Introduction
The crisis in Dubai occurred as a trickledown effect from the property market in the United States. This crisis took time to develop and invade most of the countries in the world. According to the current statistics, the global meltdown of that caused the crisis in Dubai has overshadowed the great depression that occurred in the 1930s (Christensen, 2008).
The damage caused by the financial crisis of 2008 is greater than that of the 1930s. Moreover, the complexity, range, and depth of the financial crisis in Dubai and the world as a whole have been beyond the scope of most economists. Some of the world largest economies such as Greece have been threatened by this crisis (Zubair, 2010).
The solutions advanced for the economic meltdown in the early 1930s were to reduce unemployment and increase the demand of money. During the 1930s most of the banks collapsed. However, the story in the current financial crisis is different.
The banks have employed risk management strategies and most of them have become too large to fail. The strategies used in the 1930s can longer work in the current global economy and bailouts no longer encourage the effective demand. Unemployment levels increase in most of the world economies.
Background
The financial planning in the Islamic nations has been applauded by most of the economists, scholars, and bankers in the world (Zubair, 2010). This is because most of Islamic finance has remained stable and resilient despite the crisis in the world. Most Islamic nations argue that the global crisis proved that their system of financial management is better than that being used by the other nations in the mainstream.
The Islamic finance system is strongly opposed in the world. Therefore, it has the system has not established enough with the worlds crisis. Nonetheless, some of the investors in the Islamic nations were exposed to the global crisis. One of the most notable casualties is the Dubai world. The global financial crisis hit Dubai world heavily.
The United Arab Emirates political structure is unique (Zubair, 2010). The system bestows most the economic independence to the individual emirates (Zubair, 2010). An insight into the socio-political organization of Dubai helps to understand the crisis that occurred after the global financial crisis in 2008 (Zubair, 2010).
The United Arab Emirates was formed in 1971. It is composed of Abu Dhabi, Dubai, and Sharjah. Each of the constituents is under the control of an Emir (Zubair, 2010). The Emir controls all the administrative function in the emirate. Moreover, the Emir is in charge of managing all the resources in his unit. The highest authority as stated in the constitution is the Federal Supreme Council.
This council is composed of the Emirs and it holds the legislative and the executive powers (Zubair, 2010). The president of the United Arabs Emirates was elected from Abu Dhabi, which is the largest oil-producing Emirate in UAE.
The most prominent feature about the political system in the Middle East is that most of the nations are dependent on personal decision-making. The countries are slow to adopt democracy and therefore most of the decisions are made at a personal level.
For this particular reason, most of the data, which is valuable in development of a nation, are usually missing. Analysts believe that analyzing the economic policy of the United Arabs Emirates is not a worthwhile venture due to the missing data (Chandler, 2009).
However, the UAE is in a better position than most of the Middle East countries. They have sufficient data that shows how the resources are distributed in the country. Moreover, the country has vast supplies of cheap labor both skilled and unskilled. U.A.E. has a business friendly environment because they have a stable political system. Therefore, the economic development in the united Arabs emirates is generally high (Rashid, 2010).
Freehold property law in Dubai
The United Arab Emirates is a highly civilized economy that depended on oil as its major source f income. However, with the reduction of the oil reserves in the country led to a shift in economic scope.
The country sought to diversify their economy in order to ensure that they could sustain their development through time. The government made a decision of developing the emirates as a tourist destination. Some laws were developed to govern the ownership of property in the country.
In 2003, the government enacted the law on regulating the lease property in UAE. According to the law enacted in 2003, the licensing of Individuals and companies was subject to an unconditional, irrevocable bank guarantee that was renewable annually.
The individual or company had to pay AED 5 million to obtain a license (Al Maktoum, 2003). In case of license cancellation, the guarantee paid could only be returned after six months. However, the government could waive the bank guarantee in several cases. For instance, public joint stock companies in the UAE, dealing in property were not subject to the law of paying guarantee (Al Maktoum, 2003).
Individuals who owned property worth more than AED 8 million were also eligible for a license to manage and lease his or her property without bank guarantee. In addition to these two categories, private joint stock companies that had a capital of AED 5 million and above were excluded from the bank guarantee to paid (Al Maktoum, 2003).
In 2006, the government of the United Arab Emirates enacted laws that governed holding property under freehold in UAE. Freehold property is a form of property ownership that gives the buyer total control and ownership o immovable property.
