Career prospects in Islamic finance could be thrown into crisis by the pending default on a $3.5 billion Islamic bond issue by a subsidiary of Dubai World.
To comply with interest prohibitions and other provisions of the Quran, Islamic bonds are structured so that lenders and borrowers share risks of loss. Just how risk-sharing will operate in the event of a missed payment by Nakheel, Dubai World's real estate subsidiary, is anything but clear.
"Because there have been few major defaults in this market, there is little precedent for arbitrating the unique terms of these instruments," the New York Times observes.
Workout terms for Nakheel and its parent might be dictated by Dubai's government-run court system. But financial markets would probably view the outcome as a precedent for a future default of any sukuk, the most popular type of Islamic bond. If holders of Nahkeel's sukuk bond that matures Dec. 14 turn out to have less seniority than they thought, other Islamic bond issuers might face higher risk premiums in the future - restraining the growth of Islamic instruments and job prospects.
Globally, the Shariah bond market is estimated at about $1 trillion. That's up from $700 billion just two years ago, despite the intervening global debt crisis. In the first 10 months of 2009, global issuance of Islamic bonds grew 40 percent from the same period last year, according to Moody's.
Western institutions are involved with Islamic financial instruments as dealers, investors, index data providers, and even borrowers. For instance, the World Bank issued $100 million in Shariah-compliant bonds in October.
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