DUBAI: Dubai s debt crisis has stifled sukuk issuance and unfairly put a damper on the Islamic finance industry, experts said, noting that an unstable credit environment and poor due diligence was to blame for the debacle. The state-owned conglomerate Dubai World rocked global markets in November when it unveiled plans to delay repayment of $26 billion in debt as it restructures. The company staved off default on a $4.1 billion Islamic bond linked to its property unit Nakheel after a last-minute bailout from Abu Dhabi. Prior to the repayment, investor jitters were heightened by worries about legal ramifications and the ability to claim assets, if there was a default on the issue. Executives at the Reuters Islamic Banking and Finance Summit said confusion about how Islamic finance works had led to an unfair focus on Dubai World s sukuk financing structure. There have been some ... stories to say that just because the transaction is Islamic, that s why it s gone wrong, said Muneer Khan, partner at Simmons & Simmons. In fact, he said: it comes down to credit worthiness. Conventional banks have suffered as much as Islamic banks in the global financial crisis, said Hussein Hassan, head of structuring, Middle East and North Africa at Deutsche Bank. There s an irony in that you would think that Islamic finance should have fared better than conventional, Hassan said. But they were all subject to the same pressures. In fact, some of the concerns raised around the Nakheel product would have popped up even if Nakheel had issued a conventional bond with a guarantee from Dubai World, said Anzal Mohammed, partner at Allen & Overy. In Nakheel, it was very much a credit issue, he said. Sharia scholars say that as Islamic finance is a relatively young industry, there is a lot of room for misconceptions over the Islamic structures involved in major deals Prominent shariah scholar Dr Hussein Hamid Hassan said under the ijara sukuk system, which was used in the Nakheel offering, the sukuk transaction was independent of the performance of the business underlying activities of the obligor. Scholars said Islamic finance was dragged into the broader problems Dubai World had in repaying its obligations. But it was not the cause. Jawad Ali, partner at King & Spalding, said there was an implicit perception in the marketplace - what he called a wink, wink understanding between investors and investment bankers - that Nakheel s debt was guaranteed by the government. Legal documents show the government does not back the loan and Dubai was quick to distance itself from the debt issue. But investors jumped into the deal based on Dubai World s cachet, without taking the time to understand what assets were being used to secure the transaction, experts said. In this case, it was not the land that was the asset but rather the leasing of the land when it was developed. The lesson we should be learning is that realities and perception and legal terms and conditions of the documents should always sort of match, said Sheikh Muddasir Siddiqui, Islamic scholar and partner at Denton Wilde Sapte. But Islamic finance experts do see some good coming out of the financial crisis, even if the industry has suffered some hits to its reputation. Investors are now demanding much more clarity, said Ziad Makkawi, chief executive of Algebra Capital. It s raised the bar and is forcing everyone to be more transparent. He said the focus now will be on the issuer and the credit worthiness of the deal, rather than their name or affiliation. Makkawi said the days of implicit guarantees are dead as investors are now looking for concrete facts and figures in order to become involved with deals in the region. You really have to have a solid structure and the pricing is now going to reflect the reality of the underlying risk, he added.
