HLS Paper: The Relevance of Islamic Finance Principles to the Global Financial Crisis

Earlier this month, I spoke at two events – one at the Harvard Law School (HLS) and the other at the Harvard Business School (HBS) – regarding the relevance of Islamic finance principles to the global financial crisis. The topic has been raised by observers in the Muslim world and beyond – including regulators in a number of G20 countries and even commentators at the Vatican.

Kuwait-Dow Breakup: Regulatory Concerns Become a Two-Way Street

In late 2007, I lauded the announced JV between Kuwait Petroleum and Dow Chemicals (dubbed “K-Dow”) in a letter to the Financial Times. I cited the planned venture as an example of a sound partnership “enabling Dow and KPC to build a stronger business than either could do on its own.” A year later, Kuwait pulled out of the transaction unilaterally. The reason cited in reports was that the Kuwaiti press and certain parliamentarians had voiced concerns about the deal, and were intent on probing the transaction with an eye to potentially blocking it.

The “Hajj Economy” and Gulf Competitiveness: Fostering and Leveraging Capabilities

Earlier this month, the Hajj (pilgrimage to Makkah) was performed  by around 3 million pilgrims. The Hajj — an Abrahamic tradition dating back to the pre-Islamic era– has been a cornerstone of the Gulf economy since ancient times.  The “Hajj economy” has shaped the development of the Gulf throughout history.

While the direct economic impact of the Hajj is easily observable, the strategic implications for GCC — and particualrly Saudi — competitiveness are more subtle. If fostered and applied more deeply, capabilities and skills linked to the Hajj can be pivotal in developing and expanding world-class initiatives and companies. The skill set of the Hajj economy can, if viewed strategically, be a significant source of competitive advantage.

The Arithmetic of Surplus: Implications of Lower Oil Prices

In a late September piece, I argued that the Gulf would not be immune from the current global financial crisis. One reason cited was the volatility of oil and gas prices as a result of the crisis. This month, oil prices remain volatile and show a strong downward trend, dipping well into the $60s per barrel and closing yesterday around the $70 level. While it remains unclear where the oil price will settle, the implications of a cheaper barrel are evident for GCC economies and their role in capital markets. A key framework for understanding the effect is the “arithmetic of surplus.”

Global Financial Crisis: The Gulf is Not Immune

As the global financial crisis continues, markets across the world struggle to interpret and adapt to the wave of bank collapses, unprecedented government intervention, and wild volatility in equity and commodity markets. Markets everywhere are gripped with uncertainty as the saga unfolds. One fact, however, which is quite certain is that the Gulf — despite its fundamental economic health — is not immune to the crisis.

Gulf Games: Hosting the Olympics in the GCC

With the Beijing Games fresh on their minds, aspiring cities across the globe feel increased enthusiasm to play host one day to the Olympic Games. A natural question on the minds of Gulf leaders and observers will be if – and when – a Gulf city will host the Olympics and capture the world’s attention as raptly as Beijing has. While GCC cities certainly have some of the elements needed to host the Games, Gulf leaders will need to reflect carefully on whether hosting the Olympics truly fits with their overall development strategies.

Advantaged Airlines: Gulf Carriers’ Competitive Positioning

In a time when the global airline industry faces significant challenges, a number of airlines — especially Gulf-based carriers — are enjoying extraordinary success. As noted in today’s Wall Street Journal, Etihad Airways — the national carrier of the UAE — enjoyed an astonishing 64% rise in passenger volume last year. The airline industry is one in which the Gulf States enjoy some substantial competitive advantages in the global marketplace, as well as a set of challenges particular to their unique circumstances.

A Unique Toolkit: Managing Gulf Inflation

In recent weeks, commentators around the world have become increasingly concerned about the menace of inflation. As pointed out in an Economist cover story, “inflation’s back” and is particularly damaging in emerging markets most sensitive to commodity prices and the cost of foodstuffs. The Economist rightly points out that at least half the Gulf states are grappling with double-digit inflation. In the Gulf context, however, it’s worth noting that policy makers have a unique toolkit for managing inflation which differs significantly from the tools available elsewhere.

