Dubai and Islamic finance

November 30, 2009

Some great stuff from the great John Carney:

The market has recovered from the initial panic over a possible default on debt issued by Dubai World, and many are assuming that the United Arab Emirates will stand behind the bonds.

But under Islamic financing rules, creditors may be required to take a haircut. Guarantees on debt are prohibited by the shariah, which requires investors to accept risk in exchange for profits. Indeed, there were already questions about the legality of Dubai World’s debt arising from the principal guarantee of the bonds.

In recent years, there has been something of a backlash against some of the more aggressive types of Islamic financing, many of which have been structured to mirror Western bonds to make them more attractive to Western investors. Abu Dhabi, the UAE state expected to bail out Dubai World, may be hesitant to do anything that would be seen as disrupting the profit and loss sharing required by shariah.


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I have been following the Nakheel sukuk for nearly a year now and I re-read the prospectus to find out what the creditors could expect if there were a default: 2009/11/what-can-nakheel-sukuk-holders-e xpect.html

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