Holders of property that is freehold have the right to use their property in a manner they see fit as long as they remain within the boundaries set by the law. Article 4 of the 2006 enactment states that ownership of real property in the United Arab Emirates shall be restricted to the nationals of the UAE and GCC (Al Maktoum, 2006).. The law allowed companies owned by the nationals to own property.
Non-nationals of the UAE and were granted with the rights to own freehold real property without restrictions and a right to lease. Subject to the laws enacted in UAE in 2006, an individual could hold leasehold property period of 99 years (Al Maktoum, 2006).
UAE is one of the pioneers in the idea of freehold property. Dubai was the first emirate to adopt the idea of freehold real estate (Eupdate, 2009). Before 2002, the expatriates were not allowed to own any real property in the UAE. The law allowed them to rent the property.
After the change in law in 2002, the government allowed expats to own freehold property (Eupdate, 2009). The government allowed the expats to invest in some specific developmental projects (Eupdate, 2009).
In Dubai, the idea of freehold property was for encouraging international investments. This idea worked well and currently, Dubai is one of the wealthiest, prominent, and attractive landmarks for business. However, the main reason for introducing the freehold property in Dubai was because the oil reserves were dwindling and the UAE wanted to diversify its economic portfolio.
Therefore, the government decided that the only way to create a lucrative economic portfolio was by encouraging investments. The emirates aim was to develop tourism and service industries that would sustain growth and development even after the oil wells were dry. The idea of freehold property encouraged the investors to build grand hotels and luxury resorts in Dubai.
The boom in the property market of Dubai occurred in 2002 after Sheik Rashid Al Maktoom issued a decree that allowed investors from different countries to purchase and own land in Dubai. After announcement of the freehold property in Dubai, the property values increased.
Investors scrambled for the land and property in Dubai in 2006 the actual legislation on freehold property occurred and Dubai became one of the most important business hubs in the world. Property prices in Dubai kept rising until 2008 when the global crisis began (Zubair, 2010).
The most surprising fact though is that analysts find no relation between the sector growth and monetary rates in the United Arab Emirates (Zubair, 2010). The crash of property value in the UAE can be attributed to the reduction in demand for the luxurious hotels and tourism services (Zubair, 2010). UAE is relatively more westernized than most countries in the Middle East region.
The Financial Crisis of 2008
The financial crisis that occurred in 2008 was one of the major debacles that have ever occurred in the global economic scene. This crisis was triggered by careless banking mistakes and insurance errors (Pinyo, 2008). Moreover, greed contributed the financial crisis that occurred in 2008 (Pinyo, 2008). Hofstede (2009) cites culture as one of the causes of financial crisis in the world.
However most analysts believe that apart from culture, there are other factors that caused the financial crisis in 2008. Haspeslagh (2010) attributed the financial crisis to failure in corporate governance like most economic analysts. Other major causes of the financial crisis included greed and “dreaming big” (Haspeslagh, 2010).
Most managers have stopped making decisions based on the logical judgment. Instead, they are dependent on mathematical models, linear extrapolation, and market situations to make decisions. This has led to incompetence in the work setting and finally it led to the global financial crisis of 2008. The shortcoming in corporate governance remains one of the most probable cause of 2008 financial crisis (Haspeslagh, 2010).
The crisis in 2008 had a domino effect in other economies that are interconnected. Most of the countries were affected by the 2008 crisis that began in the United States. Among the affected nations was the United Arab Emirates.
The real estate market in the United States developed steadily for 50 years since the Second World War. The market experienced only a few hitches such as a price increase (Deusen et al., 2002). However, in 2008, the United States economic crisis occurred and the effects trickled down to Dubai. Dubai, which is considered as one of the largest economies in the world, became the target of a global crisis.
The property sector was affected by the crisis of 2008 and almost led to the collapse of banks and financial institutions in the United Arab Emirates. Other sectors affected in the economy were also affected by the crisis (Hofstede, 2005; Hofstede, 2001).
The crisis in Dubai was caused by the burst in the real estate bubble (Guina, 2009). This crisis began with the increased demand in the real estate industry. Dubai’s bust in real estate bubble occurred in 2008 after the occurrence of the financial crisis in the world. The investors had created an excess in supply and the market had more than it required. The prices of real estate crashed.
The sales of property in the once booming market were extremely low. By November 26 2008, the government of Dubai requested all the creditors to reschedule payment. This declaration put the financial scene in panic and share prices started to fall all over the world.
