Laying the foundations
“What law firms really need are good finance lawyers who can structure and execute Sharia-compliant deals,” says Graham Lovett, managing partner of Clifford Chance’s Dubai office. “The skill is not in the execution of the deal, but in the structuring.”
Although the prohibition on riba is essentially what draws the line between Islamic and other finance, the complex issue of getting the transaction approved by a Sharia board is what can make or break a deal. Guanxi (close ties) with Islamic scholars who are on the Sharia board is all-important. “The only way to get cutting-edge deals is to be constantly involved in Sharia-compliant ones and know the outcomes that the banks, clients and scholars want to achieve from them,” says Bryans. “In other words, we have to provide an ‘Islamic solution’.”
This is echoed by Shibeer Ahmed from Lovells. “We spend a lot of time discussing issues with banks and the leading Sharia scholars and developing solutions to those issues,” he says. The results show: Lovells’ Dubai office has scored 13 sukuk deals worth more than US$12bn since it started operations in Dubai in May last year.
Of bonds & bulls
The market continues to be bullish when it comes to sukuk. With all the activity concentrated in the Gulf and Asia – particularly Malaysia – lawyers will have their antennae tuned to the region. According to a Standard & Poor’s Ratings Services report, the United Arab Emirates (UAE) dirham has emerged as the currency of choice for the issue of sukuk as the US dollar fades in popularity. In the six months to July 2008, less than 15% of the total value of Islamic bonds issued were denominated in US dollars. As the traditional interest-paying bond structure is not permissible under Sharia law, the issuer of sukuk sells an investor group the certificate, which then rents it back to the issuer for a pre-determined rental fee. The issuer also makes a contractual promise to buy back the bonds at a future date at par value.
The dirham accounted for about 35% of all sukuk issuance globally in the first half of 2008, followed by the Malaysian ringgit (about 33%), US dollar (13%) and Saudi riyal (12%). The shift from the dollar to other currencies, in particular the dirham, is partly due to the greenback’s weakness compared to other currencies but also the result of speculation about a change in the foreign exchange policy of some Gulf countries.
After the start of the global credit and liquidity crisis, sukuk issuers deserted global markets and concentrated on their own regions where liquidity was available and the appetite for Sharia-compliant instruments was strong.
In the first half of 2008, almost 70% of issuance was denominated in dirham and ringgit. Mohamed Damak, S&P’s credit analyst and author of the Standard & Poor’s report, is of the opinion that sukuk issuance is expected to reach between US$20bn and US$25bn in 2008, and that – despite the rather gloomy market conditions – sukuk issuance is expected to surge to the US$100bn mark in 2009.
“There are a lot more inbound deals in the sense that many of the Middle East issuers are issuing sukuk instruments which are often bought by non-Middle East institutions,” says Ahmed. “Middle Eastern Islamic finance institutions are also active in providing Islamic finance to non- Middle Eastern entities.”
Islamic finance: the new safe haven?
Whether Islamic finance is going to be a panacea for the global meltdown following the Wall Street collapse is anyone’s guess. If lack of liquidity is the main problem, cash rich investors from the Middle East might just be looking for a way they could maximise their opportunities right now. For lawyers, it may mean that Islamic finance will no longer be treated as a ‘specialised area’.
Looking at the number of lawyers flooding in to the Middle East in recent months and the expansion of banking and finance teams in the region, it is apparent that law firms are increasingly shifting focus – away from the US and UK, and towards the Middle East.
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