More on Awal Bank Chapter 11 Filing

Updated for comments on Chapter 11.

Here are some additional details on Awal's filing.

1. The case number assigned by the Bankruptcy Court of the Southern District of Manhattan is 10-15518-alg.  Awal's previous Chapter 15 filing has case number 09-15923alg.
2. As indicated by the "alg" at the end of the case number, Justice Allan L. Gropper has been assigned this case.
3. The Bank is being represented by Brown Rudnick LLP who filed the Voluntary Petition for Bankruptcy under Chapter 11.
4. The filing was authorized by Awal's Administrator, Charles Russell, LLP.  Presumably before proceeding CR obtained the no objection of the Central Bank of Bahrain who appointed them.  I think this is a pretty strong indication that the CBB has decided to proceed with the liquidation of the Bank.  Note:  A Chapter 11 proceeding is of course a reorganization not a liquidation.  The latter is Chapter 7.  Chapter 11 allows the debtor to propose a plan for dealing with its existing obligations - either payment in full, in part, conversion to equity, etc.  Post implementation the debtor continues as a going entity (e.g., Continental Airlines).  So what I mean here is that the CBB has decided to proceed knowing it will cause the lenders some pain.  That in turn means the situation is beyond repair.  And that the Bahraini authorities have decided to "bite the bullet" and take the reputational damage that will come from such action. 

As part of its filing, Awal Bank made the following statements:

1. After the payment of various expenses including that of administration, there will be no funds available for distribution to unsecured creditors.
2. Estimated creditors are between 50 and 99. 
3. US assets are above US$50 million up to and including US$100 million.
4. Estimated debts (worldwide) are over US $1 billion.  (This is the largest amount provided on the Bankruptcy Filing Form).

As required on the Filing Form, the debtor lists its top twenty unsecured creditors.  No amounts are provided though.

Here they are in the order of appearance on the Form:

1. Abu Dhabi Commercial Bank, Abu Dhabi
2. Abu Dhabi Islamic Bank, Abu Dhabi
3. AlGosaibi Money Exchange, Saudi Arabia
4. Bank of Montreal, Canada
5. Bayerische Hypo-und Vereinsbank, United Kingdom (London Branch)
6. Bayerische Landesbank/Bayern LB Germany
7. Boubyan Bank, Kuwait
8. Calyon Corporate and Investment Bank, United Kingdom
9. Commercial Bank of Kuwait, Kuwait
10. Commercial Bank of Qatar, Qatar
11. Commerzbank Global Equities AG (formerly Dresdner Bank) Germany
12. Commonwealth Bank of Australia, United Kingdom (London Branch)
13. Fortis Bank, Belgium
14. Gulf International Bank, Bahrain
15. HSBC, Australia
16. HSBC, United States (NY Branch)
17. HSH Nordbank AG, German
18. JP Morgan, United Kingdom (London Branch)
19. Kuwait Finance House (Liquidity Management House), Kuwait
20. The International Banking Corporation, Bahrain

If you're wondering about TIBC (which also filed under Chapter 15 in 2009) taking a similar action, a  court hearing is scheduled under their case next week Tuesday (26 October).  Stay tuned.

AlGosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell

 

 Warning:  Ethics Depicted in Picture May be Smaller Than They Appear

In  my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank.  The necessary step to get funds to AlGosaibi for the loan.

As they say (and they are right), reading is fundamental.   I could have saved a bit of time by looking a bit closer at two documents I had printed out.  

Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79.   Documents I had printed out on 9 July!

Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq.  of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date  ADIB agreed to confirm Awal Bank's letter of credit.  ADIB's SWIFT confirmation to Fortis was sent 16 June 2008  as per Document #24 Exhibit #2.  Some two or so months later.   By the way, that document (not the Bunge 7 April email but the copy of  SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration.  Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.

The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB.  There are a variety of copy parties but their affiliations are not clear from the message.  The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).

So what did the Bunge email say?

"Section 15. Structure  This is a structured transaction whereby Discounting Bank [AA:  Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA:  AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer").  Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately.  Applicant will enjoy the cash financing during the Tenor [AA:  the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA:  Awal Bank] on maturity of the Instrument."

