Dubai under scrutiny after debt payment delay

[Chuck]

Brother Chuck, it is getting tiring the way you are disrespecting people's professional knowledge and underestimating your ignorance on the matter. You are NOT a financial expert by any standard, you're just blabbing laymen deductions, and it is getting annoying when you start claiming buying at 40. I am no longer willing to discuss finance with you considering you couldn't even address the most basics correctly or answer the questions set that ANY floor sweeper in a financial institution could have answered specifically.

But if you're going to claim that sukuk are proper Islamic then you are seriously blabbing out of place. Sukuk are fundamentally unislamic and all they did was avoid direct outright set interest-rate, did not avoid the forbiddence of "loan that brought benefits is still usury", nor the fact that guaranteed capital is not Islamically compliant. If you're going to count on wikipedia then you might as well subscribe to whatever nonsense is being written there.

Now you have moved to another topic. And I'm getting tired of you twisting and spinning. Wikipedia I gave for explanation, I don't have to write anything that is already written. Sukuks are Islamic or not they is debatable but they are based on lease-to-own model. Any argument against sukuk will make lease-to-own unislamic too.

As for disrespecting people's professional knowledge and underestimating, where did I do that? I only explained why your example was poor and stated empirical reasons for it. Anyhow, many of your statements were hearsay about Dubai, I can quote you again if you want. You can dodge it all you want but anyone with experience in financial market (or perhaps even with common sense) and not tainted by the media can see your mistakes. Example of one of your hearsay (my polite way of saying baloney): "Abu Dhabi has cut off Dubai."

 

[Chuck]

What I'm wondering is: is the debt of this company tied to the market value of its assets? If a creditor owns a portion of the company, that ownership stake should be tied to the market value of what they own, so this way there can never be a "negative-equity" position (like so many homebuyers in the US are facing right now). I understand that the company has more assets than liabilities, but this doesn't mean the liabilities can't become more than the assets should the market drop significantly lower.

It is not possible to guarantee against negative equity, because nobody knows what can happen in the future and how much a price of asset can fall, for example, drought, war, etc... However, in Islamic finance a transaction must be backed by an identifiable asset with fair valuation. Nahkeel sukuks were based on Ijara, which is lease to own. Sukuks were backed by assets, and Nakheel was the leaser and investors in sukuks were the owners of those assets. Nakheel is suppose to follow lease-to-own model and pay amount to the owners while gaining ownership of the assets. So it is true what you are saying about the ownership stake, which is there in DW's case for the sukuks, but that doesn't guarantee against negative equity. Because contract is based on the market price when the contract was signed, and if later market price falls significantly then there will be difference between the contract price and market price, hence, negative equity.

Islamic finance is going through learning experience since it is new industry in modern times, so Islamic scholar are studying cases as they emerge, working out and improving Islamic financial instruments. But certainly for now, leasing is halal and manuals of Islamic law are filled with the subject of leasing.

Nakheel is the real estate subsidiary of DW. DW has 2 big real estate subsidiaries Limitless and Nakheel which may not be profitable for the next 5 years due to real estate market crash. For this reason, DW wants to restructure debts so it can sale assets and off load the debt of these two companies and one investment company, and focus on companies that are healthy and profitable for DW.

Sukuks in the news were issued by Nakheel.

 

[rpwelton]

It is not possible to guarantee against negative equity, because nobody knows what can happen in the future and how much a price of asset can fall, for example, drought, war, etc... However, in Islamic finance a transaction must be backed by an identifiable asset with fair valuation. Nahkeel sukuks were based on Ijara, which is lease to own. Sukuks were backed by assets, and Nakheel was the leaser and investors in sukuks were the owners of those assets. Nakheel is suppose to follow lease-to-own model and pay amount to the owners while gaining ownership of the assets. So it is true what you are saying about the ownership stake, which is there in DW's case for the sukuks, but that doesn't guarantee against negative equity. Because contract is based on the market price when the contract was signed, and if later market price falls significantly then there will be difference between the contract price and market price, hence, negative equity.

