The finance world was recently shocked by the disclosure that Dubai World, the conglomerate fueling growth in the desert kingdom, was not in a position to maintain its repayment schedule for its $60 billion debt. Dubai has often been held up as a shining example of Middle East growth with its expensive hotels (Burj Al Arab), tall towers (Burj Dubai) and artificial islands (Palm Jumeirah), and so this news had sent global markets in a panic.
However, various authorities have come out with statements saying that Islamic finance is not under threat due to the Dubai crisis. The Indonesian government would continue with its plan to issue Islamic bonds, or sukuk, next year, said debt management director at the Finance Ministry, Rahmat Waluyanto.

“[Dubai World subsidiary] Nakheel’s problems will add to the list of corporate Islamic bonds that have defaulted” in the past year, said Rahmat Waluyanto, the ministry’s director general for debt management. However, while some corporate issuers of sukuk had defaulted globally, the Indonesian government Islamic debt was unlikely to be affected, he said.

“While the Dubai World crisis could have some impact on capital inflows into emerging markets, the government is still upbeat that investor confidence in the country’s sukuk remains high” in the longer term, he said. “This is because Indonesia’s prospects and our long-term economic fundamentals remain good”. He said the debt crisis in Dubai would benefit Indonesia. "The government is not worried. We hope investors who are getting out of Dubai will enter Indonesia."

Mahmoud Abushamma, the head of HSBC Amanah Indonesia, the bank’s local Shariah unit, said he did not believe investors would treat all Islamic bonds the same after Dubai’s problems. Indonesian debt would not be compared with Dubai’s. “Indonesia is a much bigger country, with a much bigger economy and population. Indonesia has real manufacturing [industry], a lot more diversity in its economy. From that point of view, the effect [on sukuk] will not be negative,” he said.

Many people at the centre of Islamic finance, Malaysia, have also expressed their faith in the system’s resilience. CIMB Islamic Bank Bhd CEO Badlisyah Abdul Ghani has said that the situation in Dubai will have little impact on Malaysian Islamic banks as they have very little exposure to Dubai, focused as they are on regional markets. He also emphasized the strength of the country’s Islamic finance industry that has emerged unscathed from two earlier crises, one involving Malaysia itself.

Analysts of foreign banks present in Malaysia universally agree that the exposure to Dubai World’s bonds or other assets, though not quantified presently, was minimal and would not derail earnings momentum. HSBC Bank Malaysia Bhd deputy chairman and CEO Irene Dorner in a statement said, “HSBC Bank and our Islamic subsidiary HSBC Amanah continue to focus on growing our business here in Malaysia.”

After all Dubai is just a small city in the United Arab Emirates (around 1.3 m residents). But it is surprising which symbolic character Dubai is obviously representing with regards to global prosperity and wealth. It grew too big too fast is now probably facing an economic downturn for the years to come. But everybody who knows this vibrant city knows that it will come up again.