This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded.   ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan.  Some might say that transactions like this are  a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).

It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.   

ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings.  They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC  it confirmed. 

Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country.  Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.

Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف  in their legal pleadings as in the case of TID v BLOM.

Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.

AlGosaibi v Maan AlSanea - BNPP versus Abu Dhabi Islamic Bank in re TIBC L/Cs

In discussing the Fortis lawsuit against ADIB, I mentioned that ADIB was also a defendant in a lawsuit brought by BNP Paribas' "Full Commercial" Branch in the Kingdom of Bahrain.

The relevant documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 603365/2009.   Or more precisely one document as all that is posted so far is the complaint by BNPP - missing what I'll bet ares some very interesting attachments.  Unclear why this is.  Especially since the submission in question dates from November 2009.

Here are the facts from the material posted on the NY Supreme Court's website:

1. In March 2009, ADIB issued six irrevocable reimbursement undertakings ("IRU's") in favor of BNPP to induce it to confirm 6 "commercial" letters of credit issued by The International Banking Corporation in favor of Dawnay Day and Co for the Account of AlGosaibi Trading Company.
2. BNPP confirmed TIBC's letters of credit and then upon presentation of the documents accepted the documents and the time drafts presented.  
3. On an unspecified date, BNPP claimed reimbursement of some US$44,875,000 from ADIB.  Presumably, the maturity date of the accepted time drafts.
4. ADIB refused to pay.
5. In September 2009 (after acceptance of the drafts by BNPP) ADIB obtained a judgment in Bahrain Court enjoining ADIB from making any payment.  
6. BNPP is seeking to have the Court issue a temporary restraining order preventing ADIB from moving assets (presumably balances in its correspondent accounts in NY) from the USA.
7. Its claim is for the principal of the payment (US$44,875,000) plus interest, attorney's fees and costs.

Now to some comments.

1. It's not clear to me why there isn't more precision in documents sent to the Court with exact dates when events took place, additional details of the individual transactions -  currency, goods, tenor, etc.  Perhaps time was of the essence and BNPP's lawyers wanted to file quickly to block the potential movement of assets outside of the USA. 
2. Dawnay Day was a very large "financial firm" with a commodities trading wing which ran into some "financial difficulties" as a result, I believe, of the global financial crisis (small "g" as always).  It was also an active participant in structured "Islamic" trade transactions as described in my post about Fortis.  It had at least one subsidiary Condor Trading which it uses so that the "purchaser" and "seller" of the goods are not the same party.  
3. It appears (but the documentary record here is very slim so this is an educated guess) to be a mirror of the Fortis transaction.  The TIBC L/Cs are one half of the "Islamic" structure:  the purchase on deferred terms.  For TIBC/AlGosaibi to actually get the funds a spot sale on a cash basis is required.  That could have been with Condor with TIBC Bank acting as the "arranger" of the transaction.   That is probably the most likely scenario and the one that I think happened - but again note this is an educated (or uneducated) guess.
4. Since discovery in other legal cases has resulted in the publication of  some details of at least the US - domiciled US dollar accounts of Awal Bank and TIBC, clever boots might be looking through that material for incoming credits around the time of the negotiation/acceptance (but not the payment date) of the first leg letters of credit. That is in the Fortis case the Awal Bank LC confirmed by Fortis under ADIB's IRU.  And in the BNPP case, the letters of credit issued by TIBC and confirmed by BNPP against ADIB's IRUs.  If these are indeed disguised clean money on money loans, the second leg (the spot sale) should have occurred around the same time.  The amounts would not necessarily be the same as interest on the loan might be built into the price on the first leg (the deferred payment).
5. But one key additional bit of information.  If we look at the Fortis Case (NY Supreme Court Reference 601948/2009 Exhibit #2 Document #34 Amended Declaration of Qays Zubi, we note two things.  First, TIBC LC's seem to have been denominated in Euros not US.  Second, a restraining order has only been obtained for four L/Cs not six as mentioned in BNPP's complaint.  The total of the L/C's mentioned in the Qays Zubi Declaration are some Euros 18,243,975.  Clearly, that does not equal US$44,875,000.  Two L/Cs are "missing".  Does that give Fortis a legal "wedge"?
6. We also learn that the payment dates on the TIBC L/Cs were between 22 June and 24 June.  You'll also notice that the certified translation has an error in that it shows the last LC as due March 23,2009.  The Arabic clearly states (in "Western" numbers not Arabic!!!) 23 June. 
7. The central point of BNPP's claim (like that of Fortis) is that under a documentary (aka commercial) letter of credit the bank's obligation to pay is independent of the commercial contract.  Its obligation is set by the terms of the letter of credit.  Compliance with the documentary requirements of the letter of credit establishes the obligation.  
8. To overcome the rather substantial amount of case law and precedents in favor of BNPP's legal position, I believe ADIB has to prove two things. (a)  Fraud in the inception.    (b) Involvement of BNPP in that fraud.  That is a a tough row to hoe as the saying goes.  

