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The Collapse of Dubai's

Economic Dream: AConsequence of Abandoning the IslamicEconomic SystemSaturday, 26 December 2009 13:50 Adnan Khan

Whilst many have been looking at the prospect of global economic recovery,Dubai sent investors into a tailspin in December 2009 when the governmentrevealed that it planned to ask creditors of Dubai World, the state-ownedconglomerate, for a six-month standstill on its debt repayments, stopping short of defaulting. Dubai has $ 80 billion worth of debt, with the vast majority held byDubai World, which owns Nakheel, the property developer.

Nakheel, which built the Palm Islands in the Gulf, was due to repay a $ 4 billionIslamic bond on December 14th 2009. Most investors had assumed that therewould be no difficulty doing so as Dubai World, the Government of Dubai andSheikh Mohammed bin Rashid Al Maktoum, Dubai's billionaire ruler, wereassumed to be supporting the developer. It now appears that nobody has themoney to repay or refinance the bond and so the other $ 56 billion of DubaiWorld's liabilities are also at risk.

Dubai's rulers were considered to have provided a master class in how todevelop an economy from almost nothing. They used what oil revenues they hadto create a port and free-trade zone, believing that their little state could become

a business hub if they created the right conditions. For many this was a shrewdmove. Emirates, the airline, bolstered the hub and became the best possiblemobile advertising banner. Dubai was considered a genuine economic miracle.

However the global economic crisis brought Dubai to its knees and has exposedthe fragility of its economic model. Dubai's growth was initially through its oilwealth. This wealth was used to develop Dubai in order to attract foreigninvestment and soon enough, foreign companies and foreign workers arrived

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looking for opportunities in Dubai. Its position as a trading hub meant manycompanies relocated their staff to work from Dubai which is fundamentally whatbrought Dubai its wealth.

This however was never sustainable. The skilled workers that were developing

the service sector were mostly from overseas, with only a small percentage of Dubai's population today considered to be native Arabs. Its growth has been adirect result of it becoming a tax-free zone for foreign nationals and companies.These companies, whilst providing jobs and income to people in the country, arenot transferring any technical skills to the people. Its property market boom wasdue in large part to speculation that the prices would continue to rise.

Dubai has merely exploited limited natural resources and has been importingtalent from abroad with little skills and knowledge-transfer to drive its economy.Dubai was always nothing more than a mirage in the desert; its growth andsurvival was dependent upon the talent and expertise of foreign entities. It could

only offer specialist services such as banking and finance as a means toguarantee its future, along with tourism. As these sectors rely heavily on thegoodwill and confidence of foreigners, if in any way this sentiment was affected,Dubai's desert empire will crumble.

This is exactly what happened with the Global credit crunch. In order for financialcompanies to shore up their losses they have withdrawn their money fromexpensive and lavish projects. Service companies which relied on loans are nowseeing this dry up as one bank after another either collapsed or requiredgovernment bailouts. One expert from Nomura investment Bank encapsulatedthe situation in Dubai: "Lenders blinded by rising oil prices and borrowers

spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance." As Dubai was built upon foreign money, it now awakes to find this has dried up,so in essence Dubai's source of growth has been cut, causing the breakneckbuilding-boom to come to a crashing halt. The lending bonanza has evaporatedand the government continues to ponder wider steps to repay its debt, includingasking its neighbouring emirate, Abu Dhabi, for financial assistance.

Dubai accumulated huge debt to construct the islands lavish towers and lavishlifestyle to attract foreigners. The development of the islands infrastructure led toDubai borrowing large amounts of money in the form of bonds. Dubai evenattempted to sell its development as a distinctly Islamic approach through thedevelopment of Islamic finance and through the sale of Islamic Bonds (Sukuk).

Sheikh Mohammed bin Rashid Al Maktoum has attempted to calm investor confidence through the tried and tested formula Western nations attempted onthe eve of the global financial crisis with regard to the 'fundamentals.' SheikhMohammed said: "The economic fundamentals, such as our highly developed 

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infrastructure, strong transport and communications hub and regional financial centre will ensure Dubai remains an attractive regional market." 

Islamic Economy

The suggestion that Dubai offered a new model for economic development andan Islamic approach could not be further from the truth. Building an economyupon foreign wealth, external expertise and personnel is a tried-and-tested modelwhich has a substantial track record of failure. Latin America, South East Asiaand the Baltic states have all attempted this approach with catastrophic results.

The development of the economy has extensive rules in Islam which have beenelaborated by many scholars throughout history. Islam has made the Khilafahresponsible for da'wah and the defence of the Ummah and this can only beachieved through a process of industrialisation. It also obliged the Khilafah toorganise the fulfilment of the basic necessities of the people which are food,

clothing and accommodation. This cannot be achieved by having an economygeared around services but needs one geared around manufacturing andagriculture. This allows a nation to produce all that it needs and export anysurplus. Relying and depending on imports and foreign money is not an assuredpath for development and survival.