Islamic finance is going through learning experience since it is new industry in modern times, so Islamic scholar are studying cases as they emerge, working out and improving Islamic financial instruments. But certainly for now, leasing is halal and manuals of Islamic law are filled with the subject of leasing.

Nakheel is the real estate subsidiary of DW. DW has 2 big real estate subsidiaries Limitless and Nakheel which may not be profitable for the next 5 years due to real estate market crash. For this reason, DW wants to restructure debts so it can sale assets and off load the debt of these two companies and one investment company, and focus on companies that are healthy and profitable for DW.

Sukuks in the news were issued by Nakheel.

A bond is a type of loan (or "investment" if you want to call it that) from one person to another with the intention of being paid back, and in the Western conventional finance it is paid back with interest. In Islam, the only way to be in debt is to borrow money from someone at 0% interest.

If these sukuk deals are made by fixing the amount of ownership to the market value based at a particular point in time, then this is essentially a loan. The parties are agreeing up front that they each own a portion of the company valued at X. So regardless of whether the companies wins or loses they still get X back, plus any profits. Is this not exactly what a interest-bearing loan is, albeit with different wording?

The only way Islamically this can work is if their ownership stake is tied to the market value as a percentage, not a fixed amount. This way they win when the company wins, and they lose when the company loses.

 

[Chuck]

A bond is a type of loan (or "investment" if you want to call it that) from one person to another with the intention of being paid back, and in the Western conventional finance it is paid back with interest. In Islam, the only way to be in debt is to borrow money from someone at 0% interest.

If these sukuk deals are made by fixing the amount of ownership to the market value based at a particular point in time, then this is essentially a loan. The parties are agreeing up front that they each own a portion of the company valued at X. So regardless of whether the companies wins or loses they still get X back, plus any profits. Is this not exactly what a interest-bearing loan is, albeit with different wording?

The only way Islamically this can work is if their ownership stake is tied to the market value as a percentage, not a fixed amount. This way they win when the company wins, and they lose when the company loses.

You know how contract of Al-Ijarah works or that is not Islamic in your opinion?

 

[rpwelton]

You know how contract of Al-Ijarah works or that is not Islamic in your opinion?

I am aware of ijara, in that it involves a business transaction whereby the lessee agrees to rent an item of productive use for a specified period of time, which is halal. However, a lease to own deal seems to be different (although I am aware that it is considered a type of ijara). As far as I am aware, the price of the asset to be sold at the end of the leasing term cannot be fixed before the contract is signed. One can, however, enter into a new agreement at the end of the leasing term where the lessee takes ownership of the item.

Perhaps you can explain the mechanics of this sukuk deal for me.

 

[Chuck]

(1) Nakheel sold properties against the issue of these sukuks.
(2) Nakheel leased these properties and giving a return on these sukuks. Half the returns were periodical and half were supposed to be given on maturity.
(3) Nakheel is suppose to buy back these properties at the maturity. However, contract doesn't guarantee that Nakheel will buy back these properties. I don't know the exact circumstances but DW parent company of Nakheel put some guaranteed behind these sukuks.

Issue is detailed here: http://blogs.thenational.ae/economy_blog/2009/08/nakheels-bond-prospectus.html

Assets belonging to these sukuks expected to have lost 20% of their value, that means market value of these sukuks should worth 2.8 billion currently. What happens is between DW and investors of these sukuks. Obviouly, there is a pressure from investors that DW buy back these assets at the original price of the contract. I don't know the exact details of the guarantee made by DW, if guarantee stipulates that DW buy back these properties at original price than DW has to buy them back at original price. However, as far as I know sukuks agreement doesn't obligate Nakheel to buy back these properties according to shariah compliancy rules.

Here is fatwa on lease-to-own transaction: http://www.islamweb.net/ver2/fatwa/ShowFatwa.php?Option=FatwaId&lang=E&Id=92515

 

[Chuck]

Nakheel paid its sukuk debt today with the help of Abu Dhabi *cough* *cough*

sukuks I purchased for 40, sold them for 115 today. *ahem* *ahem* that is 75% profit in less than a month.