AlGosaibi v Maan AlSanea - Fortis Bank versus ADIB - The Letter of Credit

See important additional information here on Bunge's role in transaction and ADIB's knowledge of the nature of the transaction.

As promised a look at the Letter of Credit ("L/C") issued by Awal Bank which Abu Dhabi Islamic Bank ("ADIB") advised and confirmed to Fortis Bank Netherlands.

The text of the L/C issued by ADIB through Fortis is Exhibit #2 to Document #24, the Declaration of Nuhaid Saliba dated 31 August 2009. Note Exhibit #1 is the text that Awal proposed to ADIB.  That of course is not the instrument on which Fortis relied and through which ADIB conveyed its irrevocable undertaking.  Exhibit #2 is the key document as ADIB is its author.

And just to be complete, as you'll recall, ADIB is asserting fraud as the basis for voiding its obligation but not fraudulent documents or fraudulent shipment or non shipment.  Most jurisdictions have held that if the documents comply with the terms of the L/C then the bank is obligated to pay.  The "fraud" defense is applicable only in very limited circumstances.  

These and other documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 601948/2009, 

Let's step through the details of the L/C.

1. Issue Date: 16 June 2008.
2. Expiry Date:  14 July 2008
3. Applicable Rules:  UCPURR = Uniform Customs and Practice for Documentary Credits (#600 of 2007) and Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (#725 of 2007).  The former sets forth the rules for the handling of L/Cs.  The latter the rules for banks to reimburse or pay one another   These are pretty much the standard governing principles for commercial letters of credit (aka "documentary credits").
4. Issuing Bank:  Awal Bank BSC Bahrain
5. Applicant - AlGosaibi Trading Services Hamilton Bermuda
6. Beneficiary - Bunge SA Switzerland
7. Currency/Amount:  US$39.999,996.52
8. Payment:  360 Days after acceptance of documents.
9. Port Loading:  Any port in Brazil.
10. Final Destination: Any port in Taiwan and/or Spain.
11. Latest Date of Shipment:  30 June 2008.
12. Goods Description:  (a) 52,686.31 MTS of Brazilian soybeans, packing in bulk at US$564.90 Per MT CFR Taiwan (b) 30,000.00 MTS of Brazilian maize SLM packing in bulk at US$341.25 per MT CFR Spain.  (Note: CFR = Cost and Freight)
13. Documents Required:  (a) One copy of commercial invoice.  (b) One photocopy of the bill of lading. (c) One copy of beneficiary's certificate stating that the copies of shipping documents provided are true and correct copies of the originals.  That the original bills of lading relating to the shipment should be sent to the Notify Party stated in the B/Ls or to the agent at destination and that the goods described should be discharged at the port state in the B/Ls.

