Dubai's Debt Crisis May Hurt Islamic Finance

Dubai's debt woes are bringing the world's attention to the Islamic finance, particularly the Islamic bonds known as sukuk. Sukuk are Sharia-compliant bonds that do not pay interest. Instead, the sukuk sellers pay the debt holders a share of the rent or capital gains from non-cash physical assets or share of the profits earned from businesses purchased with the money raised. Unfortunately for the Nakheel sukuk holders, the real estate bubble in Dubai that promised big gains from rents and sales has collapsed. And the Islamic bond holders are facing the possibility of a major default, resulting in a dramatic sell-off of sukuk in the last few weeks. According to Data Explorers, a company that tracks how much of a company's stock or bonds are out on loan, about 75% of institutions holding the sukuk sold their position between the end of August and the end of November. "It's an extraordinary sell-off in a bond so close to maturity, when there was no indication of a problem refinancing. The data suggests they had some information that it was a good time to sell," said Data Explorers managing director Julian Pittam.

Dubai's recent request for a debt standstill for Nakheel, one of its biggest state-owned companies, has raised the possibility of the largest Islamic bond or "sukuk" default on record, raising alarms in the global Islamic debt markets.

Nakheel, the Dubai developer behind many of the Emirate's high-profile projects, has to find $4bn to repay sukuk by the middle of this month, according to a report in Financial Times.

If Nakheel doesn't get creditors to agree to a stay on their claims, the Dubai company could be declared in default after Dec. 14, 2009. A group of the sukuk holders, including New York-based hedge-fund firm QVT Financial LP, have appointed London-based law firm Ashurst to represent them in the matter, says the Wall Street Journal.

A December 2006 report on the Nakheel sukuk sale in Euroweek, a trade publication for capital markets, said about 100 accounts bought the notes. Of those, more than half were banks. By geography, about 40% of the issue was placed in the Middle East and 40% in Europe.


Beginning modestly in 2000 with three sukuk issuers collectively worth US$336 million, the Sukuk bonds exceeded $75 billion last year. Issuance of sukuk - both in domestic and foreign currencies - has been quite common in some countries. The most active issuers of sukuk in the past year include Malaysia, the UAE, Saudi Arabia, Pakistan, Kuwait and Bahrain.

The potential Dubai default is likely to negatively affect nations in Asia and the Pacific region planning to raise money by offering sukuk. Indonesia, Pakistan and South Korea are planning to sell Islamic bonds offshore in separate offerings. Jakarta plans to sell up to $1 billion of global sukuk by the second quarter of 2010, according to people familiar with the situation. Pakistan, the only other Asian nation to have issued offshore Islamic bonds, has just $600 million outstanding from its 2005 sale. It is looking to raise $500 million in Islamic bonds next year.

The Karachi city government is preparing to issue $500 million in municipal sukuk by February, 2010, a Pakistan finance ministry official said in September this year.

South Korea is looking to sell what would be its first ever sukuk as it continues to refine its tax laws to facilitate issuance. It wants to attract capital from Islamic nations to diversify its funding sources and reduce its refinancing risks. The Korean government has been planning a road show in Malaysia and the United Arab Emirates.

Since the start of this year, $8.1 billion of Islamic bonds out of the Asian-Pacific region have priced, exceeding the $6.4 billion volume in the same period last year, according to data provider Dealogic.

Last year's global economic crisis brought attention to Islamic finance as an alternative for both Muslim and non-Muslim customers. In an article, the Vatican newspaper Osservatore Romano voiced its approval of Islamic finance. The Vatican paper wrote that banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Osservatore Romano said. “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the "car industry or the next Olympic Games in London,” the article said.

Investors have been attracted by Islamic banking's more conservative approach: Islamic law forbids banks from charging interest (though customers pay fees) and many scholars discourage investment in excessively leveraged companies. Though it currently accounts for just 1% of the global market, the Islamic finance industry's value is growing at around 15% a year, and could reach $4 trillion in five years, up from $500 billion today, according to a 2008 report from Moody's Investors Service.

The unfolding debt crisis in Dubai is the severest test yet of the short life of the Islamic debt markets. The process and the outcome of the ultimate resolution of the debt crisis in the tiny Gulf Emirate will have a lasting impact on the future of the entire global Islamic finance.

Related Links:

Trillion Dollar Halal Business

Sukuk.me

South Asians Flee Dubai

Nakheel Saw Unusual Selling

Islamic Finance Structures 101: Mudarabah

Pessimism is the Ultimate Kufr

Nakheel Sukuk Saw Unusual Selling

July in Dubai

Is Halal Business Real?

For a long time, the halal simply meant buying meat from a halal butcher, who slaughtered in accordance with Islamic principles. But the halal food market has exploded in the past decade and is now worth an estimated $632 billion annually, according to the Halal Journal, a Kuala Lumpur-based magazine. That's about 16% of the entire global food industry. Throw in the fast-growing Islam-friendly finance sector and the myriad other products and services — cosmetics, real estate, hotels, fashion, insurance — that comply with Islamic law and the teachings of the Koran, and the sector is worth well over $1 trillion a year, according a recent report in Time magazine.

Time attributes the rise of the halal economy to the world's 1.6 billion Muslims, most of whom are younger and, in some places at least, richer than ever. Seeking to exploit that huge market, non-Muslim multinationals like Tesco, McDonald's and Nestlé have expanded their Muslim-friendly offerings and now control an estimated 90% of the global halal market.