Some of the scholars and economists viewed the crisis in the UAE as a problem caused by Sheikh, Mohammad who invested in the United States property industry. The company, which Sheikh, Mohammad had invested in, went bankrupt. This led to a trickledown effect where the economic crisis in the United States put pressure in the property market in Dubai.
However, the Abu Dhabi government and the central bank reacted to situation and stepped in with a bailout worth $ 10 billion (Zubair, 2010). The government offered the bailout kitty to Dubai World that was run by the state and was very indebted. 4.1 billion dollars was set aside to cater for the world’s debt. The government bailout came in a period when the debt was due to be paid.
Dubai has since been able to meet its obligations as stipulated by the various contracts (Zubair, 2010). The remaining 5.9 billion dollars was to be used in meeting duties of Dubai world towards the trade creditors and contractors (Zubair, 2010). The idea of using a bailout to avert the crisis in 2008 was a great idea. Many economists applauded the move by UAE, including the International monetary fund.
Analysts believed that failure to address the crisis in Dubai might have threatened the cohesion f the UAE (Zubair, 2010). The 10 billion dollars bailout offered by the UAE government served to calm the nerves of the investors in the global market. Otherwise, the market was going to be in ruins had the government let the situation continue in its path.
Impact of the crisis on the Dubai Freehold properties
The crisis caused a major slump in the housing market. This in turn led to a chain reaction in the global economy. Individuals, investors, and developers could no longer use their property as security to get loans (Edwards et al., 2004). Moreover, banks and other financial institutions adjusted the rate of borrowing upwards in order to discourage borrowing.
Finances became difficult to obtain and only investors who could afford to pay the high rates of interest could obtain the loans (Hall, 2008). Investors who had used assets to back their loans suffered great losses due to the financial crisis. Investment firms and banks started to “leak” money.
This caused a glut of real estate, which reduced the prices of property in Dubai. Majority of the workers, laborers, and contractors lost their jobs due to the financial crisis.
The financial crisis of 2008 had various impacts in Dubai’s real estate business. To begin with, the process of developing property in Dubai took a lot of money out of the banks and other financial institutions. Therefore, the announcement that the value of property was falling meant that some investors would not be able to repay their debts. The government of Dubai had guaranteed all these loans.
Therefore, they asked the investors to extend the payment period. In the process, banks felt that they would suffer losses if the creditors failed to repay on time. On the other hand, the investors felt that they would also suffer losses. Therefore, speculative trading began and the value of shares in companies involved in developing Dubai fell drastically.
Another impact that arose from the crisis is on the monetary policy employed by the major players in the UAE market. Most of the major central banks had to unwind from the financial crisis and the property crisis. However, there were a few notable exceptions. For example, the United Kingdom maintained its monetary policies despite the crisis.
In Norway and Australia, the central banks stopped shy of raising their interest rates. In this article, we discuss the impacts of the property crisis in Dubai while incorporating some of the key factors that have changed since the crisis. The article goes into details on property rights and some solutions that may be viable in preventing future crises.
Since the most affected area in the crisis affected the real estate industries, the casualties are likely to the people working in this industry. For instance, the engineers and contractors in the real estate industry lost their jobs during the financial crisis. In addition to this, most of the projects that were underway during the financial crisis were stopped due to lack of funds.
The Islamic bonds played a minute part in the financial crisis that occurred in Dubai. However, most scholars and analysts realized he role played by the bonds in the Dubai fiasco. The Islamic bonds attracted the attention of the scholars and analysts because their payment was due on 14 December.
Therefore, when Dubai World announced that they needed an extension, analysts viewed the Islamic bonds as the major reason for this announcement. Therefore, some of the investors downgraded the value of the Islamic bonds.
Solutions
Solutions used to combat the crisis of 2008 are many. The first real solution occurred when the government offered Dubai World $10 billion to settle some of the debts. When Dubai world asked for an extension to pay a debt of about 60 billion dollars, the global markets experienced a quiver. The investors confused between delay and default of payment.
Therefore, the announcement of a bail out by the government came as relief to many investors. In fact, the stock markets changed their trading trends and the euro, the dollar, and the yen traded at an improved rate (Brunnermeier, 2009). In the case of Dubai, the central bank and the government acted swiftly to reduce the liquidity pressure that was building in the country.