Additional Conditions:

1. Third party documents except drafts and invoices acceptable.
2. Documents showing one or more third party (ies) as shipper and/or exporter are acceptable.
3. Fax or photocopy of documents are acceptable.  Documents issued before LC issuance (including B/L) are acceptable.
4. Documents acceptable inspite of any and all discrepancies with exception that invoice value drawn may not exceed the maximum letter of credit value and the letter of credit may not be expired.
5. Typing mistakes do not constitute a discrepancies.
6. Late presentation of documents is accepted on the condition that documents are presented within LC validity.
7. Bill of lading presenting a greater quantity/amount than shown on invoice is acceptable.
8. Documents shall be acceptable as presented.
9. Abu Dhabi Islamic Bank Abu Dhabi UAE is authorise to confirm this L/C and advise it to Fortis Bank Rotterdam.
10. Fortis Bank Rotterdam is authorised to confirm this L/C at the request and for the account of the beneficiary.  The confirmation of the first advising bank, that is Abu Dhabi Islamic Bank, Abu Dhabi UAE covers the obligation of the issuing bank, that is Awal Bank BSC, Manama and the confirmation of the Fortis Bank (Nederland) NV Rotterdam only covers the obligations of the first advising bank, Abu Dhabi Islamic Bank, Abu Dhabi UAE.
11. Charges:  ADIB's confirmation charge (a cool US$500,000) for Awal.  Fortis' charge (not specified here) for Bunge.

Now to the tafsir.

First, as is pretty clear from the text of the L/C this is not a typical documentary letter of credit.  It is closer to a standby letter of credit - which you can think of as a guarantee of payment.

1. At no time do any of the banks involved have an original bill of lading in their possession.  An original bill of lading is generally required by a shipping company to release goods it has shipped.    Having the B/L provides a measure of collateral security, if the applicant does not pay.  Now in a transaction in which the bank is giving its obligation to pay the beneficiary in the future (in this case 360 days after it accepts the documents) having the B/L only provides collateral comfort for a short period while it is at risk for the applicant or issuing bank's failure to pay.
2. In Additional Conditions #4, the issuing bank has explicitly waived all and any discrepancies in the documents except for the amount drawn under the credit and presentation within the L/C validity.  That means any other condition.  Hardly the stance that a party concerned with the underlying commercial transaction would take.  The power to refuse payment for discrepancies (in the documents) provides a way to enforce the terms of the contract on the seller. Giving this right up doesn't make a lot of commercial sense.
3. In Additional Conditions #7, B/Ls showing a larger quantity are acceptable.  Under UCP 600, for bulk commodities, a variation of +/- 5% is allowed (Article 30 (b)) unless prohibited.  5% of the amount shipped would be roughly US$2 million.  Would all of you out there who think that Bunge is going to ship another US$2 million worth of crops but not get paid for them, please raise your hands?  Didn't think I'd see any.  Of course there is no harm in this clause as it benefits the applicant.   But what is the commercial reason this would be included?  
4. A couple other conditions are worthy of mention.  As noted above, Additional Condition #1  allows third parties on the shipping documents.  Meaning the shipper need not be Bunge and the party receiving the goods need not be AlGosaibi.   Additional Condition #3 allows documents to be dated prior to the L/C issuance. Faxes of documents are acceptable.  Coupled with the earlier waiver of  all discrepancies except for payment amount and presentation within L/C validity, all this looks like setting up the conditions for document shopping.  That is, making it very very easy to find conforming documents from another trade transaction not involving the parties named in the L/C.  All one needs is access to documents and a photocopier.

Second, is there a commercial reason for such a structure?  Possibly but how likely?

