‘A significant chunk of Dubai’s debt is in the form of Sharia-compliant bonds.’ What is unique with these ‘increasingly popular instruments’ is that lenders are forbidden to collect interest. It is now unclear how Dubai’s default will affect these Islamic lenders who gave these funds under a ‘partner-like relationship with the borrower.’ The misfortune that befell Dubai World, the Dubai emirate’s chief investment arm, now proves to be ‘a critical test for the rapidly growing Islamic finance sector, and Dubai’s murky judicial system.’
Muslim lenders and their Sharia-compliant bonds are in a fix. These lenders expect ‘that they hold the more secure position, and should be paid out before banks, a reverse of the traditional bankruptcy hierarchy. Of course, first they’ll need to get government permission to sue the government-run company, and even if they get it, Dubai law protects government assets from creditors. Dubai’s courts are run by the ruling family, and lawyers say their decisions are erratic.’
According to Zaher Barakat, a professor of Islamic finance at Cass Business School in London, ‘there are no consistent rules about who gets repaid first if a company defaults on such debt.’ Dubai World has, in recent years, issued many Sharia-compliant loan and bonds. As an ill effect of the global economic meltdown that saw the crash of the Dubai property market, Dubai World is now seeking to delay payments on its $59 billion debt.
