In the New York Times, Heather Timmons reports on the looming debt crisis in Dubai and the questions that it elicits concerning the legal mechanisms of Islamic finance:

Shariah-compliant investments prohibit lenders from earning interest, and effectively place lenders and borrowers into a form of partnership. Yet there are no consistent rules about who gets repaid first if a company defaults on such debt, said Zaher Barakat, a professor of Islamic finance at Cass Business School in London.

The first test of what that means for investors may happen around Dec. 14, when payments on a $3.5 billion Shariah-compliant bond owed by Dubai World’s real estate subsidiary, Nakheel, come due. If Nakheel defaults on its payment, legal proceedings may be initiated.

It is unclear what may happen next. Nakheel bondholders have formed a creditors’ group representing more than 25 percent of the outstanding debt, a legal adviser to the group said Monday.

Holders of these bonds “are going to argue that they are in the secured position on the underlying asset,” said one bank investor involved in the issuance of some of Dubai’s Shariah-compliant debt. That means that bondholders could insist on being repaid before banks, upending the traditional bankruptcy hierarchy.

Read the entire article here and listen to a podcast from featuring an introduction to the fundamentals of Islamic finance by Zafar Sareshwala, the head of Parsoli Corporation Ltd., a Mumbai based Islamic brokerage firm.