1. The above conditions would be useful if both parties were engaged in rapid turnover trading.  Bunge strikes a deal with ATS at price X but finds another seller willing to sell at less than X.  Being able to substitute sellers/shippers allows Bunge to make an additional profit by buying the goods from this other party and delivering to ATS.  This condition allows ATS to sell the goods  to a third party, Buyer B, before it has taken possession by switching the delivery party.
2. But waiving the right to refuse to pay for any discrepancies could be problematical if ATS has on sold the goods as described to new Buyer B.   One would think Buyer B would have stipulated certain quantity and type of goods and reserve the right to refuse payments if these and other conditions that it required were not met.  Now perhaps Buyer B has waived these.  But what are the chances?  The goods are the commercial heart of the transaction.
3. On that score it might be more typical to see an inspection certificate (of the goods) particularly since a third party shipper might not be as reliable as Bunge. 
4. Now it's not unheard of that cargoes already at sea are sold (remember that documents issued prior to the L/C issuance date are acceptable).  But at that point, one should know the exact quantity of the goods and the identity of the parties.  And this could be incorporated into the L/C.  Now, I suppose the transaction could be taking place so quickly that speed was of the essence - a split second response required.  However, the documents submitted in the case indicate that ADIB cogitated for a while (though perhaps not long enough) before agreeing to the transaction.  And then it appears the transaction amount was increased after it had given an approval for a lower amount.  And so it had an opportunity like Proud Edward "tae think again".  Though to be fair, ADIB seems like Proud Edward to have thought again after "24 June" and not before.
5. Generally, transactions of this sort would be secured (from the intermediary buyer's perspective -- here ATS) by use of a transferable letter of credit (opened by the final buyer Buyer B in favor of ATS).  Or through a "back to back" L/C which is a particular favorite among many MENA banks though it is technically less sound from a protection perspective, including for the issuing/confirming banks of the second or "back to back" L/C.

Third, so what could be another reason for this structure?   To provide Awal and/or ATS financing.  But this requires a few bits more in the structure.

1. This L/C provides for a payment to Bunge 360 days from documentary acceptance.  At this point there has been no movement of funds.  Now it's not uncommon in such situations for the seller (Bunge in this case) to ask the confirming bank (Fortis) to make an immediate payment.  The bank would "buy" (discount) the acceptance for an amount less than its face value.  You can think of the difference as interest.  This could get the money to Bunge, though strictly speaking that's not necessary to get funding to ATS/Awal.  
2. If you reflect on the typical "Islamic" "trade" financing described above, you'll see that the ADIB L/C is the equivalent of the purchase of the goods on deferred payment basis.
3. Getting the funds to Awal/ATS requires the other half of the "Islamic" "trade" financing structure: the offsetting transaction the sale of the goods for spot settlement.  Such as sale could be either back to Bunge.  Or to a third party.  This may be a reason why ADIB's lawyers are pushing for further disclosure by Fortis to see if they are involved in this critical leg.
4. Just to close the Bunge circle.  The usual "Islamic" "trade" finance transaction keeps the deal "all in the family" so it's not inconceivable that they might have been involved.  If Bunge were involved, one would presume that it discounted the Fortis payment to use as the purchase price back from ATS/Awal - of course with a suitable commission for its trouble.   Note:  This is hypothetical.  I have no knowledge of Bunge being involved in the second leg. This discussion provides an illustration of how the transaction may have been structured.  Not that it was so structured.
5. Presumably, ATS did not hang on to the commodities with the intent of selling a year later.  Equally, it's unlikely that ATS has a "factory" in which to process the goods.  So the likely disposition of the goods is a sale.  If the goods were sold on a spot basis, then ATS/Awal have a one year loan due when the Fortis acceptance "matures" - irrespective whether Fortis has or has not discounted that obligation.
6. It's well known out there that commodity companies and brokers (including the one named in the TIBC  BNPP / ADIB legal dispute) specialize in providing "trade documents" for "Islamic" "trade" transactions that are really disguised financings.  Because Shari'ah Boards have become a bit more alert, many of these parties have established special purpose subsidiaries with completely different names so the buyers and sellers appear to be unrelated parties.   And have made presentations to  banks who wish to engage in "Islamic" "trade" transactions (or loans if you'd prefer) on how they  can help.
7. How does this work?  The financing bank arranges to acquire goods from Company A (Let's call it Dewey Night Company).  It then sells them to the Buyer (borrower if you will) on a deferred payment basis (the tenor of the loan) at original cost plus a mark-up.  At the same time it offers to sell the goods spot for the Buyer (borrower) to another company (Let's call that one "Eagle" Trading Company).  Usually the Murabaha contract (for this is a Murabaha trade transaction not a loan!) specifies that the spot sale cannot be for less than the original cost. The helpful commodity firm or broker provides all the required documents for the two sales   The mark-up miraculously just happens to equate to the interest on the loan.  Proving that in some forms of "Islam" miracles are indeed common. The commodity company makes a fee for its role - just as the innkeeper makes a profit for renting you a room for a night.  Documents are available for the Shari'ah Board to review if it wants.  These on their face document a trade transaction.  It seems everyone is happy.  و الله اعلم
8. And if you'd like to place a deposit with a bank, you can do the reverse transaction.

