexology.com/library/detail.aspx?g=620d006a-943f-42da-9330-058caa3f2ad6
11 https://www.danagas.com/wp-content/uploads/2019/06/Company-Statement-To-Sukuk-Bondholders_6-July-
2017
.pdf

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generated by the associated assets, as well as the consideration that capital losses did not

correspond to reductions in the value of the assets. As per both internal assessments and

independent legal opinions, the further provision of profits and principal repayments to Sukuk

holders would be in violation of both Shariah and UAE law; the Company argued that it was

therefore obligated to provide an acceptable restructuring option in order to both retain

shareholder confidence and ensure conformity to all relevant laws. It then offered a restructuring

option whereby the existing Sukuk holdings could be swapped with new, Shariah-compliant

Sukuk that would “confer rights to profit distributions at less than half of the current profit rates

and without a conversion feature.”12 The Company also filed for protection in Sharjah’s Federal

Court, claiming that no dissolution or default could take place given the unlawful nature of the

Sukuk.

After declining the Company’s aforesaid restructuring proposal, the Sukuk holders –

consisting of both UAE investors as well as international investors such as BlackRock and

Goldman Sachs – offered a proposal which would entail the payment of USD 300m and an

extension of the outstanding Sukuk’s life by three years. Dana Gas PJSC rejected the proposal,

and filed an action in London’s High Court, seeking for the aforementioned Purchase Agreement

to be held void and unenforceable. The Company made the following arguments to support its

case: the Purchase Agreement would not come into effect as the required transfer of the

underlying Sukuk assets would be invalid under Shariah law, the Purchase Agreement was void

as it was entered into based on the belief that the Mudaraba structure was lawful, and the

enforceability of the Purchase Agreement should be null given that all associated obligations

would have to be performed in the UAE and that they were unlawful in the jurisdiction of the

12 https://islamicmarkets.com/publications/dana-gas-outlines-broad-terms-for-Sukuk-discussions-13

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same.13 Ultimately, prior to the decision of the UAE court regarding the Shariah compliance of

the Mudaraba agreement, the London High Court ruled against all three arguments made by

Dana Gas PJSC against the associated Purchase Agreement. The Court found the following: the

Purchase Agreement would come into effect as the obligation to pay the exercise price was

separate from that of the lawful transfer of the underlying assets, the Purchase Agreement was

not void as the risk of mistake was effectively allocated to Dana Gas PJSC, and the associated

obligations were not unlawful in the jurisdiction of the UAE.14

Conventional and Islamic Perspectives

Creditors argued that Dana Gas PJSC had challenged the Sukuk’s Shariah compliance in order to

avoid its payment obligations upon their maturity. The Company had been facing commercial

and financial difficulties in the last few years, which included significant liquidity issues such as

credit deterioration and uncertain cash flows. When the Sukuk had been entered into, its validity

and enforceability had been determined according to UAE law, they argued; moreover, the

undertaking agreement had been entered into based on English law for the precise reason of

protecting creditors’ rights in such a situation, with Dana Gas having explicitly agreed to submit

to the jurisdiction of English courts and English law thereby being applied before Shariah

principles in determining obligations. Numerous financial and legal experts have agreed with the

Sukuk holders’ contention that the actual motivation of the Company in refusing to honor their

Mudaraba Sukuk obligations was to avoid having to declare themselves in default; in an effort to

benefit shareholders at the expense of Sukuk holders, Dana Gas PJSC was attempting to exploit

13 https://www.trowers.com/insights/2018/june/the-end-of-dana-gas-saga
14 https://www.clearygottlieb.com/~/media/files/emrj-materials/winter-2017-issue-no-5/deal-news-uae--can-the-
Sukuk-industry-survive-the-dana-gas-dispute.pdf

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the fact that certain elements of the underlying Mudaraba agreement were based in transaction

documents with varying government laws, thereby utilizing jurisdictional and structural

loopholes in order to avoid their obligations.