May Media Citations: WSJ and Fox Business

This month, Dubai & Co. has been featured in two major media outlets: the Wall Street Journal (WSJ) and Fox Business. The articles touch on significant trends in global business in which the Gulf region is playing a central role: the increased commitment of multinationals into the Middle East and the role of sovereign wealth funds in international private equity.

Unrest in Lebanon: Assessing the Impact on Gulf Business

The current unrest in Lebanon, which has caught much of the outside world by surprise, raises meaningful humanitarian, political, and economic concerns. To many observers, the situation evokes memories of Lebanon’s protracted civil war, in which decades of economic progress were lost. What, one might ask, are the implications for firms doing business in the Gulf?

Wall Street Journal Citiation: Time Management in the Gulf

Earlier this month, I was cited in a Wall Street Journal (WSJ) article entitled “Time Runs Differently in the Emirates.” In the piece, WSJ writer Emily Flitter discusses experiences of global businesspeople who have noted that expectations regarding the timing of meetings and the exactness of appointments may vary in certain UAE settings.

Wealth Talk America: The Dubai Opportunity

Earlier this week, I appeared on “Wealth Talk America,” a radio show hosted by Garrett Sutton (an author in the Rich Dad series). The interview reflects the level of widespread interest amongst US businesspeople in learning about the Gulf in general and Dubai in particular.

My discussion with Garrett was broad in scope, touching on the various reasons why the Gulf is a region “no one can afford to ignore if they’re interested in global strategy.”

ADIA’s Letter: Transparency on its Own Terms

In a major development for sovereign wealth funds (SWFs) – and capital markets more broadly – the Abu Dhabi Investment Authority (ADIA) issued a letter this week to finance ministers and international bodies (such as the World Bank / IMF) regarding its investment principles. The letter represents a major milestone for the historically guarded ADIA, and reflects the institution’s desire to accommodate demands for transparency – but on its own terms.

Business Intelligence Middle East: Dubai & Co. Review and Interview

Earlier this month, Business Intelligence Middle East published a review of Dubai & Co.: Global Strategies for Doing Business in the Gulf States. The publication, widely read in Gulf business circles, offered a powerful endorsement: “if you read just one book this year, we recommend that you pick up this one.”

Sovereign Wealth Funds and Global Private Equity: Principals, not Agents

This past week, the Financial Times ran a front-page piece on the increased role of sovereign wealth funds (SWFs) in providing debt to support private equity firms’ acquisitions. As the global credit market copes with the subprime crisis and slowing economic growth, SWFs — particularly those in the Gulf — remain strong and are a crucial source of capital and liquidity.

The FT quoted a Terra Firma executive who asserted that the Abu Dhabi Investment Authority (ADIA) “will effectively replace Wall Street.” While sovereign funds do have the capacity to provide debt financing, it is crucial to remember that they approach debt as principal investors, not as financial agents. When engaged as genuine co-investors — rather than as a new flavor of “banker”– SWFs can make private equity firms more effective and enable higher levels of return for all.

Capturing Fair Share: Tips for Small Businesses on Accessing the Gulf

Since the publication of Dubai & Co.: Global Strategies for Doing Business in the Gulf States, a number of US companies have contacted me with a similar and compelling question. While the book provides a strategic guide for international firms seeking to integrate the region into their global strategies, is the Gulf opportunity available only to large multinationals? How, if at all, can smaller businesses enter the region?

For small firms, business development is typically a key challenge. When development plans include Gulf aspirations, the challenge takes on unique — and exciting — dynamics.

Educational Expansion: Opportunities, not “Outposts”

Earlier this month, the New York Times ran a front-page story on the international expansion of US educational institutions. While the scope of the story was global, most of the examples were of US universities entering the Gulf.

Higher education is, without a doubt, one of the sectors in which global institutions can find significant opportunities in the Gulf. The most successful institutions, however, will be those that view Gulf expansion as a genuine strategic opportunity and not simply an “outpost.”

Endowment Investments: Opportunity for Authentic Business Model Transfers

Last week, I was in Dubai to present at a conference on strategies for the investment of endowments (called awqaf in Arabic) in the Muslim world and beyond. The event, entitled the Dubai International Conference for Endowments Investment, was hosted by the emirate’s government.

Endowment investment is a prime example of an area with opportunity for transferring global business models and best practices into the Gulf – and the Islamic world more broadly. At the same time, it is an area in which authenticity and consistency with indigenous values are critically important.

