Islamic banks caught between two worlds

* username: rupertbu

Corporate restructurings were until recently relatively rare in the oil-rich Arab Gulf, but the experience is particularly novel for investment companies and banks that adhere to Islamic, or sharia, law.

The Islamic finance industry grew exponentially in the years preceding the financial crisis – particularly in the Middle East – boosted by increasing religious awareness and an inflow of billions of dollars of oil revenue into the Gulf. The industry now holds total assets of about $950bn, according to Moody’s.

Yet it has been hit by the economic downturn, which caused several high-profile Islamic investment banks to default and restructure their operations and debt.

Restructurings in the Gulf are already complicated by underdeveloped legal frameworks, a lack of transparency, inexperienced commercial courts and a “head in the sand” approach, bankers and lawyers say. Adherence to sharia adds another layer of complexity to the process.