Honest Money

separate and differentiate ad infinitum

Dubai shocked the world on Wednesday 25 November 2009 when it asked its creditors for a standstill on billions of dollars of debt issued by the Dubai World conglomerate and its property subsidiary Nakheel, builder of luxury homes on man-made, palm-shaped islands.

On Monday 30 November 2009, the Government of Dubai has refused to honour the debt obligations of Dubai World.
These debts are Islamic bonds or sukuk.

Sukuk (plural of sak) are based on the idea of making a non-permissible transaction [an interest-based transaction] permissible by introducing degrees of “separation” until eventually it becomes impossible for any jurist, however strict, to prohibit the practice as merely a trick to subvert the substance of Islamic law, the prohibition of interest based transaction. (1)

Sukuk are defined as certificates of equal value representing undivided share in ownership of tangible assets of particular projects or specific investment activity, usufruct and services. (2)
On Monday 30 November 2009, Nakheel asked for three of its listed sukuk worth $5.25 billion to be suspended from trade until it can inform the market more fully about its restructuring plans. (3)

Emirates Business 24/7 confirms this Tuesday 01 December 2009 morning that the sukuk of Nakheel are backed by real estate leasehold interests. (4)

The reason why on Monday 30 November 2009, the Government of Dubai has refused to honour the debt obligations of Dubai World is, said Abdulrahman al-Saleh, department of finance chief, that it is not correct that Dubai World is part of the government and that therefore Dubai World’s debts are not guaranteed by the emirate’s government.

Saleh’s remarks in an interview to Dubai TV, a station owned by the Ruler of Dubai, confirmed there is going to be a restructuring. This shows that [the masters of Dubai] are doing what they can to “differentiate” between the government and companies, said Mohieddine Kronfol, managing director at Algebra Capital (5)

But sukuk are already introducing a “separation” until eventually it becomes impossible for any jurist, however strict, to prohibit the practice as merely a trick to subvert the substance of Islamic law. Dubai now wants a further “differentiation”.

We thought the United Arab Emirates government had the ability to tax people or to print money to pay its bills and that there was virtually no credit risk [with sukuks]. (6)

By defaulting, Dubai has crippled itself, since this has impaired its ability to borrow further even though, as I just said, the UAE central bank could have printed UAE dirham to pay the interest on its sukuks. (7)

Dubai may have defaulted because the tangible assets underlying its sukuk are gone.
But how the heck was Dubai prepared to impair its ability to borrow further?

This anarchist cannot find an answer to the latter question and can therefore not but conclude that it has something to with the pegging of the UAE dirham to the US of A dollar. This pegging introduces the ultimate separation of the dirham from the real world.

Ivo Cerckel
honestmoney@maktoob.com
http://twitter.com/ivocerckel/

NOTES

(1)
Elisabeth Jackson-Moore, “The International Handbook of Islamic Banking and Finance”, Cranbrook, Kent: Global Professional Publishing, 2009, pp. 125 and 126

(2)
Muhammad Ayub, “Understanding Islamic finance”, John Wiley & Sons, 2007, Glossary

(3)
Nakheel asks for sukuk suspension
Nov 30, 2009 at 08:31
http://business.maktoob.com/20090000401938/Nakheel_asks_for_sukuk_suspension/Article.htm
SNIP
DUBAI – Dubai’s Nakheel, one of two flagship companies behind the emirate’s rapid growth, said on Monday it had asked for three of its listed Islamic bonds worth $5.25 billion to be suspended from trade until it can inform the market more fully about its restructuring plans.

(4)
Nakheel sukuk is backed by real estate leasehold interests
By Staff Writer on Tuesday, December 01, 2009
http://www.business24-7.ae/Articles/2009/12/Pages/30112009/12012009_ed5356960d4a444898dda269576f17b5.aspx
SNIP
Fixed income analysts said to Emirates Business that in the case of a sukuk, the Islamic version of bonds, the issue is always backed by asset. With regards to Nakheel sukuk, which is maturing within two weeks, the assets consist of the leasehold interest in all land, buildings and other property known as DWF South and Crescent Lands at Dubai Waterfront.

(5)
Dubai says not responsible for Dubai World debt
Mon Nov 30, 2009 3:33pm EST
By Rania Oteify and Tamara Walid
http://www.reuters.com/article/topNews/idUSGEE5AS0AH20091130
SNIP
DUBAI (Reuters) - The Dubai government said on Monday it wasn’t responsible for the debts of Dubai World, dealing a blow to creditors’ assumptions that the Arab emirate would guarantee the conglomerate’s liabilities.
“Creditors need to take part of the responsibility for their decision to lend to the companies,” said Abdulrahman al-Saleh, director general of Dubai’s Department of Finance. “They think Dubai World is part of the government, which is not correct.
+
Saleh’s remarks in an interview to Dubai TV, a station owned by the ruler of Dubai, came after UAE markets closed.
They have confirmed there is going to be a restructuring and are doing what they can to differentiate between the government and companies,” said Mohieddine Kronfol, managing director at Algebra Capital
+
Saleh made clear on Monday that while the government owned Dubai World, the conglomerate had long operated as a stand-alone entity and was never guaranteed by the emirate’s government
 
(6)
Harry Browne, “Fail-Safe Investing”, New York, St Martin’s press, 1999, p. 110
 
(7)
Harry Browne, “The Economic Time Bomb”, New York, St Martin’s Press, 1989, p. 41