Heat and Noise

I make no apologies for returning to an issue I have commented on before – both in these blogs and in the editorials of The Treasurer.

The reaction to the announcement by Dubai World of a standstill in its financing arrangements has given rise to the usual mix of sensationalist and factually incorrect reporting in the UK press – whether in respect of Islamic finance, the legal relationship between the states of the UAE or, indeed, the impact on any or all Gulf region states. No doubt this is replicated across the Western media who often play fast and loose with financial reporting. Readers of The Treasurer and the Middle East Supplement (MES) have however been better informed.

In February 2008 the Accounting Auditing Organisation for Islamic Financial Institutions, AAOIFI, had outlined a number of principles applying to sukuk structures. In June this year the MES reported that according to Moody’s Investors Service, the disparity between the ideals and the reality of sukuk investing remained a concern: up to around 85% of existing sukuk across the whole of the Islamic world weren’t fully compliant with shariah requirements. It’s worth noting as well that the large majority of sukuk and similar Islamic finance debt issues have been made not in the Gulf or Middle East region; rather, Malaysia has the most developed marketplace – and Malaysia sits alongside the most populous Islamic nation, Indonesia. More pertinently, we highlighted Moody’s conclusion that where a sukuk’s security is property and the originator a real estate developer, then under distress it is likely that both originator and investor would be impaired simultaneously.

Treasurers however need to be aware that doing business in any developing marketplace – especially ones with a nascent legal infrastructure - requires additional effort to appreciate the formal and informal networks of commercial life. However my own view is that these practices should not fully override the principles of business: 'buy low , sell high'; 'pay debts when due'; and 'do what was agreed'.

By Peter Matza