Islamic finance damaged by financial crisis

Islamic finance damaged by financial crisis
Nakheel's Palm Jumeirah island off the coast of Dubai

Supporters of Islamic finance say that its model of risk- and profit-sharing is less vulnerable to the problems associated with Western finance, as demonstrated by the current crisis, but the response to our web poll last week suggests that our readers disagree.

More than two-fifths of those who voted in the poll said that the reputation of Islamic finance had been damaged by the financial crisis. One of the biggest question marks hanging over Islamic transactions is how they will hold up in distressed situations. Nakheel, a Dubai property developer owned by Dubai World, is in talks with creditors at the moment to try to restructure its $980 million sukuk, which is due on May 19.

Bankruptcy treatment is not clearly defined under Islamic law, perhaps unsurprisingly, and investors are afraid of the uncertainty as much as anything else. But doubts about where Islamic bonds fit into the capital structure of bankrupt borrowers have also contributed to unease about such transactions. Insolvency practitioners also question whether jurisdictions such as Dubai or Kuala Lumpur can handle large bankruptcies as efficiently as their Western counterparts.

Some of those questions will be answered in Dubai World's restructuring and by the subsequent reforms promised by authorities in the emirate and elsewhere in the Islamic world, but for the moment the jury is still out.

In total, 44% of respondents said that the reputation of Islamic finance has been damaged by the financial crisis, 34% said there is no change and 21% said that it has been improved. 

Photo provided by AFP.

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