Riyadh, Asharq Al-Awsat – Three years ago, there was fierce competition between the Gulf region, Dubai in particular, and Malaysia over the sukuk market. The competition caused a rapid growth in this new kind of Islamic tool, as the Dubai government and its subsidiary companies issued numerous consecutive sukuk between January 2006 and December 2007. The property and real estate company Al Nakheel issued the largest number of sukuk when it issued 3.5 billion dollars worth. DP World also issued 3.5 billion dollars worth of sukuk, whereas the Jebel Ali Free Zone issued 2 billion dollars worth. Dubai World issued 1.5 billion US dollars worth of sukuk before Al Nakheel issued an additional 750 million dollars worth. It is thanks to these amounts that the Gulf region took the lead over Malaysia, which established this Islamic economic tool when it first issued sukuk in 2002.
However, the global financial crisis in 2008 and the subsequent deficiency in liquidity led to a deflation in bank financing, showing signs that signs were looming on the horizon of a crisis in the sukuk market. Some exporters began to declare that they would not be able to pay off their debts on time such as the Kuwaiti Dar al Istithmar and the Saad Group. However, what dealt a lethal blow to the rising sukuk market was the announcement made by Dubai World on November 25 that it had requested its creditors to postpone the payment of its debts by another six months. These debts included Al Nakheel’s sukuk, which is considered the real estate subsidiary of Dubai World. The announcement came as a shock to those who had invested in the sukuk market and they found themselves in a fix. Will Dubai World pay off the sukuk on time? What if it continues to postpone paying the debts? How do we deal with this problem legally? Everybody began to pass the buck; the Dubai government announced that the debts are purely commercial and that it could not offer any guarantees in this regard, whereas credit rating agencies hastened to avoid accountability by re-classifying the group and giving it lower ratings. Lawyers and Sharia bodies also exchanged accusations about the ambiguity and problems with the structure of sukuk. Although Al Nakheel managed to pay off its debts on time, debate on the issue of sukuk continues.
In my view, the failures of some exporters of sukuk can be seen as something positive because it will cause this market to mature and improve, and it is better for this kind of failure to take place now than in the future. This crisis revealed the weakest points of sukuk as a financial tool and these are represented in the lack of support from advanced international financial markets or rich countries. Moreover, the fact that support of this particular tool is limited to two small markets in Dubai and Malaysia makes sukuk vulnerable to crises that may hit these two countries, as we saw in the case of Dubai World where the sukuk market suffered deflation, as the sukuk decreased from 39 billion dollars in 2007 to only 19 billion dollars in 2009. Another weakness is that sukuk are focused only on real-estate activity, which makes it vulnerable to the risks involved in this sector that suffers from speculation and that does not reflect the true state of supply and demand, especially in Dubai. The crisis also revealed that fragility of the legal and Sharia milieu and that most of the structures upon which these sukuk are based do not reflect the legal status they should be based on.
The recession and deflation from which the sukuk market is suffering today is not a major concern because these are natural outcomes for a new financial tool in the same way that any other new financial tool is being subjected to trial and pressure. I believe that this can be treated like a break in which weaknesses can be studied and tackled so that they are avoided in the future and so that this tool can grow. In the past, the growth of this kind of tool happened randomly and it was not subjected to scrutiny and the target was only competition and profit without considering the potential consequences, and this caused a relapse. However, the sukuk market will remain a promising one and is expected to achieve unprecedented growth because the prerequisites necessary for its growth are still visible; most Muslim investors want Sharia-compliant tools and that will never change.