Islamic jurists have also concurred with the aforementioned view: scholars of the

Department of Fiqh and Usul al-Fiqh at the International Islamic University Malaysia found that

despite Dana Gas PJSC’s position of certain elements of the Mudaraba Sukuk not being

compliant with Shariah, the English court decision “seems to be fair based on the Islamic

maxims such as ‘Difficult situation cannot violate the right of other’ and ‘The conditional

matters among Muslims are binding’.”15 The jurists note that the enforceability of the associated

Purchase Agreement is based on the principle of Al-Wa’ad (promise), and that this principle is of

great significance in the context of the Shariah. The jurists quote the International Islamic Fiqh

Academy’s ruling that – in line with the Malikiyyah school of thought’s opinion that a promise is

legally binding if it is associated with a purpose and leads the promisee to commit to expenses –

the promisor in a Sukuk contract should be legally compelled to fulfill their promise to purchase

underlying assets at maturity. They also cite the results of a survey conducted on the subject of

Sukuk defaults, noting that over 80% of the respondents – who were mainly scholars,

practitioners and regulators – agreed that the Purchase Undertaking should be considered binding

as per English law. The scholars state that the legal and Shariah experts at Dana Gas PJSC

should have “acted earlier to justify the essence of the claim”; they assert that violation of the

contractual terms in the manner that it was done would be considered an act of hardship to a

contractual party, which would therefore require that Dana Gas PJSC respect the agreement and

accept liability.

15 https://www.emerald.com/insight/content/doi/10.1108/IMEFM-01-2019-0033/full/pdf

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 Resolution of Dispute

In hopes of ending the legal disputes in the UK and in the UAE, a committee was formed to

represent the Sukuk holders, including BlackRock Inc. and Goldman Sachs Group Inc. to

negotiate a new deal with Dana Gas. Dana Gas reported that the committee agreed to restructure

the Sukuk with two options included for the creditors - (1) to exit the Sukuk at 90.5 US cents per

dollar of the face value of the Sukuk or (2) to roll over the existing Sukuk into a new three-year

Sukuk with a coupon of 4% per annum.

Dana Gas announced in 2018 that an overwhelming majority of its Sukuk holders voted in favor

of restructuring the deal. In light of this decision, it was reported that Dana Gas will proceed to

dismiss all litigation disputes in the Sharjah courts and the English courts associated with the

Sukuk.16

Implications for the Global Sukuk Industry

It is important to understand that the Islamic finance industry has faced Sukuk disputes before.

For instance we can consider the landmark case of Shamil Bank of Bahrain versus Beximco

Pharmaceuticals Ltd. and others heard by the London Court of Appeal in 2004, whereby

Beximco called for the annulment of its murabaha financing agreement, alleging it was an

16 https://www.trowers.com/insights/2018/june/the-end-of-dana-gas-saga

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interest-bearing loan dressed up as an Islamic transaction. The court ruled in favor of Shamil

Bank and upheld the validity of the agreement based on the provisions of the contract.17

Sheikh Taqi Usmani, a prominent Islamic scholar, stated that over 85 per cent of the Sukuk in

circulation were non-compliant with Shariah in 2007, because they promised to pay back the

principal at the maturity date. Following a period of uncertainty, the Accounting and Auditing

Organization for Islamic Financial Institutions clarified its position on redemption features.

However, it was only after a year, in 2009, that Investment Dar, a Kuwaiti company sought to

discredit its Islamic bonds offering, when it was faced with the repayment of a wakalah deposit

received from the Blom Bank based in Beirut. Not only was the appeal rejected in an English

court, but Investment Dar was also prohibited from using arguments related to Islamic law by its

own Shariah Supervisory Board.18

Dar Al-Sharia, a prominent Shariah consultancy and a subsidiary of Dubai Islamic Bank was

responsible for approving the mudarabah structure of the Sukuk issued by Dana Gas.19 Within

the final terms of the Sukuk as stated at issuance, Dar Al-Sharia stated, ‘The Shariah advisory

board of Dar Al-Sharia has confirmed that the Transaction Documents are, in their view, Shariah

compliant.’ The terms also stated:

In addition, prospective investors are reminded that Dana Gas has agreed under the

English Law Documents to submit to the jurisdiction of the courts of England. In such

circumstances, the judge will first apply English law rather than Shariah principles in

determining the obligations of the parties.

