Maldives hunts for bailout to avoid first Islamic sovereign debt default

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The Maldives is facing a potential default on its Islamic sovereign debt, raising concerns about the stability of the nation's finances and the broader impact on the sukuk market, a form of sharia-compliant debt. The island nation, renowned for its luxury tourism, has borrowed extensively from both India and China to cover growing budget deficits. However, with foreign reserves dwindling, the Maldives is now seeking a bailout to avoid missing a crucial $25 million payment on its $500 million sukuk bond, which matures in 2026.

The sukuk, a bond-like financial instrument that complies with Islamic law by offering profit-sharing instead of interest payments, has dropped in value to about 70 cents on the dollar. If the Maldives defaults, it would mark the first sovereign default on sukuk debt, shaking the confidence in a market worth $860 billion globally.

Despite efforts by the Maldivian government to secure external financial support, including talks with bilateral and multilateral partners, global observers are uncertain about whether India, China, or Gulf nations will step in. A default could complicate the legal framework for sukuk bonds, as the underlying assets used to back the debt are difficult for investors to seize in the event of non-payment.

This financial struggle comes as the country continues to grapple with high import costs and inflation, exacerbated by large infrastructure projects.