Although it has been through some difficult periods in the past, Islamic finance is now a thriving multi-billion dollar global industry which offers Muslims, and non-Muslims an interest-free alternative to conventional financial products and services.

http://en.wikipedia.org/wiki/Islamic_economics
http://en.wikipedia.org/wiki/Islamic_finance
http://en.wikipedia.org/wiki/Islamic_banking

While I like this different approach in a global financial market that is increasing offering similar products. The problem is financial laws and regulations have to keep in stride with these new services.

When I worked in Kuwait, it was commonplace for a failed investor to bring in his wife as a signatory to a loan, when in actuality it was meant for him only his previous projects have failed. Financial watch dogs and evaluators need to spring around this new market. There doesn't seem to be an SEC type organization acting as over watch in transactions.

Because of lack of this, there are many loans handed out to various investment projects that most of the time don't have a sound business plan.

It will be interesting to see when the larger oil funded projects will become far more regulated in their applications, the last thing the gulf needs is more hotels, shopping malls and bloody coffeehouses.

Farhad

Regulation of the Islamic financial sector was a problem in the past, but there has been a lot of effort made in recent years to effectively regulate the industry. Most states with large Islamic financial sectors - such as the UAE, or Britain, have passed regulatory legislation in the last few year. There have also been concerns that what constitutes Shari'ah complient financing (and accounting) varies dramatically between banks and countries. There is now a major project being carried out to harmonize standards between banks and countries and to establish one authoritative fiqh body whose rulings are decisive.

It's interesting what you say about loans in the Gulf. Under most traditional Islamic loan contracts the borrower can only borrow if there is a clear business plan. Furthermore, if the borrower is negligent in his dealings he is liable for the losses and the bank is unlikely to lend again - even to the man's wife.

"the last thing the gulf needs is more hotels, shopping malls and bloody coffeehouses" - couldn't agree more! But there are some signs that they are now starting to invest in music and the arts.

Loans in the gulf are loans in the gulf, when I worked in Kuwait, we would receive daily faxes of central bank cleared clients who could apply for a loan, this would be put in a large paper binder. One would literally spend 40 to 50 minutes going through this gigantic list to find the loan applicants file. In short the system was hardly modernized for speed or accuracy clearly. There was no centralized network system between the banks and the central bank. Then furthermore you factor in wasta, familial relations and such it's not surprising that many loans went into doomed ideas.

These regulations and modernization has to be stepped up definitely if real growth is to take place, inshallah we will see it come within the next 5 to 10 years.

But more so then that there needs to be a loosening of the stringent markets that currently exist in many of the Middle Eastern countries that have large oil reserves, they require a silent partner from the country to participate in any business scheme. This is of course unattractive for any foreign direct investor because instantly there needs to be a middle man working between the firm and the goverment to get commercial registration. This is a form of market protectionism, it also leads to bad managerial conflicts as the silent partner could pull the plug on the business by demanding more then his fair share of profits.

There has been progress towards this with the development of Free Trade Zones however the greater domestic market is still monopolized by co-ops and other larger retailers. Goods for these is controlled by a few key suppliers.

Furthermore there needs to be greater investment in infrastructure. Specifically telecommunications. Which is just poor in many of the Gulf States.

The basic problem for all the middle east nations is how to remove themselves from oil dependency, and develop and foster a economy based on trade between East and West. Dubai has been trying to do everything at once and in some ways I think it has been poorly managed, alot of the projects put in place are vanity projects hoping to see a large influx of tourism. This of course would not happen until the middle east is politically stable enough for more then just the European and Asian markets to visit. However they have successfully been reducing their oil dependency, and most of their GDP is now non-fossil fuel based, so we will see how it progresses.

I agree with you about oil. The typical Gulf rentier state is in need of reform if it is to survive beyond the era of oil. It's interesting, because in pre-oil Gulf economies, the Sheikh exchanged political power for loans and financial support from the middle classes - normally merchants, fishermen, those in the pearl trade. Oil essentially broke this mold and allowed the Sheikh to take back the vast majority of political power in exchange for oil revenue. Now oil is running out, and furthermore, as the Gulf states expand they require increasingly large bureaucracies to run them. These two factors are changing the balance of power and should lead to political and economic reform.

While there has been a lot of mismanagement in Dubai, 85% of its GDP is derived from non-oil sources. While it remains to be seen if the economy can survive without oil I think positive steps are being taken. For example, not only are there th free trade zones that you mentioned, there are also institutions like the Dubai International Finance Centre. Similarly, countries like Oman, with very small oil reserves are having to invest heavily in tourism - and I think that this may provide the standard development model for most of the small gulf states. One of the biggest problem in the Gulf is nepotism - most businesses are family owned and this means that it is unlikely that they will open up a private business to the kind of financial and accounting scrutiny that is standard in the West. Another problem is capital flight - as long as there are wars, political instability, and a lack of financial transparency, most Gulf arabs will choose to invest their money abroad for security reasons. Furthermore, the same factors deter foreign investors.

It's funny, because the locals in Dubai used to joke about the modern Gulf and say that if it all failed they would just go back to the simple life of their forefathers (I'd like to see the younger generation try and live without luxury!). They would often point at Dubai's skyscrapers and quote the following passage from the Gabriel hadith: "the herdsmen of the sheep will compete with each other in raising lofty buildings".

good sift and interesting discussion.