17 https://www.bailii.org/ew/cases/EWCA/Civ/2004/19.html
18 https://www.lexology.com/library/detail.aspx?g=5bb11115-0711-4bd9-a473-00fa4d1a30ed
19 https://www.reuters.com/article/dana-gas-Sukuk-scholars-idUSL8N1JH2MI

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Despite claims by Dana Gas that its case had no wider implications on the wider Sukuk market,

panicked investors reacted by re-assessing their investment portfolios to ensure legitimacy. In

fact, Bloomberg had classified seven outstanding Sukuk issued by the UAE borrowers as risky,

based on mudarabah contracts. These included:

1. Abu Dhabi Islamic Bank’s 6.375 per cent Sukuk

2. Dubai Islamic Bank’s 6.75 per cent and 6.25 per cent Sukuk

3. Al-Hilal Bank’s 5.5 per cent Sukuk

4. Noor Islamic Bank’s 6.25 per cent Sukuk

5. GEMs Education’s 12 per cent Sukuk

6. DP World’s 6.25 per cent Sukuk

Consequently, many Sukuk issuers resorted to making amendments to their documentation in an

attempt to reassure investors of Shariah compliance. For example, the Islamic Corporation for

the Development of the Private Sector based in Jeddah amended its newest Sukuk prospectus to

include clauses that clearly renounced the company’s right to challenge the Shariah compliance

of the Sukuk issue. Dana’s case reportedly triggered a wave of modifications to the existing

regulation to ensure stronger governance.20

For an analyst, the Dana Gas issue was an eye opening case which required all investors and

analysts to be cautious in the future. In making investment decisions, this complicated situation

not only required simplified assumptions from an analyst’s perspective but also an investigation

of the much wider consequences of non-repayment for the Sukuk market, in general. The Dana

Gas Sukuk default in general and the lacuna exposed by the contradicting court judgments has

20 https://journals.sagepub.com/doi/pdf/10.1177/0972820119884395

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taught stakeholders of Sukuk investment lessons on the importance of documentation and

consideration of tighter clauses to ensure that it is binding in the law court.21

Recommendations

Given the panic that was created among investors following the Dana Gas controversy, it is clear

that the changes are necessary to prevent a similar incident from taking place in the future. From

a legal standpoint22, the following should be considered when drafting documentation for Sukuk

or a facility agreement for any Islamic facility.

1. Inclusion of representation from the obligor that the documentation is Shari'a compliant

and lawful

2. Inclusion of undertaking from the obligor that it will not challenge the Shari'a compliant

nature of the documentation after the contract has been signed

3. Allocation of the risk of invalidity, illegality and repudiation of the documentation to the

obligor and ensuring that the documentation clearly sets out the consequences, so that

there is no loophole in the contract which would allow the obligor to claim that the

documentation is void

Conclusion

There is little doubt that the Dana Gas dispute had a significant impact on the Islamic finance

market globally. It was a cause for concern for investors as they realized the implications of the

21 https://www.emerald.com/insight/content/doi/10.1108/IMEFM-01-2019-0033/full/pdf
22 https://www.trowers.com/insights/2018/june/the-end-of-dana-gas-saga

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dispute, with fears mounting that Sukuk issuers could simply declare their Sukuk as non-shariah

compliant in an effort to prevent repayment upon maturity. Many Sukuk issuers resultantly

scrambled quickly to make amendments to their Sukuk prospectuses in order to alleviate

investors’ fears. However, the Islamic finance market has recovered from this dispute as the

Sukuk market continues to grow today. The geographical distribution of Sukuk investors also

indicates that there is less of a regional bias in Sukuk, with Sukuk issuances receiving interest

from investors around the world. This a positive sign, with Sukuk becoming a viable form of

alternative financing, especially with the increased demand for liquidity during the pandemic.

However, Islamic finance today still remains unregulated on a global level as it does not have a

body similar to the Basel Committee for Banking Regulation. Although some institutions such as

the IFSB in Kuala Lumpur aspire to become the standard, they lack the resources, capacity,

mandate and political will. This means that Islamic finance is still not properly institutionalized

in most markets, which is primarily the reason that the Dana Gas dispute occurred. Although the

dispute was eventually dealt with, and other Sukuk issuers made sure to prevent a similar

situation, it still remains as a warning of what could happen if Islamic finance is not

institutionalized. In recent years, the diversity of type of shariah-compliant contracts used for

Sukuk has increased in addition to high-yield, non-investment-grade Sukuk issuances by non-

financial sector corporations. This indicates that with shariah-compliant contracts becoming

more complex and there being an increase in risk of default, it is becoming increasingly

important for over-arching regulation to be introduced. If not done, investors would continue to

demand security such as subjecting all transactional documents, and the Sukuk structure, to the

laws of a foreign jurisdiction for certainty around the rules applicable to any potential future

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disputes. All of this raises the cost of Sukuk issuance for all parties involved, making it less

competitive, and putting it on a back foot compared to conventional finance.

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