Toby Birch

Articles:

Dubai: Innovation or Illusion

By Trevor Roberts January 2009 EU Bankers

Deserts are the home of the mirage; a well-worn metaphor for recent descriptions of Dubai. The Emirate has been the glitzy shop front of a region that should rightly be proud of its spectacular progress. Instead of squandering wealth, the GCC has invested in its infrastructure for the benefit of future generations; in stark contrast to the wastrel policies of Anglo-Saxons countries.

Some have used the downturn in Dubai as an excuse to sneer at Islamic Finance and highlight the region’s over-dependence on oil; a fact they were already well aware of as the rationale for diversification in the first place. The problem for Dubai has been its mimicry and over-exposure to failed western financing methods. Islamic funding techniques in fact account for only a minority of development projects. Throughout history it has been natural to copy the culture of the leading powers of the day in the belief that they are role models of sophistication. In modernity, we see imitation of the West in architecture, consumerism and liberal lifestyles. What appears on the surface to be glamorous and progressive is already proving to be shallow and obsolete. The beauty of the credit crisis is its revelation of these ugly truths.

For some reason there is still a belief that western financial products are pioneering or that complexity is clever. If anything bankers should be embarrassed by the layers of leverage they have packaged and must return to simplicity and transparency. Investment funds have become far removed from the true purpose of money; to aid transactions in the real world. At the risk of using stomach-churning phrases like back-to-basics with all the associated hypocrisy, this is exactly what we are undergoing. The reversion process has already begun as equity dividend yields now exceed bond yields, which was the norm before the 1950s. In the Victorian era, stock markets matched investors with entrepreneurs, creating dividend streams rather than capital growth as the reward. There were of course panics but the stability of the gold standard helped companies to generate genuine cash flow which was recycled back into the economy.

The word ‘innovation’ in Islamic Finance is developing into a misnomer or battleground between liberal and conservative interpretations. Many of the latest investment offerings look more like speculative western products, albeit with Islamic labels. It is reminiscent of the dot.com bubble where anyone not buying into the modern concept was deemed to be a dinosaur destined for destruction. Venture capital was the funding source of authentic innovation which greatly benefited Britain and America in the past. It requires hard work on both sides to launch and nurture start-up businesses. Nowadays this balanced approach to risk and reward is all-too-rare in a

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