Legal and ethical issues of any company are considered as one of the most important aspect of business. In this project I am going to research on the topic relating financial crisis in Dubai and Nakheel Properties. This topic has been chosen because it is one of the recent activities which happened in Dubai and regarding the legal and the ethical issues, it is showing the legal and the ethical factors of Nakheel Properties who was no agreed on blocking the money to the Dubai government for six months because of which the entire economy had to face problems because of blockage of money in the market because of which there was no proper flow of money in the market.
This project is divided into four main sections. First section describes the topic on which we are going to research the subject of our analysis. Second section will take care of the legal issues involved in the described topic on which the entire discussion is based. Third section will carry out all the outcomes of the situation which we are discussing and the last section will take care of what else could have been done or what were the alternatives for the same situation which would have the taken the scenario into a better way.
Subtopic: Dubai Financial Crisis, Boom Bust policy of Central Bank of UAE and Nakheel Properties
What happened and why?
In November of 2009, Dubai city of UAE was hit by an instant financial crisis. Main reason behind the financial crisis was that Nakheel Properties was agreed to freeze the money was to be used as a debt repayment to the Dubai Government for 6 months. Moment, this information came out; there was a declared financial crisis in the city. However the effect was not on the other emirates of UAE because these emirates like Abu Dhabi is not related to real estate and their main economy is based on oil (Shostak, 2009).
Main cause because of which this financial crisis occurred was the blockage of money with Nakheel Properties who are the builders of The Palm Island in UAE. There was no flow of money remained in the market because of which heavy crisis came into action. This was one of the most sudden financial crises of all time. There are various people who commented on the status of Nakheel Properties and said that there could not be a fault of these property developers but there could be a fault of the banks who have lent money to Dubai World Properties.
This was such a huge event that it was named as an oasis of debt. This was a debt because of all the construction projects which ruined the flow of money and there was no pace left in the market regarding the flow of cash which made the situation worst.
What were the legal issues involved
There were various legal issues involved in this situation. Main legal atmosphere in the issue was the implementation of boom bust policy by the government of UAE- Central Bank. There was a necessary jump required in the money. It had become necessary for various activities in Dubai that money pumping has been made necessary. There was huge money pumping between the years 2006 to 2008. In October 2006, there was a monetary growth of 4 percent in the balance sheet of Central Bank of UAE but with in just one year this monetary growth went up to 177 percent
With such a great pump in the money there were various activities emerged in the city which required monetary pumping for sure. When Nakheel Properties has announced that it would not pay its debt before six months there was a huge shock to the government because it was felt that there will be no pumping in the monetary situation of the city hence there will be problems all around.
Nakheel Properties was not the sole reason for the financial crisis in the city. It has been city from the starting of the year that there had been a great decrease in the monetary plumping in the economy. The level of economic plumping had gone down to minus 36 percent and hence with the agreement of Nakheel Properties of not paying debt for the next six month was a hammer of the hot rod (The global economic and financial crisis: regional impacts, responses and solutions, 2009).
There were some other legal considerations which were there in the entire situation. This situation was based on the support provided by Central Bank of UAE to Dubai city in order to overcome from the financial crisis.
All the legal consideration was based on the massive spending of the government of the construction activities going on in the city. One of the most probable defaults for the two largest conglomerates which are sponsored by the government of UAE are the main spark in the financial crisis of the city. There has been a request put up by the government of Dubai to freeze the payment of $ 80 billion debt for the next six months. One of the most important factors which lead to the financial crisis in the city was the introduction of boom bust policies by the central. However central bank has helped a lot but still the root cause of the problem initiated from there only. There was a lot of expansion in the business in Dubai which has lead to the increase in the monetary pumping up to a large extent. Because of all this there was a huge growth in the monetary plumping in one year i.e. from the year 2006 to 2007. After that a bubble in the growth of the monetary plumping blasted which made the rates of every thing gone high in order to cover up the loss but that was not sufficient.
What were the outcomes?
As a result of this financial crisis in Dubai, the government of Dubai has considering a sale of its properties of state. In this sale there will sale of one of the most famous ships of the world, QE 2 i.e. The Queen Elizabeth II. It is also planning to sell the investment arm of the city, Isthitmar World in order to restructure the debt finance (Fund, 2009).
The final outcome of the situation was that there was a financial crisis in Dubai because of this delay in the repayment of debt to Nakheel Properties and some other sub ordinates because of which the entire problem began but there is another thing which has come into picture because of this financial crisis and that is the power and the supporting behavior of the central bank of UAE. Central Bank of UAE has given an assistance of $ 10 Billion to the city in order to rescue from the financial crisis. It is true that this amount of money is not sufficient for Dubai to come to the older scenario but it is more than enough for the city to come out of the financial crisis so that the city can move towards the prosperous life again.
As far as the outcome from the Nakheel properties is concerned, Nakheel Properties agreed to freeze the money of Dubai Government for the period of six months which was a large amount of time for any company to take such a huge amount of debt after the final submission date. This was the major reason for the financial crisis in the city because of blockage in the flow of money.
Central Bank of UAE became ready to pay for the short term losses which occurred because of all such activities of financial downturn which occurred in Dubai. There was a strong banking system implemented in the city and there was a surety among the people that this support by central bank of UAE, there will be again a betterment of the city soon.
How could the situation been dealt with differently?
There would have been another way of dealing the situation. This issue was handled in an absolute single way. This was not a both sided approach because in this situation, all the problems had to be aced by the Central Bank of UAE and there were no restriction put on the Nakheel Properties regarding repayment of the debt at a later stage. When a necessary time has been issued by the government of Dubai to repay the debt then at that time repayment of loan should have been there but this did not happen
The entire problem had to be faced by the central bank of UAE which finalized all its plans to help Dubai to overcome from the situation of financial crisis but the support that it gave to the city was remarkable and would have to be appreciated to the core because there was a very quick recovery in the economic situation of Dubai even after the financial crisis which was not at all expected.
Hence, there could have been an other alternative which could have been taken into consideration for solving this problem. A part of debt should have been repaid by Nakheel Properties and if it would not have been ready some restrictions would have been put on the company so that government should have benefited from them. Along with this, a part should have been given by Central Bank of UAE. Then the burden on Central Bank of UAE would have been less.
Conclusion
Hence we can say that legal and ethical issues in any situations are necessary. We have seen in the project that because of some legal and ethical consideration, central bank of UAE has helped the city to overcome from the situation of financial crisis and the support was such a wonderful that it rescued the city in a quick time.
