The tsunami of the global financial crisis finally struck the coast of the Arab Gulf, after it managed to avoid this for more than one year, to the point that many believed that the region had emerged from the crisis without suffering any losses. However the world, and the Gulf States, woke up last Wednesday following the closure of the Dubai markets to the news that Dubai World had requested a six-month halt to debt payments that amount to around $3.5 billion, and this is in the framework of restructuring the company’s debts that total around $59 billion. This led to a wave of aftershocks that struck the global financial markets that were in the process of recovering from the effects of the global financial crisis. This was due to the close links between these markets, in addition to the fact that Dubai is the financial and economic icon of the Gulf, and was the prime destination for Gulf investors until not long ago. However this was when Dubai was enjoying an attractive investment environment. This was because this emirate [Dubai] was managed with the mentality of a company, away from the complex governmental bureaucratic complications. This is with regards to the impact of the financial crisis being experienced by Dubai on the global and local financial markets, but I believe that this impact will also affect Islamic banking in the region.
Dubai was poised to become the financial centre for the Islamic banking industry, and a gateway for Islamic banking in the Middle East, as due to Dubai’s position, the Gulf region was able for the first time in 2007 to surpass Malaysia in the issuance of Islamic Sukuk bonds. Dubai also sought to make the Dubai International Financial Centre [DIFC] the centre for Islamic finance as well, and last year DIFC sought to make Dubai Gold Securities compatible with the provisions of Islamic Sharia law, which was through cooperation between the World Gold Council, and Dubai Multi Commodities Centre.
DIFC was also planning to establish goods and services compatible with the provisions of Islamic Sharia law, launching a series of international Islamic share indexes in cooperation with the FTSE [The FTSE Shariah Global Equity Index Series], as well as an online platform for Islamic hedge funds. Dubai was planning on all of this in order to turn itself into an international financial hub for Islamic banking. Dubai also hosts many Islamic financial institutions, most notably the Dubai Islamic Bank, which was the first Islamic commercial bank in the world, as well as Noor Islamic Bank, and Dubai Bank which was a conventional bank that became an Islamic bank, in addition to a number of Islamic finance companies. There are also Islamic windows in a number of conventional banks, such as HSBC Amanah, and Saadiq Islamic Banking which is part of Standard Chartered Bank.
However I believe that this endeavour [to turn Dubai into a centre for Islamic banking] will be strongly affected by the results of the financial crisis that Dubai is suffering from today, and which is due to it’s companies inability to pay their debts, such as Dubai World, and Nakheel Properties. This news [of inability to repay debts] shook Dubai’s financial credibility, and raised many questions over Dubai’s financial transparency, as many investors and creditors had received assurances over the past month from officials that Dubai would be able to meet its financial obligations. The announcement of the restructuring of this debt also did not include a lot of detail, leaving many questions unanswered.
There is no doubt that all of these factors will [eventually] help to transform Dubai into an international financial centre, as it must enjoy a high level of [financial] credibility and transparency to do so, in addition to its institutions enjoying an acceptable credit rating. This is something that I think Dubai is not close to achieving today until it addresses these concerns wisely and carefully, and takes into account the concerns of its investors and creditors. In addition to this the crisis demonstrated the fragility of the financial and economic system in Dubai, which is one based on excessive borrowing to finance excessively luxurious dream projects without considering the economic feasibility of such projects, and therefore Dubai must arrange its priorities.
In conclusion, in my opinion the most serious thing about the Dubai crisis is that this may be a prelude to a new financial crisis that arises due to the bubble of sovereign debt bursting, and if this happens only God knows what the extent [of its impact] will be.