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by Daniel Pipes
June 16, 2009
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Islamic banks have been crowing of late how well they weathered the financial tumult of the past year but that should not blind investors to the risks associated with these houses. The trouble was already apparent in the 1990s, as Clement M. Henry and Rodney Wilson tell what happened in their book The Politics of Islamic Finance, p. 34:
Earlier this year, I followed the fraud at Le Meridien Towers in Mecca. These problems continue today, as the Wall Street Journal's Stephen Fidler explains in "Defaults Pose Latest Snag In Islamic-Bond Market":
The once-booming market for Islamic-friendly bonds, having suffered a contraction amid the credit crisis, now faces a new challenge: default. The fledgling market in recent months experienced its first two defaults, and they aren't expected to be the last as issuers like Saad Group hit financial difficulties. This is taking investors and courts into uncharted territory as they seek to apply Western laws to bonds that were designed to comply with Islamic law, or Shariah. …
In October, East Cameron Gas Co. filed for bankruptcy protection after its offshore Louisiana oil and gas wells failed to yield the expected returns, partly because of hurricane damage. Some $167.8 million of sukuk bonds were affected. And last month, Investment Dar Co., a Kuwaiti investment company that owns a 50% stake in luxury-car maker Aston Martin Lagonda Ltd., missed a payment on a $100 million sukuk, becoming the first company from the Middle East to default on Islamic bonds. …
In what could prove to be a test case, a bankruptcy judge in Louisiana is deciding the fate of holders of bonds tied to bankrupt energy firm East Cameron Partners LP, which in 2006 became the first U.S. company to issue the most popular type of Islamic-friendly instrument, known as a sukuk. One question: whether the bondholders actually own a portion of the company's oil and gas. As such cases work their way through courts, or are resolved without court intervention, "they may give some guidance to investors on the default of sukuk and how this would be resolved," says Mohamed Damak, an analyst with ratings firm Standard & Poor's in Paris.
(June 16, 2009)
Related Topics: Criminality, Islamic law (Shari'a) receive the latest by email: subscribe to daniel pipes' free mailing list This text may be reposted or forwarded so long as it is presented as an integral whole with complete information provided about its author, date, place of publication, and original URL.
