The Daily Clarity

Dubai, Debt, and the Sharia

Dubai is a micro example of the broader global economic meltdown. A country short on natural resource, politically independent (ish) in a region of extremes, a sort of Vegas for the Middle East. It attracted ex-pats looking for wealth, and a climate of heat and more heat. That dream, like many others around the world, is now in tatters as Dubai begins to slow down and possibly even halt its extreme building craze. An estimated 8% of ex-pats have already left the country with many more planning to follow soon. However, unlike the  West, walking away from debt in Dubai can have serious and long-lasting impact. Debt in Dubai is governed by Sharia (Islamic laws), and unlike the US where foreclosure, credit counselling and bankruptcy are options for escape, the Sharia is a lot less forgiving.

Bouncing a check in Dubai can get you jail time. Bailing out without telling has become the primary means of exit for the Dubai ex-pats. They are dumping their cars at the airport on the way out – more than 3,000 have been towed away by police in the last few months. Some left credit cards charged to their max in the glove boxes. The cars are sold at auction. The baling ex-pat has an arrest warrant written in their name, but they are gone and know if they ever come back they will face arrest and imprisonment.

The British newspaper The Times carried the report:

“The abandoned cars underscore a worrying trend. Five years ago the Emir, Sheikh Mohammed bin Rashid Al Maktoum, embarked on an ambitious plan to transform Dubai into a hub for business and tourism. A building boom fuelled double-digit growth, with thousands of Westerners arriving every day, eager to cash in on the emirate’s promise of easy living and wealth.

Many Westerners invested in Dubai’s skyrocketing real estate market, buying and reselling homes before building was even complete. But, as the recession took effect, property and financial companies made thousands of workers redundant and banks tightened lending. Construction companies have delayed or cancelled projects and tourism is slowing.

There are increasing signs that the foreigners who once flocked to Dubai are leaving. “There is no way of tracking actual numbers, but the anecdotal evidence is overwhelming. Dubai is emptying out,” said a Western diplomat.

International schools are having to be flexible on fees as expatriate parents run out of cash. Louise, a single mother from Britain, said that her son’s school had allowed her to pay a partial fee until she found a new job after her redundancy in December. “According to the headmaster, a lot of people had come into the school saying they had lost their jobs so the school was trying to be a bit more flexible,” she said.

Most of the emirate’s banks are not affiliated with British financial institutions, so those who flee do not have to worry about creditors. Their abandoned cars are eventually sold off by the banks at weekly auctions. Those recently advertised include BMWs, Porsches and Mercedes.”

If the same punitive laws were applied to US debtors, we wonder whether the US would be having such credit issues. Would individuals have signed up for jumbo ARM mortgages they couldn’t repay? Would they have charged up credit cards with penalty interest rates and then turned them over to credit counselling services? Would they have bought that latest model car and then defaulted on payments and settled for repossession? The answer is probably not. The US might though have had its own band of ‘skips’ (as fleeing Dubai ex-pats are termed) slipping quietly over the border into Mexico at the depth of night. It may have caused a whole new immigration headache for the US-Mexico authorities. Instead in the US, the government is bailing out the very credit issuing instruments that helped cause the economic meltdown in the first place. Maybe some provisions of Sharia law could have benefited the US economy and prevented the melt-down in the first place? We are only kidding, and as the Dubai report shows, the unwillingness to take responsibility for one’s financial obligations is a global characteristic.