The central bank of Dubai understood the need to act quickly in order to combat the rapid rise in demand for liquid cash in its markets. Given the cross border involvement of Dubai in trade it was necessary for the central bank to overlook some and policies in order to ensure the stability of united Arab emirate economy and the other economies of the world.
To combat the crisis Dubai decided to downgrade and suspend the operations of some agencies that had speculatively reduced the amount of the Islamic bonds even before the actual failure to pay the debt had taken place (Zubair, 2010). The opinion of Dubai was that these rating agencies should have shown restraint when declaring the value of the bonds.
Most agencies yield a lot of power and can destroy the economy of governments by merely announcing their intention to downgrade the value f the bonds (Zubair, 2010). Therefore, when these agencies announced that they were reducing the value of the Islamic bonds it led to a financial crisis.
Dubai contemplated setting up a mechanism that they could use to regulate the activities of the agencies. Moreover, they had the idea of setting up separate agencies that catered for the Islamic bonds (Zubair, 2010).
Recommendation
The recommendation I would give to Dubai entails using models to ensure sustainability in the economy. The use of a hub and spoke model may come in handy in global economies like Dubai (Minkov, 2007).
This is because the model defines the global financial flows and encourages excess saving. However, this model requires that the united Arab emirate maintain a budget without deficits. Proper governance of the model will ensure that the economy in Dubai is sustainable by creating a systematic financial system that is not prone to risks.
The use of “spider web” architecture to manage the financial element of an economy can also reduce the risks financial crisis. However, the use of a spider web requires infrastructure.
The spider web has supervisory and regulatory effects in the financial markets and will ensure that Dubai and United Arab Emirates as a whole maintains its stability. It is also recommendable that Dubai should adopt a more democratic approach in the form of governance. This would ensure that most of the countries decisions do not depend on a single individual.
Analysts argue that some financial crises can be foreseen and are preventable. Therefore, countries should employ strict financial rules that will safeguard the interest of the economy. Dubai should equally be cautious when dealing with finances. Economists and analysts should use all their knowledge to increase the financial strength of Dubai.
Crises that may be foreseen should be avoided rather than waiting for the situation to explode. Moreover, financial decision-making process should be done after careful consultation to avoid a situation similar to the one caused by Sheikh, Mohammad in 2008 when he invested in a company that collapsed.
Insurance against risk may also work in favor of economies if done properly. Dubai should equally ensure some o the major financial players in the region to avoid the risk of financial collapse.
Conclusion
The property crisis in Dubai started when the financial crisis began in 2007 to 2009. Previously, Dubai had enjoyed a lucrative property market for a period of over six years. The financial crisis that occurred in 2008 was one of the major debacles that have ever occurred in the global economic scene. Careless banking mistakes and insurance errors triggered the crisis that occurred in 2008.
Therefore, when the property crisis finally occurred in Dubai, a number of significant impacts occurred in the global markets. The crisis in Dubai occurred as a trickledown effect from the property market in the United States. This crisis took time to develop and invade most of the countries in the world.
According to the current statistics, the global meltdown of that caused the crisis in Dubai has overshadowed the great depression that occurred in the 1930s. The damage caused by the financial crisis of 2008 is greater than that of the 1930s. Moreover, the complexity, range, and depth of the financial crisis in Dubai and the world as a whole have been beyond the scope of most economists.
To begin with, the banks that had exposure to the UAE the Dubai market suffered losses. The United Kingdom banks had the largest exposure to the UAE market. Therefore, they suffered greater losses than their counterparts who had invested less in Dubai. However, the banks were not the only casualties of the property crisis in Dubai. Companies also suffered great losses when the crisis occurred.
The Dubai property crisis was a revelation to many countries in the world. The shock raised by this crisis has led to changes in policy of most investors in the global scene. Most investors moved more cautiously than they previously did. In the actual sense, the Dubai property crisis has had a butterfly effect in the global market scene and has left investors around the world more careful/ cautious when entering financial ventures.
The best solution used in the crisis experienced in Dubai was the bailout. Most economists, scholars, and financial analysts supported this decision. This is because the decision calmed the nerves of the investors and reduced the risk of losses.
Suspending the activities of agencies that reduced the value f the Islamic bond was also part of the solution used to reduce the economic crisis in Dubai. The financial planning in the Islamic nations has been applauded by most of the economists, scholars, and bankers in the world.
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