Sharia Banking and the Financial Industry

Despite the Dubai World debacle, Islamic finance remains an area of interest for Australian investors. When General Electric became the first major United States company to enter the sukuk market, it seemed Islamic finance was finally heading for its day in the sun. While the global financial crisis had shaken the western world, according to Bursa Malaysia global head of Islamic markets Raja Teh Maimunah, the Islamic market had escaped relatively unscathed.
“It has been really interesting times in the last nine to 12 months as we’ve seen the landscape change due to what I would call the western financial crisis, but everybody just calls it the global financial crisis,” Maimunah said.
“Governments in non-Islamic markets that never used to have any interest in Islamic finance are beginning to show interest and we have had calls inviting us to all corners of the earth.” One of the stumbling blocks in melding modern finance with Islamic law had been the prohibition of the payment of interest, according to a report in The Wall Street Journal. But the GE Capital deal, which involved a five-year, $500 million Islamic bond, signalled a bright beginning. “We intend to be regular issuers in the sukuk market and are heartened by the support we have seen in this first transaction,” GE Capital senior vice president Kathy Cassidy told The Wall Street Journal. And Siraj Capital chief executive Ibrahim Mardem-Bey said the transaction was a “big deal”. “People in the industry have been eagerly awaiting something good like this to reignite the market,” However, mere days after the transaction was made public, property developer Dubai World announced it was seeking to delay debt repayments, with its property unit, Nakheel, seeking a standstill agreement on a US$3.5 billion ($3.8 billion) bond due for repayment on 1 December. (more…)

In Dubai, simply bouncing a cheque can land you behind bars. So it should come as little surprise that since the global economic crisis slammed a painful brake on the emirate’s extravagant expansion, the courts have been busy with creditors struggling to recover debts from once booming businesses fallen on hard times. Most of the cases so far have been small and have attracted little outside attention. But now that Dubai World is seeking to restructure $26bn (€17bn, £16bn), there is the potential for the United Arab Emirates’ legal system to be tested like never before.
If creditors or bondholders did pursue legal action, however, they would be entering uncharted territory and taking on a system criticised for being outdated, unpredictable and lacking transparency. Much of the debt is believed to involve international, local and regional banks’ exposure to syndicated and bilateral loans. Experts say many of these creditors, particularly those with higher exposure to the conglomerate, would seek to work with Dubai World in an orderly restructuring rather than risk legal action.
The full extent of Dubai World’s financial difficulties is not known. But the group is understood to be looking to keep the process out of the courts, a person familiar with the situation said. Although there are bankruptcy provisions in the UAE’s commercial codes, there is no structured work-out system such as Chapter 11 in the US, or the administration process in the UK, says Neil Cuthbert, managing partner for the Gulf region at Denton Wilde Sapte, which is representing some Dubai World creditors.
Consequently, restructuring tends to take place by consensus with creditors. If not, the creditor can mount legal action against the entity but that would be a long and challenging process, lawyers say. (more…)

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