A decision by a Middle Eastern gas producer to declare its ownShariah-compliant bonds unlawful has baffled investors in the $2trillion Islamic finance industry.

Sharjah-based Dana Gas PJSC said Tuesday it no longer consideredits two Islamic bonds totaling $700 million issued four years agoas Shariah compliant under the United Arab Emirates' law. A courtin Sharjah has since barred bondholders from taking any actionagainst the company's securities until it reviews Dana Gas'sapplication to declare its debt “unlawful and unenforceable.”

“As creditors we understand that this is a liquidity and apayment issue, not a solvency issue — but clearly the company istrying to squeeze sukukholders to the benefit of shareholders andthat is a strategy that will end up hurting everybody down theroad,” said Abdul Kadir Hussain, the head of fixed-income assetmanagement at Arqaam Capital. Even if there were potentialdevelopments in Islamic finance that raised questions on thestructure, “it is still a debt instrument and money they haveborrowed,” he said.

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