As investors flee debt-laden Dubai, neighbouring Bahrain, Qatar and Saudi Arabia are likely to pick up much of its Islamic banking business, though the financial hub is expected to bounce back eventually. While banks and builders from London to Singapore count their losses from Dubai's troubles, there are also worries the crisis will hurt its status as a regional centre for sharia finance, which itself had a hand in the emirate's meteoric rise.
Dubai sucked up investments as Islamic banking boomed on the back of record oil prices, drawing throngs of specialist lawyers and bankers attracted by its ease of doing business and more cosmopolitan lifestyle than its conservative rivals. The emirate positioned itself as a Islamic finance centre with top lenders like HSBC, Deutsche, Standard Chartered using it as a base, as it sought to become a financial hub between Asia and Europe.
Much of that money and talent could now to flow to its immediate neighbours as Dubai slowly works through its mountain of debt and its shaken financial community exhibits a new-found aversion to risk. Up for grabs is a bigger share of an estimated $1 trillion Islamic financing industry, which like conventional banking is back on a growth trajectory as the global credit crisis ebbs.
Saudi Arabia, Bahrain and Qatar, which also have ambitions of becoming regional financial centres, will catch up as they are well regulated and have developed at a more measured pace, bankers told Reuters. "Saudi Arabia will be the next wave when it comes to Islamic finance in the Gulf," said Mohamad Safri Shahul Hamid, deputy CEO at Malaysia's MIDF Amanah Investment Bank.
"They have got all the infrastructure in place, they have all the guidelines on Islamic finance, Islamic REITs, Islamic securities," said Safri, who used to work for Deutsche Bank in Dubai. Countries outside the Middle East are less likely beneficiaries, market watchers say.
Malaysia, for example, has the world's largest Islamic bond market and is known for more business-friendly interpretations of what is allowed under sharia law than many Gulf countries, opening the door for a far greater range of financial products. Its ringgit currency, however, is tightly managed, restricting the ease of investment flows. Many Gulf currencies, meanwhile, are pegged to the US dollar.
"The problem with the Malaysian market is that it is very ringgit dominant so the dollar market is still not here," said Haszeri Hussin, Islamic treasury head at the Malaysian unit of Singapore's No 2 lender Oversea-Chinese Banking Corp. Dubai still attractive.
LONGER TERM Dubai's debt crisis exploded last week when the emirate, known for its flashy lifestyles, said it would delay payment on debt issued by two of its flagship companies while they tried to negotiate a restructuring with creditors. State-run Dubai World announced on Monday a $26 billion restructuring bid that would mostly affect property firms Limitless World and Nakheel, which had issued the world's largest Islamic bond.
Financial markets tumbled on the initial news, which investors feared could plunge the world back into financial crisis, though markets outside the Gulf have since recovered on a growing belief the problem will be largely contained to the Middle East. Global issuance of Islamic bonds, or sukuk, could taper off in the near term as investors await more developments in Dubai, but it is not expected to dry up completely, bankers said.
Uncertainty over the Dubai government's role and borrowing by the region's state-owned firms could see sovereign and quasi-sovereign bonds in particular come under greater scrutiny. The Islamic finance industry had already been growing more cautious as defaults elsewhere in the Middle East and uncertainty over how the courts would treat such instruments weighed on the market, which has over $100 billion of outstanding paper.
Still, many bankers believe investors will eventually see the Dubai restructuring - if it proceeds smoothly - as a singular credit problem rather than one which will permanently impair its Islamic financing ambitions. The Dubai International Financial Centre was set up to lure companies with tax breaks and other incentives and has a regulatory framework with its own laws and courts. "What happened in Dubai doesn't have anything to do with Islamic finance," said Abdul Jalil Rasheed, equities chief at Aberdeen Asset Management's Malaysian unit.
"It's just a question of them taking on more debt than they could afford." Jawad I. Ali, a Dubai-based partner with lawyers King & Spalding, also sees investors returning to Dubai over time, saying the emirate "has gotten as close to perfection as possible from a foreign investment point of view." "You can come in, you can set up with relative ease and there is relative transparency," he said. "This crisis is not going to affect that, they've already built that system. The market will absorb the shock and turn the page.