The Islamic economy also makes the aim of the economy the catering for itcitizens, not foreigners. To attract foreign industry, labour and money, Dubai hashad to compromise on many Islamic values to do with the mixing of the sexesand alcohol in the name of necessity. The imposition of some Islamic rules inreality is a charade. Islam has a framework for the economy and Islamic finance

forms one aspect of its detail. The mere existence of some Islamic financialcontracts does not make a nation Islamic. Britain was one of the first nations inthe world to offer Islamic bonds yet nobody would argue that Britain has anIslamic economic system.

The Islamic economic system has extensive rules for ownership and disposal of citizen's wealth and assets. Beyond this Islam recognises a sphere of theeconomy as the economic science ie through study and research a solution canbe derived. Hence how to develop and economy or to industrialise, where thefactories and the supply lines should be, how the steel and iron mills should beconstructed fall under this category, however what is produced and how it isdistributed falls under the 'system' for which Islam has extensive rules.

The Islamic economy is based upon wealth generation where participantspartake in investment, employment and trade in the real economy. Islam doesnot have a dual economy where the real economy operates alongside a financialsector. The Islamic economy focuses all participants on the real economy,through employment, company profits, utilisation of land (agriculture) and

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manufacturing. This brings the huge benefit of wealth only circulating in onesector - the real economy, where all can participate.

The Islamic economy is built upon the real economy this is where the process of production of tangible goods and services, Islam has designated a role for 

finance in the economy - due to Islam's focus on the real economy which is thewealth creating aspect of any economy finance in Islam is not an end in itself asthere is no interest (Riba). Wealth in Islam is created through each stage of industry ie mining, refining, manufacturing and sales' All of this adds value ateach stage and creates wealth for the economy.

Islam's monetary policy is centred around a legal tender based upon the Goldand Silver and not one based upon interest rates to regulate inflation and theeconomy. In Islam when it comes to exchanging a commodity with a specificmonetary unit, Islam has guided Muslims to the monetary unit by which theexchange is to take place. It has restricted the Khilafah to a specific type of 

money, which is gold and silver. The Islamic evidences have designated goldand silver as the primary measuring unit for prices and labour. This is understoodfrom the actions of Muhammad peace be upon him when he collected Zakat,levied taxes and imposed fines, all were measured according to gold and silver.This means the notes and coins circulating in the economy would all be backedby gold and silver. This will no longer make possible the free printing of currencyas the Khilafah would need to increase the actual holdings of gold and silver.This has a unique effect on Inflation which free market economies have beenunable to contain.

Although Islam is built upon the real economy and the financial sector is based

upon providing finance for the real economy, Islam has allowed a few purelyfinancial transactions. Islam has permitted currency exchange as this was acommon practice amongst the people of Mecca and Madina and the Prophetpeace be upon him did not object to it. Islam permitted some forward contracts -this is where payment is taken before the actual delivery of goods or before thefinal transfer of ownership of the goods. However the items that can be soldbefore ownership is undertaken must be of a defined nature where they can becounted, measured or weighed, this is due to what is established in the hadith of ibn Abbas, that the Messenger of Allah peace be upon him said: "Whoever paysin advance in dates, let him pay in advance for a known price and a knownweight for a known period." And in another narration of ibn Abbas who said:The Messenger of Allah peace be upon him said: "Whoever pays in advance insomething then (it should be) in a known measure and a known weight for a known period" (narrated by Al-Bukhari). Islam has categorically prohibitedpurely financial transactions where one lends money in the hope of receivingmore in repayment. All trade and transactions are linked to the real economy asthey are built upon construction, manufacture, services, or the production of goods and so on.

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In conclusion it will not be surprising if Dubai eventually defaults on its debts, thisis because the cash line for Dubai has been cut, which was foreign wealthentering the nation and going into lavish projects. Dubai could have utilized theforeign expertise and developed oil refineries in the region which althoughblessed with huge oil reserves lacks the necessary refineries. Instead it was

duped by the notion of hyper finance and geared its economy around finance,which may bring some wealth, but it does not give a nation any skills or technicalknowledge. Bankers have lost all credibility in the West due to inventing dubiousfinancial products. Dubai could have taken a lead in constructing the 21 st

century's first Islamic economy and unified with the wider Muslim world that areblessed with mineral resources. Success only lay's with Allah Almighty deen

Those who oppose Allah and His Messenger, those inthe humiliated

"Indeed, the ones who oppose Allah and His Messenger - those will beamong the most humbled." [Al-Mujaadila, 58:20]