Harvard Business Review “Breakthrough Idea”: Islamic Finance: The New Global Player

The Harvard Business Review (HBR), in its annual list of “Breakthrough Ideas,” has included my article highlighting Islamic finance as “the new global player” in the world’s financial system. The article was co-authored by Dr. S. Nazim Ali, Director of the Islamic Finance Program at the Harvard Law School.

The HBR’s recognition of Islamic finance is yet another indication of the industry’s mainstream relevance and reflects the fact that no financial services institution can be truly global without expertise in Shariah-compliant products and services.

Increased Public Engagement: Acknowledging US-Gulf Interdependency

The Gulf states and the US have long-standing, highly interdependent relationships. Events of the past week, in the GCC and here in the US, have demonstrated both increased public acknowledgment of this interdependence and visible signs of growing connectivity between the GCC and the US economies. This trend is an important one for global business leaders to watch.

Wharton Leadership Digest Interview: Leading in the Gulf

The January edition of the Wharton Leadership Digest (WLD) features an interview with me on the topic of “Leading the Gulf: Making Sense of Business Leadership in Dubai and Beyond.” The interview touched on a wide range of interesting topics, including:

• how much of Dubai’s success is a “leadership story,”
• the degree to which business leaders need to adapt to thrive in the Gulf environment,
• women in the workforce,
• effects of the Dubai Ports World controversy, and more.

Cisco’s Aspiration: A Fully Networked Gulf City?

A business unit of Cisco Systems, according to a recent report in the Financial Times, has revealed an ambitious goal: networking entire cities. City-wide Internet Protocol (IP) networks would not only give Web access to residents but also enable the Web-based management of government services and infrastructure (traffic lights, ports, etc.).

Don’t be surprised if, in 2008, we find Gulf cities competing to be the first to attain “fully networked” status. Besides the PR splash, are there real benefits to such a move?

Tapping into the MENA “Hot Spot”: Limitations of Listed Securities

On the final day of 2007, the Financial Times formally dubbed the Middle East and North Africa “the next investing hot spot” – a weighty endorsement confirming a meaningful trend. The FT cites BlackRock, T Rowe Price, Mizuho Bank (Japan), and Permal as actively raising funds to tap this market. Permal’s “Silk Road” fund – capitalizing on the increased trade flows between the Gulf, MENA, and Asia – reflects an important insight on how the regions’ economies are evolving.

The fundamental growth of MENA economies – and especially the Gulf states – is certainly inviting. Investors and asset managers need, however, to recognize the limitations of listed equity markets in tapping into the region’s growth.

Saudi Sovereign Fund: Scale, Demands & Surplus

In this usually quiet holiday period, the Financial Times broke a remarkable story (based on an unnamed source) that the Kingdom of Saudi Arabia (KSA) is contemplating a sovereign investment fund that would “dwarf Abu Dhabi’s $900bn” ADIA. The implications of such a fund, if and when created, would be far-reaching and profound.

For seasoned observers of the Gulf, the story raises more questions than answers.

Letter in the FT: Gulf Investors Exert New Control

On Tuesday, the Financial Times published my letter regarding the recently-announced joint venture between Dow Chemical and the Kuwait Petroleum Company (KPC). The letter is entitled “Gulf Investors Exert New Control” and the text is as follows:

GWU MBA Program: A Model for GCC Awareness

Understanding of the Gulf region and its business opportunities is, for the most part, highly limited amongst senior management at multinational corporations. This lack of “GCC awareness” is somewhat understandable: the GCC union did not even exist until 1981 and the region has only been exciting from a commercial perspective since the 1970s.

Less excusable is the low level of GCC awareness amongst business students today. While working on Dubai & Co., the research team conducted a survey of students at an Ivy League university (with one of the world’s top MBA programs) asking what a set of international abbreviations stands for. How many could identify the GCC?

Qatar & Conoco: A Shift in Posture

Earlier this week, ConocoPhillips struck a deal with Qatar Petroleum International (Qatar Petroleum’s global arm) by which the two will collaborate on expanding the Qatari firm’s global presence. Conoco will reportedly help QPI on energy projects beyond the Qatari market – which is phenomenally well endowed from an “upstream” perspective though small from the perspective of local consumption.

