Dubai bankruptcy 2009

Dubai finally goes bankrupt – but the interesting part here isn’t about the country going on a building spree and not being able to pay for it – that part was clear a long time ago – but the test Islamic financing is going through.

Dubai financed part of its debt binge through Sukuk bonds – a short version is that a special entity is created which ‘owns’ the asset, and ‘rent’ is paid to the bond holders in that Sukuk.

Whats the difference between regular financing and this Islamic financing? Nothing really, except for one interesting aspect – the bond holders can be paid a ‘lesser’ rent if the asset isn’t performing. With regular bonds, the interest has to be paid, rain or shine, or you’re in defualt.

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