May 12, 2009

A wave of debt defaults is set to hit Islamic banks as deals sour amid the global slowdown, testing the legal framework and stability of an industry already facing the biggest slump in its 30-year history.The global economic downturn that punctured Islamic banking's growth bubble is also expected to bring many sharia financing structures under the legal microscope for the first time in centres such as Dubai, Bahrain and Malaysia.

But the expected increase in commercial disputes raises questions about whether conventional legal systems can deal with the highly specialised niche industry which has evolved into a $1 trillion industry handling government and corporate debt.It could also test the foundations of the Islamic banking system, which the Asian Development Bank estimates is growing by 10-15 percent a year, but which some bankers and lawyers say still lacks a strong cohesive regulatory and legal framework.