Much has been said about Nakheel’s debt in the past year.  The large Dubai property developer known best for its creation of the man-made Palm Islands in Dubai has had its share of financial problems.  Much of this came in the aftermath of the Lehman Brothers’ collapse nearly two years ago, and the decline in property values in Dubai that soon followed.

This article in ArabianBusiness.com discusses a new proposal by Nakheel (owned by Dubai World) to reschedule some of its debt.  Companies reschedule debts all the time, so makes Nakheel’s debt interesting?  Nakheel’s debts touches on two major issues in international law – (1) Islamic Finance; and (2) sovereign guarantees and immunity in the commercial sphere.  Indeed, many do not even know that Nakheel has been a notable issuer of Sharia-compliant debt.

While Nakheel’s case may  have not been the best plug for Islamic finance, it is arguably an exercise in the feasibility of using Sharia-compliant finance in sophisticated transactions.  Nakheel in this case used an Ijara-based structure to create the basis of a Sukuk, often referred to as an “Islamic Bond” (notably, the Sharia does not permit bonds as most people know them; instead, Sukuk are generally supposed to be ownership certificates that are backed by tangible assets).  Good or bad, the publicity that has risen from this case could have a positive impact on the recognition of Islamic finance outside the Muslim world.

Click here for an interesting commentary in the UAE’s The National on Sukuk investments.