Fourth, how does this transaction differ from a typical "Islamic" "trade" transaction?

1. The ultimate financing bank in the transaction is ADIB.  While it is true that it does not advance funds, it is ultimately on the hook if Awal does not pay.  Under its confirmation it is obligated to pay Fortis if Fortis claims within the validity of the L/C and complies with the miniscule conditions provided.
2. For this transaction it only requires half of the set of documents.  A bit less financial engineering.
3. More importantly what is in effect a guarantee or a standby L/C is treated as a commercial L/C with a lower capital charge under Basel II.  Thus, ADIB's risk adjusted ROE/ROA is higher.  And more importantly, its CAR is higher.

Fifth, how credible is ADIB's sudden charge that something was wrong with the transaction?  That there was potential for fraud.

1. First, to accept ADIB's contention, one has to begin by assuming that ADIB has a very limited understanding of letters of credit and UCP600.  Or that the L/C Department personnel assigned to this transaction were incompetent.
2. Second, one also has to assume that ADIB is rather new to structured transactions.  However, since AA has seen ADIB's "Islamic" "trade" documentation of various flavors, at least for AA accepting that is more than a "bit of a stretch".
3. Third, the documents submitted by lawyers in this case indicate what would appear to be scrutiny of the transaction by ADIB's credit department.  If this transaction "slipped by" and wasn't recognized as a "structured" transaction - a payment guarantee and not a trade transaction - then one has to draw some rather unfortunate conclusions about credit analysis and risk management at that bank.
4. Rather what seems to have happened is that ADIB decided for about 500,000 good reasons (the US$ equivalent of the confirmation commission it received from Awal) to go forward with a structured transaction.   One that had some CAR advantages.  
5. Now that Awal has hit the wall, in what sadly seems to be a tradition of some "Islamic" banks (paging TID in re BLOM)  it's looking for a legal way out. (Paging Abu Yusuf).  At least in this case, it doesn't appear they're resorting to spurious arguments regarding the Shari'ah.
6. Finally most of what is labeled "Islamic" "trade" finance  is structured with manufactured transactions   All the parties (save perhaps for the Shari'ah Boards) know that these transactions are structured.   That they are really money on money loans, dressed up in thaubs and ghutras to disguise the reality.  For ADIB to suddenly claim ignorance of this is well beyond the plausible. 

A bit later I'll post some more comments on this case.  In the interim, you can look at the NY Supreme Court website.  Documents #78 and #79 contain letters by the two sides recapping the main points of their arguments.

AlGosaibi v Maan AlSanea - Fortis Bank v Abu Dhabi Islamic Bank In Re Awal Bank

Asa Fitch over at The National has an interesting article on Fortis Bank's suit against ADIB for some US$40 million for ADIB's failure to honor its confirmation of an Awal Bank LC which was the basis for Fortis adding its own confirmation.  

The underlying transaction appears to one of those fairly common "Islamic" transactions - a loan disguised as a commodity purchase transaction carefully to  meet "Shari'ah compliant" banking "principles".  Yes, those quotations marks mean exactly what you think they do.

ADIB is asserting fraud in the inception by Mr. AlSanea as its defense against payment to Fortis.

Where have I heard that legal defense before?

And this is as good place as any to note that Mr. AlSanea denies any wrongdoing.

In any case, I'll post a bit more on this in a day or two once I regain my composure.  I can't stop laughing.

I thought the letters of credit that Ahli Bank Kuwait issued for TIBC were a howl.   ADIB's "letter of credit" is beyond that.  

As an extra bonus for your patience, I'll also post on BNPP Bahrain's suit against ADIB for some US$44.9 million involving letters of credit issued by TIBC that BNPP confirmed against ADIB's irrevocable undertaking.  

