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There have long been questions around the rigour of Islamic finance as practised in the Middle East.
Without an overarching regulatory body in place to establish the Shariah compliance standards used in every Islamic transaction, issuers of, and investors in, Islamic instruments rely on the determination made by individual Shariah scholars.
These are complex theological assessments that could, at least in theory, be contradicted at any time by any scholar.
That means the religious premises upon which each deal rests could be brought into question. This inherent flaw does not usually pose much of a problem. In the day-to-day workings of Islamic finance, investors and issuers simply agree to consider the contractual agreement they are entering as halal – on the determination of the Islamic scholars hired for the task – and, of course, as legally binding.
In a sense, it matters little whether a deal is truly Shariah-compliant or not, as long as all parties agree to consider that it is, and to fulfil their financial commitments by it.
Now a debt restructuring brought by Dana Gas, an Emirati gas company, looks set to expose issues with Islamic finance that had long been ignored.