In reporting the deal, the Financial Times sees the arrangement as reflective of the “weakened position” of global oil companies when dealing with natural producers. Another perspective is that it reflects increased parity between producers and oil “majors”. In either case, the trends driving the shift in posture are here to stay.

Oil Consumption & the Gulf’s “Reserve Advantage”

Sunday’s New York Times ran a headline story on energy consumption in oil-producing countries. The data-rich piece stressed how local demand is reducing the level of oil exports and therefore the quantity available in international markets. This is seen a troubling trend for non-OPEC countries that import more oil than they ship abroad.

Observers of the Gulf should note a fundamental reality: the strategic implications of increased oil demand disproportionately benefit the GCC states more than other oil-exporting countries.

Chasing Exchanges: Borse Dubai, the QIA & OMX

Wednesday’s Financial Times reported that the Qatar Investment Authority (QIA) no longer seeks to increase its stake in the Nordic exchange OMX. This step leaves a joint offer by Borse Dubai and Nasdaq as the likely buyer of OMX, through a multi-step process. The process involves Borse Dubai purchasing the Nordic exchange and transferring it to a Nasdaq in exchange for (i) equity in a new JV and (ii) equity in the London Stock Exchange (LSE). The end result is that Borse Dubai is poised to end up holding pieces of both OMX and LSE, with Nasdaq as its partner.

Snatching up an exchange is, of course, a high profile acquisition. This begs the question: are Gulf buyers chasing exchanges as “trophy assets” or are there financial and strategic benefits to such transactions?

Harvard Meets MENA: Regional Firms Show Confidence

 

This past weekend, I spoke at a conference at Harvard on business in the Middle East and North Africa (MENA) region. Other speakers included the COO of Mubadala, Goldman Sachs’ Head of MENA Investment Banking, and the founder of McKinsey’s Dubai office. The first of its kind, the weekend-long event was a great success with over 400 participants.

The most powerful message of the conference was not the content presented, but the confidence with which the region was showcased.

Deloitte’s Shariah Appointment: Defining the Role

Last week, Deliotte announced the appointment of Mufti Hassan Kaleem, a classically-trained Islamic jurist, as its (presumably global) Shariah scholar. The appointment is a reflection of the fact that no financial institution – or advisory firm seeking to serve financial institutions – can be truly global without expertise in Islamic finance.

Reports in the press, including in the Financial Times, do not describe the scholar’s new role in detail. There is a reference to “signing off on products” and another to “different work with different exposure.” Were I defining the role, it would have three key elements:

 

Citigroup’s Gulf Capital: ADIA & Alwaleed

Business headlines around the world are abuzz with news of the Abu Dhabi Investment Authority (ADIA) and its $7.5 billion capital injection into Citigroup. Today’s Financial Times opines that such liquidity injections from cash-rich sovereign investors could prove a “template for other banks hit by the US subprime crisis.” The FT may be right, but the point is even broader – it’s not just the banks that are affected by subprime woes.

DIC & Sony: Music to Dubai’s Ears

In a post two days ago on Mubadala’s investment in AMD, I noted that “Gulf investors have choices, especially towards the East.” Yesterday, another UAE-based investor announced a major stake in a high-profile global firm: Dubai International Capital (DIC) is making a “significant investment” in Sony. According to the Financial Times, DIC now seeks to deploy 30% of its capital in Asia. Significantly – and not surprisingly – DIC increasingly finds the East a welcoming destination for its capital.

Mubadala & AMD: “Capable Capital” Turns to Chip Maker

On November 16, the chip maker Advanced Micro Devices (AMD) announced that Abu Dhabi’s Mubadala Development Company has acquired an 8.1% equity stake in the California-based firm. The $622 million investment provides a major cash boost for the struggling US company.

Commentators on the deal have noted that government review of the matter is possible, as some see security risks in a foreign company owning a meaningful stake in a high-tech US company. Some assert that Mubadala – despite having less than 10% of AMD and not having a seat on the board of directors – could somehow compromise our national security. What happens in the weeks ahead will be closely watched by sovereign wealth funds and other international investors with portfolios in the US.

Observers would, however, be well-served to bear in mind the following key facts: