Islamic Banking-r1:AMM grid in qxp 12/24/09 9:48 AM Page 73
accountaworst-casescenariolikeadefaultorinsolvency, Pakistan,whosaid85%ofnon-ijarah sukukissueswerenot
basedontheexperienceofotherdealshavinggone incompliancewithShariahlaw,thusunderminingthe
throughsuchproblems. credibilityoftheentireindustry;anddivergentstandards
“Precedentsindicatingwhatsuchascenariomayentail oncompliancebetweentheMiddleEastandSouth-east
arereadilyaccessible.Thesamecannotyetbesaidfor Asia.
Islamictransactions,particularlyindebtcapitalmarkets,” Sukukissuancemorethanhalvedbetween2007and
saysKhaleq. 2008,to$15.4billion,althoughitdidreboundto$16.2bil-
WhileuncertaintyaboundsintheMiddleEast,it’sa lioninthefirstthreequartersof2009.Issuancelevelshave
verydifferentstoryinMalaysia’ssukukmarket,according beendrivenbySouth-eastAsiaratherthantheMiddleEast,
toAbdulGhani. withtheGulfnationsaccountingforonly16%ofdealvol-
“Themajorityofsukukareunsecuredpaper,andthere umesinthefirsthalfof2009.
isnoexpectationwhatsoeveronthepartofthecreditors Butdespitethiscontinuinglackofclarityaboutrights
forusingtheunderlyingassettogetbacktheirmoney,”he andprocesses,themarketitselfwillpersevere.Certainly
says.“Thatassetisjustthereinatransactiontomakeit therewerefewinMalaysiawhofearedmuchcontagion,
Shariah-compliant;itisneverintendedtobecollateral.” evenwhenadefaultwasonthecardsinDubai.Malaysia’s
Instead,creditorscanseekaliquidationofasukukina US$66billionofoutstandingpublicandprivate sukukat
processwellestablishedovertheyearsinMalaysia’s theendofJune2009accountedfor62%ofthetotalout-
courts.Andthis,really,isthedifference:experience.“One standingsukukglobally,accordingtoBankNegara
ofthemajorthingsthatismissingintheGulfisthebank- Malaysia.
ruptcylaw,”AbdulGhanisays.“That’snotfullytested.” “TheMalaysianringgitsukukmarketwillbeisolated
fromthisincident,”saysAbdulGhani.“It’sadomesticmar-
COURTINGCONCERN ketwithitsownframework,itsowninfrastructure,itsown
AnotherareawhereNakheelcouldhaveshedsomelightis investorbase.It’sthemostmaturesukukmarketandits
theissueofmultiplejurisdictions. activitieshavebeentestedincourt,inrestructuringsand
Hadthecompanydefaultedonitssukuk,therewould reschedulingssince1990.”
havebeenmajorlegaldifficultiesbecausedifferentbitsof Hedid,though,expectdollarsukukissuedfrom
theinstrumentsarecoveredbydifferentlawsandcodes. MalaysiatostruggletotapGulfinvestors“asmostofthem
KhalidHowladar,ananalystspecialisingin sukukfor havebeenaffectedbyNakheel”.
Moody’s,saysthatthedeclarationoftrust,thetransaction Foritspart,BankNegaraMalaysiatoldAsiamoneya
administrationdeed,agencyagreement,certificates,co- default,ifitcame,wouldbe“acreditissueonaparticular
obligorguaranteeandtheDubaiWorldguaranteearegov- issuer”with“nosystemicimpactontheIslamiccapitalmar-
ernedbyEnglishlaw.Thepurchaseagreement,lease, ket”and“noadverseimpactontheoverallsukukmarketin
mortgagesandthesharepledge,amongotherthings,are thelongrun”.
underUAElaws–whichareIslamic.
“Thiscomplicatesissuessuchasenforcementof LESSONSMUSTBELEARNED
rights,”hesays.“Ultimately,evenanEnglishjudgment Thatmaybethecase,butthemarketisstillevolving.
willneedtobeenforcedlocallyand,giventheconflictof Ernst&Youngexpectsmoresovereignissuance,includ-
governmentownershipoftheentitiesinvolved,aswellas ingfromEuropeanandAsianborrowerssuchastheUKand
theimmaturityofthelegalenvironment,it’snotclearhow SouthKorea.Otherssayinvestorswillbegintopreferdeals
transparentorfairlocalcourtswouldbe.” fromwealthycompanieswithassetstobackthem–suchas
Intruth,nobodyintheirrightmindwouldhavetaken oilforAbuDhabi,andgasforQatar.
Nakheel’sbackers–ultimately,SheikhMohammedbin Effortsarelikelytoincreasesecondary-markettradingin
RashidAlMaktoum,emirofDubai–tocourtintheUnited sukuk.SaudiArabiaisalreadytryingthisbyintroducing
ArabEmirates. sukuktradingontheTadawulstockexchange,andthe
“It’sabravepersonwhostandsupincourtandsaysto IslamicDevelopmentBankproposestolaunchaninvest-
him:‘That’smine,notyours’,”saysonebanker.“Whenyou mentbanktocreateanIslamicinterbankmarket.
gotocourtinDubai,there’sasymboloftherulerbehind WhileNakheel’ssurvivalhasdeprivedthemarketofa
thejudge.Areyougoingtogointothatcourtandaskfor chancetolearnmoreaboutcreditorrights,thefuturemust
theruler’sassets?” involveanevolutionofstructuresthatmakesthesefactors
Kronfolalsodoubtsthepointofgoingtocourt.“It’s clearer.
neverhelpful.Andevenifyougotthecourttogiveyou “Thereisgoingtobeanincreasedpushfortransparency
accesstotheasset,whywouldyou?Itwillbecomplicated andbettergovernance,”saysKronfol.
–youwon’towntheland,you’llownalease,andthatland Asitstands,thewholemarketlookstarnished.As
isjustdesertwithafencearoundit.You’remuchbetteroff Asiamoneywenttopress,thegreatandthegoodofthe
withaplannedrestructuring.” IslamicfinanceindustryweremeetinginBahrainforthe
landmarkannualWorldIslamicBankingConference.
ISSUESTORESOLVE “Wewereexpectingtobeabletocelebratethetriumph
Thesukukmarkethasahostofotherchallengestodeal ofIslamicfinanceoverconventional,”saysonepersonin
withbesides. attendance.“InthelastyearmostIslamicbankershave
Theyincludealackofsecondarymarketliquidityany- beensaying:‘Lookatus,ifpeoplehadworkedwithusthey
whereoutsideMalaysia;thedamningremarksrecentlyby wouldn’thavelostanymoney’.Well,nobodyissayingthat
leadingscholarSheikhMuhammadTaqiUsmanifrom rightnow.”
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