McDonald's, Nestle and Tesco are not only non-Muslim owned and managed companies capitalizing on the growing demand for halal products. New ones, such as Canada-based Al Safa, whose products are found in major North American supermarket chains, are joining the fray.

A Muslim name, some Muslim employees, a logo containing Arabic, date palm tree, and a masjid, slick flyers announcing its Halal food products and a 1-800- number with a message greeting you with a Salam and a recording in English and Arabic.

But Al Safa Halal is not a Muslim owned company, according to Sound Vision website. The Kitchener, Ontario-based entity is actually owned by non-Muslim (Jewish) private investors, cashing in on the North American Muslim market.

Beyond halal food, the global economic crisis has brought attention to Islamic finance as an alternative for both Muslim and non-Muslim customers. In a recent article, the Vatican newspaper Osservatore Romano has voiced its approval of Islamic finance. The Vatican paper wrote that banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Osservatore Romano said. “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the “‘car industry or the next Olympic Games in London,” the article says.

Investors are attracted by Islamic banking's more conservative approach: Islamic law forbids banks from charging interest (though customers pay fees) and many scholars discourage investment in excessively leveraged companies. Though it currently accounts for just 1% of the global market, the Islamic finance industry's value is growing at around 15% a year, and could reach $4 trillion in five years, up from $500 billion today, according to a 2008 report from Moody's Investors Service.

Pakistan's Islamic banks plan to expand their network of outlets this year to take advantage of rising demand for Shariah-compliant financing according to Pervez Said, director of Islamic banking at the State Bank of Pakistan. These banks have 500 branches, after adding 210 outlets last year. Pakistan is promoting growth in Islamic finance to expand the reach of the banking sector which has less than 25 million deposit accounts. Shariah-compliant facilities are forecast to rise to 277 billion rupees ($3.5 billion) this year from 185 billion in 2008, according to central bank data.

French retail giant Carrefour has been selling Halal products in many Muslim countries for several years now. In fact, Carrefour Malaysia created a unique program in collaboration with the Ministry of Domestic Trade and Consumers Affairs. The company has a dedicated team to monitor and assist small and medium-sized enterprises to develop Halal products, which will be distributed through the Carrefour chains in Malaysia and other countries. Carrefour is the second largest hypermarket in the world, while Carrefour Malaysia set up its Halal Department in 2006.

Carrefour is now looking to expand in several more Muslim countries, including Pakistan. “We are not interested in what I call ‘French North Africa’, so in the west we won’t go beyond Libya. To the east we are looking at markets like Iran and Pakistan. India is too far away for us.” François de Montaudouin, chief executive of Majid Al Futtaim Group, said recently.

Former Nixon adviser and now an American-Muslim commentator, Robert D. Crane, recently described "the universal principles of what may be called Islamic economics, not the glitzy stuff of the so-called Islamic banks but the maqasid al shari’ah or universal and essential purposes of justice as taught principally in the haqq al mal of classical Islamic thought, first revived in the modern era by Grand Mufti Ibn Ashur’s book, Maqasid al Shari’ah, published in 1946 and translated by the International Institute of Islamic Thought in 2007". Crane says that "these provide a new paradigm ready to replace the bankrupt paradigm of concentrated power that dominates in both socialism and capitalism."

The dramatic growth of interest in Halal business and finance can be measured by many international conferences and expos held each year to bring together various regional and international players. A number of major events are planned this year in Asia, Middle East and Europe.

While the Islamic finance is still early in its early development stage, I see it as a crucial vehicle to ensuring in the future that significant part of the wealth of Muslim investors is invested with Muslim businesses in Muslim nations to help them develop. Already, the biggest foreign direct investors in Pakistan are Muslims from Dubai, Malaysia and the Middle East.

APP reported that Malaysia topped the list of investors making Foreign Direct Investment (FDI) in Pakistan during first six month of year 2008, according to data released by Ministry of Foreign Affairs. The Foreign Direct Investment during the first five months of current financial year reached US$ 1.8 billion registering an increase of 1.5 percent, export reached to US$ 8.2 billion with a growth of 20 percent and foreign remittance at 2.9 billion registered an impressive increase of 15pc.

The May Bank of Malaysia made the biggest investment of US$ 907 million in banking sector followed by Saudi Arabia with an investment of US$ 750 million in steel sector and UAE with an investment of US$ 500 million in power sector in Pakistan.

The global economic meltdown has not deterred the foreign investors, including Malaysia, from investing in Pakistan, as the Pakistan’s economy showed extreme resilience and defied the economic recession with registering growth in FDIs, Export and Foreign Remittance.

Islamic bonds, called Sukuk, are a great way for Muslim nations to raise development funds from Muslim lenders, rather than do Euro or dollar offerings in Europe and America. This Islamic bond market is also beginning to develop.

It is important for Muslim businessmen and entrepreneurs to seize the opportunity from the projected phenomenal growth of the halal markets. There are a whole range of products and services from food and medicine to finance to travel and entertainment that can come out of the halal movement. It is clearly a mutli-trillion dollar opportunity during the next three to five years.

Related Links:

Halal Journal

Islamic Finance News

Top 10 Islamic Funds Performance

Pessimism is the Ultimate Kufr

Islamic Finance Summit

Foreigners Eying Farmland in Pakistan

FDI Rising in OIC Economies