Friday, December 25, 2009
Stuck With Sukuks
"The debt crisis in Dubai is about to test one of the fastest-growing areas in banking, Islamic finance, and put the city-state's opaque judicial system on trial, according to bankers and experts in finance. Many loans and bonds that comply with Shariah, or Islamic law, were issued in recent years by Dubai World [DW], the investment arm of Dubai, and other Persian Gulf companies as oil-rich Middle East nations increased spending, and the global credit crisis fed-debt investments in emerging markets. ... This is likely to create many legal issues for investors in [DW], which sent jitters through global markets, by seeking to delay payments on $59 billion in debt. ... Shariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London. ... 'No one has tested the legal system or the documentation,' a lawyer briefed on the situation said. ... In October, the British Treasury drew up rules that would soon allow Britain to issue Shariah-compliant government debt. The same month, the World Bank issued $100 million in Shariah-compliant bonds", Heather Timmons at the NYT, 1 December 2009: http://www.nytimes.com/2009/12/01/business/global/01islamic.html.
DW sukuks were a disaster waiting to happen, see my 3 July 2009 post: http://skepticaltexascpa.blogspot.com/2009/07/eichmann-moment.html. I can't imagine how a government could issue Sukuks unless they are paid from some specific tax.