Abu Dhabi Islamic Bank - A Tale of Two Press Releases

Let's look at two press releases on ADIB's 2009 financial performance.  One reflects well on the professionalism of the institution.  The other frankly does not.  

Let's start with the offending press release.

First, at WAM the headline reads "ADIB Reports An Operating Profit of AED 1,527 mn for the 2009 Financial Year."

This approach illustrates another of Abu Arqala's 8 Simple Rules of Financial Analysis.  When the earnings headline doesn't mention net income, you know there's an earnings problem.  And a corollary:  the further down in the press release the net income line is buried the more serious the problem.  There were a couple of egregious examples of this in Bahrain a while back, despite a very clear statement in the Central Bank of Bahrain's Rulebook Module PD about burying bad information.

In the second paragraph, after being regaled with the year's numerous achievements we get the bad news:

After a year of multiple achievements, including: increasing total customer numbers by 27.2% to 342,097; the opening of the 50th branch in the UAE; an increase of 25.1% in total assets to AED 64.1 billion; the strengthening in both capital adequacy (to 16.96% under Basel II) and liquidity ratios (financing to deposits ratio improved to 83.9%); and a top three year-on-year improvement in customer service ratings, the Bank has taken a preemptive decision to set aside a year's earnings to enhance its total provisions and secure future growth.

You'll notice that the provisions aren't described as being necessary to cover duff loans and investments that the bank has made.  They are actually a pre-emptive decision to "enhance total provisions and secure future growth".  Right.

Equally amusing is the later statement "while the growth in customer financing comes on the back of a robust credit process that ensured the booking of quality assets."  If the credit process is so robust, why then is there a need for provisions of this magnitude?  Or are these the sins of the past? 

In regard to credit quality asset growth of  25% during the year is touted as though this were some great accomplishment.  It is really not that hard to make loans to people.  The trick is of course collecting the loans you've made.  That raises a second of AA's 8 Simple Rules of Financial Analysis.  When a bank has explosive growth in assets, look for a spike in bad loans to follow in the next 18 to 24 months.

If things are just fine, I suppose there is also an intriguing question why the Federal Government and the Emirate of Abu Dhabi had to put in additional capital in the form of Tier 2 instruments.  If I'm not mistaken the amounts are not trivial:   AED4.2 billion compared to shareholders' equity of AED5.9 billion as of 30 September 2009.

The press release then goes on to recount a variety of peripheral and not particularly important issues related to 2009's financial performance.  It seems in the hope that the bad news will be buried in so much prose that the reader will miss it or forget it by the time he finishes.

A couple of comments:

1. Provisions generally are the result of past mistakes and/or to be fair as well bad luck.  There's no real banker who's never made a bad loan unless it's someone who works in administration. That being said, precisely how booking a provision leads to further growth isn't clear.  In fact, when a bank has to take a provision this size, it might be a good occasion for it to consider whether a bit more moderation in growth (booking assets) is advisable.
2. Does whoever wrote this press release actually believe that this sort of announcement isn't perfectly transparent?  And doesn't elicit a snicker or two from just about everyone who reads it?  And leave the impression of less than kalaam sharif? 

Turning to the press release at the ADX, this is much more professional and deals with the provisioning issue in its headline:  "To Provide A Solid Base for Future Growth, Abu Dhabi Islamic Bank Sets Aside A Year's Earnings As Provisions".   

There the hard news is dealt with up front.  Some of my same quibbles would apply to the sugar coating of the need for the provisions, but at least the thorny issue is raised.   

BTW  provisions are now 4.2% of gross financings up from 1.69% the previous year.  Simply put, bankers don't take provisions for fun.  Taking provisions is one of the hardest things for a banker to do because it directly impacts his or her career and bonus.  Also it is very hard to get unneeded provisions past competent, diligent auditors particularly given the current constraints under IFRS for recognition of impairments.

So we're left with a question.  Did WAM take ADIB's reasonable press release and cut and paste to create what we saw above?  I'm guessing this is the case.  If so, then ADIB and others would be well advised to have a word with WAM to avoid "Gulf News journalism standards" in the future.