Dubai Crash Will Test Murky Sharia Finance
Unclear how default will affect Islamic lenders, who earn no interest
By Kevin Spak,  Newser Staff
Posted Dec 1, 2009 9:48 AM CST
An Egyptian trader reads the newspaper while following the Cairo stock exchange market in Cairo, Egypt Tuesday, Dec. 1, 2009.   (AP Photo/Nasser Nasser)

(Newser) – Dubai World’s unraveling could prove a critical test for the rapidly growing Islamic finance sector, and Dubai’s murky judicial system. A significant chunk of Dubai’s debt is in the form of Sharia-compliant bonds, the New York Times explains. These increasingly popular instruments forbid lenders from collecting interest, instead putting them in a partner-like relationship with the borrower. There have been few major defaults on them, leaving courts little precedent in arbitrating them.

Holders of Sharia-compliant bonds intend to argue 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.