Dubai bonds, what are the implications?

I've heard some interesting stories from my friend about doing business in Dubai. He sells jewelry and regularly makes trips over there. His customers over there buy jewelry in large and lucrative quantities and he has built the contacts and relationships so that it is worth it for him to hand carry his jewelry from Malaysia and sell it in Dubai.

Sometimes, when my friend would call up, they would tell my friend they were busy and then out of the blue tell him to come NOW. They treat him like a dog. That example speaks a lot about the over cocky style of business over there. So it doesn't surprise me when Abu Dhabi tells Dubai to handle their own problems.

But now, the world is placing a huge microscope over the situation and how it is handled. This also has huge implications for Islamic finance. If the bond holders pull the nuclear option and take the assets over in court, we will see how the UAE responds as they probably will not be prone to letting foreigners come up and take over nationally backed companies. Further opaquing the situation, the Islamic Sukuk bonds may not give holders the legal strengths of bonds as they are considered a form of equity and bonds. Although, I'm sure the sukuk holders would prefer bond power in re-organization. I think a lot of people buying the Sukuks believe they are a type of bond.

The law system in in the UAE is also suspect as the courts basically do what the rulers say if they so deem it. For small cases, I think re-organization is not a problem, but for something like Dubai World, international investors will scrutinize their decision.

Even if Malaysia does not have a lot of interests directly affected by Dubai's crisis, their future growth and confidence in Islamic financial instruments are under scrutiny. They are affected as an Islamic finance hub. Future slow down in growth from this area will cut valuations of players in the Islamic finance arena today. A dubious ruling will definitely see the financial arena in Malaysia drop in value to investors. The public officials here should be mindful of the risks and take a proactive approach to the UAE handling of this situation. That means sending people over there to lobby the rulers not to screw up. We have vested interest.