Islamic banking and finance in UAE

Muhammad Arif
(Chairman CAIF)

UAE Islamic banking assets have risen to $141.5bn. UAE Central Bank official says UAE now holds about 7% of global Islamic banking assets. UAE Islamic Banking and Finance is distinct from other countries due to its tilt, towards new innovations, new ideas based on Islamic principles
Saif Hadef Al Shamsi, Assistant Governor for Monetary Policy and Financial Stability at the UAE Central Bank, says that Islamic banking’ assets account for around 20 percent of AED2.6 trillion of the total assets of the state’s banks. He added that there are seven Islamic banking and financial institutions operating in the country. The UAE has already shifted towards becoming a hub for financial innovations.
The country’s financial sector shows how leading the pack leads to unprecedented value. The UAE is laying out plans to develop the financial technology ecosystem in the country
The United Arab Emirates has emerged as a shining example of how a traditional oil powerhouse can diversify its sources of national revenues away from oil to other industries. One of the key components of this diversification is the strong development of the financial ecosystem.
The country has been focused on developing the banking, finance, offshore financial services and corporate governance initiatives to drive this diversification. However, the banking sector in the UAE continues to be quite fragmented, with 23 domestic banks and 29 foreign institutions operating onshore, as well as a plethora of alternative finance companies that exist to serve SMEs and retail clients whom have exhausted traditional banking lines and offerings.
It is imperative to understand that the hydrocarbons sector continues to be the compelling force behind anticipated growth for the near future. Nevertheless, the UAE government continues to pursue its diversification programme through several investments in trade, transport, tourism, manufacturing, and technology – a strategy that is helping the UAE to promote other core sectors such as banking, finance, trade and tourism.
The UAE banking sector recently saw the merger of two dominant players, First Gulf Bank and National Bank of Abu Dhabi, creating one of the largest financial institutions regionally, with the breadth and scale to be competitive globally.
There are, however, challenges that will continue in UAE’s banking sector, with property markets across the emirates continuing to show volatility in prices and depressed yields. Faced with these challenges, many corporate and developers are looking at restructuring their traditional lending lines with more alternative financing options that are more flexible in terms of repayment and required collateral. This comes with a higher possibility of increased nonperforming loans and has a negative effect on the banks’ P&Ls due to higher provisioning. Nevertheless, banks continue to perform well and are profitable despite these challenges, certifying the breadth and strength of local banking institutions and their ability to sustain weakening banking segments through diversification and investments.
Although the banks today are flushed with cash and have a larger appetite for lending, these banks are being more cautious than ever. Adding to this is the IFRS 9 and Basel III regulations, aimed at reducing exposure to the real estate markets even further. This gives room for other finance companies to gain market share and flourish.
One other vital change is the drive towards financial technology. Fintech is redefining modes of operation in the financial industry, and UAE is witnessing unprecedented levels of change and growth. Although it comes at a high initial cost of development, fintech in the long run will serve to drive efficiencies in the sector to new levels. Fintech – which is now omnipresent in the industry – is providing the critical elements of swift action, more convenience and higher accessibility to the delivery of financial services. The influx is exceptionally transformational and continues to gain momentum.
The UAE has been at the forefront of such changes, with the introduction of e-banking, e-dirhams, online platforms and regulatory bodies such as the Abu Dhabi Global Markets and Dubai International Financial Centre serving as bright examples of how the country is becoming a hub for financial services innovations in the region.
The UAE financial services industry is truly geared to becoming a leading example of how leading the pack creates unprecedented value. It is clear that as the financial services industry continues to mature in the UAE, the country will enjoy great dividends and be a leader on the world stage of the industry.
Recently, the government had one of the largest gatherings of its kind in the UAE, in which new strategies were discussed, resulting in the launch of 120 initiatives in 30 different sectors at the local and federal levels, as the country works towards a roadmap for the UAE’s centennial in 2071. This initiative demonstrates how the leaders of this great nation are gearing up to make sure the UAE is a global leader and regional role model.
Islamic banking deposits have increased by 42 percent over the past three years, compared to an 18 percent growth rate in conventional banking institutions, and that lending by Islamic banks increased by 54 percent in the same period.
The Dubai Islamic Economy Development Centre (DIEDC) says the refreshed strategy focuses on ensuring long-term impact, with its main objective to lead the growth of the Islamic economy sectors on a local, regional and international scale, and to set a benchmark for the Islamic ecosystem worldwide.
At the heart of the strategy are three key pillars – Islamic finance, Halal sector, and Islamic lifestyle that include culture, art, fashion and family tourism.
Knowledge, standards and digital Islamic economy serve as cornerstones in supporting the pillars while playing a pivotal role in shaping an enabling environment for sustainable investments and real development.
A centre in this respect has been tasked with implementing Dubai’s strategy to become a global hub for the Islamic economy has made progress on about 75 per cent of its initiatives so far this year.
The centre has identified key sectors for developing three segments of the Islamic economy: Islamic finance, halal products and Islamic lifestyle which includes culture, art, fashion and family tourism.
Dubai and the UAE are instrumental in raising awareness about the culture of Islamic economy worldwide and boosting global interest in adopting its principles.
The Islamic economy strategy adopted by Dubai and the wider UAE is truly unique in its ability to foresee economic changes, offer secure investment options and utilize bonds to finance major projects across the globe.
New initiatives, include a proposal to set up a national re-takaful or Islamic re-insurance company and creating a central Sharia advisory body “to streamline the provision of sharia review services to Islamic financial institutions” in the UAE.
Meanwhile, the UAE Cabinet has approved members for the Higher Sharia Board for Banking and Finance, which will bolster the Islamic finance industry, The board will be responsible for setting “rules, standards and general principles for banking and financial activities that comply with Islamic laws” and “a general framework for Islamic governance and fatwa issuance on matters highlighted by the central bank or other financial institutions” in the UAE.
These are the changes happening in Islamic Banking and Finance in UAE.

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