Islamic banking in UAE- Case Example of Emirates Islamic Bank

Emirates Islamic, belonging to Emirates NBD Group, is gaining traction in asset growth, profitability and asset quality, thanks to strong demand for Islamic banking services, a sharply focused retail strategy, and innovative digital offerings, In the first quarter of 2019, the bank reported a net profit of Dh411 million, an increase of 97 per cent year-on-year and 54 per cent quarter-on-quarter, for the highest ever quarterly net profit since inception in 2004.The bank attributes its strong performance in a relatively challenging economic environment to continuing improvement in cost of risk, healthy balance sheet, stable credit quality and better liquidity. The UAE remains a promising avenue for the growth of Islamic banking and finance. The financial results of past few quarters prove the bank has come a long way from the days of deleveraging and low profitability in 2016-17 to strong balance sheet growth, higher funded income, growth in fee income and lower provisions. “We see enormous potential for the growth of Islamic banking in coming years, both worldwide and in the UAE. In the UAE, demand for Islamic banking products and services continues to grow, and we are seeing more uptake among both Muslim and non-Muslim consumers Islamic banking continues to gain traction in the UAE market, going from a single-digit market share to over 20 per cent and growing. In the last 12 months, conventional banks’ total assets saw a growth rate of 4-4.5 per cent while Islamic players have been growing at 7 per cent. The UAE remains a promising avenue for the growth of Islamic banking and finance, particularly given the substantial market share held by Islamic lenders in other core markets. For instance, in Malaysia, the share of Islamic banking is about 25-26 per cent, and in Kuwait it is about 40 per cent. This figure becomes significantly higher in Saudi Arabia at upwards of 50 per cent. In the UAE, Islamic banking penetration is expected to cross 25 per cent in coming years.

Islamic Banking and Finance in Africa

Although Islamic banking has been developed in Gulf and South East Asian countries, Africa, with an estimated 50 percent Muslim population, is trying to adapt itself with this industry until recently. As of end-2012, about 38 Islamic finance institutions-comprising commercial banks, investment banks, and Takaful (insurance) operators-were operating in Africa. South Africa, Nigeria, Kenya and Mauritius are advancing in Islamic banking in Sub Saharan African. Growing middle class combined with its young population, the development of infrastructures and necessary changes to the regulatory and policy framework among others are the good news. However, liquidity problems, slow development of new products, regulatory issues, competition from bigger conventional banks and so on remain the challenges. However, the industry is improving and the future seems bright nowadays since many countries are adopting structural and regulatory changes. With respect to sukuk, several countries are joining the market to attract their local Muslim and Gulf and Southeast Asian investors who are interested in Shariah-compliant instruments that greatly contributes for financing huge projects and infrastructural developments. Lack of skilled manpower and public awareness together with economic, financial, legal and regulatory challenges remain prevalent.

Islamic Banking in Pakistan- end December 2018

Assets of Islamic Banking industry in Pakistan increased by 8.1 percent (Rs. 200 billion) during the quarter October to December, 2018 and were recorded at Rs. 2,658 billion. Similarly, deposits of Islamic banking industry witnessed a quarterly growth of 9.9 percent (Rs. 198 billion) and stood at Rs. 2,203 billion by end December, 2018. During CY18, assets and deposits of Islamic banking industry witnessed year-on-year growth of 17 percent and 16.9 percent, respectively. Market share of Islamic banking assets and deposits in the overall banking industry was recorded at 13.5 percent and 15.5 percent, respectively by end December, 2018. Profit before tax of Islamic banking industry was registered at Rs. 34 billion by end December, 2018 compared to Rs. 23 billion in the same quarter last year. The network of Islamic banking industry consisted of 22 Islamic banking institutions; 5 full-fledged Islamic banks (IBs) and 17 conventional banks having standalone Islamic banking branches (IBBs) by end Dec 2018. Financing and related assets (net) of Islamic banking industry continued their growing trend and reflected a quarterly growth of 10.7 percent (Rs. 146 billion) to reach Rs. 1,511 billion by end December, 2018 compared to Rs. 1,365 billion in the previous quarter. ncing and related assets (net) of Islamic banking industry continued their growing trend and reflected a quarterly growth of 10.7 percent (Rs. 146 billion) to reach Rs. 1,511 billion by end December, 2018 compared to Rs. 1,365 billion in the previous quarter.

Fact about Saudi Arabian Islamic Banking Market

Despite the trend in the Saudi Arabian banking market to convert to full-fledged Islamic Banks, only four among the 12 local licensed banks are considered to be pure Islamic banks:

  • Al-Rajhi BankSaudi Arabia
  • Al Jazeera Bank
  • Al-Bilad Bank
  • Alinma Bank

According to scholar of international finance, Ibrahim Warde, the two largest Islamic banking groups, Dar al-Maal al-Islami and al-Baraka Bank, have not been able to obtain licenses to operate commercial banks in Saudi Arabia, despite the fact that they are both owned by prominent Saudis. In 1985, the al-Rajhi Banking and Investment Company was authorized to engage in interest-free banking, but on the condition that it did not use the word “Islamic” in its name. Saudi Arabia does not officially recognize the concept of Islamic banking. The logic is that if one bank is recognized as an Islamic institution then all others, by implication, would be un-Islamic. The official line was that all banks operating in Saudi Arabia were by definition Islamic.

UK as world leader in Islamic finance

Islamic finance is reinforcing the UK’s position as a global financial hub, says Amir Firdaus, CFO of the UK’s oldest and largest Islamic bank, Al Rayan Bank.The UK has a long-standing reputation as one of the world’s most important and innovative financial centers. The City of London is already the global leader for currency trading, fintech, cross-border banking, asset management and much more. It is also the leading centre for Islamic finance outside of the Muslim world, with assets of UK-based institutions that offer Islamic finance services totaling more than $5bn. In light of current political and economic uncertainty, this is certainly a position the UK can leverage, particularly when it comes to driving inward investment and securing trade opportunities in a post-Brexit world. In recent years, the UK has reinforced its position as the western hub for Islamic finance. Today, over 20 banks in the UK offer Islamic services, five of these banks are fully Sharia-compliant, including Al Rayan Bank. Al Rayan Bank currently provides Islamic financial products to over 85,000 customers in the UK.  The Bank is the largest provider of Islamic home finance in the country and was the first to introduce Islamic business banking to Britain. The Bank is also one of a handful of Islamic current account providers and offers the largest range of Sharia compliant savings products, including the country’s only cash ISAs. Last year, Al Rayan Bank became the first bank in the world to issue a public Sterling Sukuk (Islamic bond) in a non-Muslim country.  The London-listed £250m securitization was rated AAA by Standard & Poor’s (S&P) and Aaa by Moody’s Investors Service (Moody’s) and was significantly oversubscribed – reflecting the strong demand for Islamic financing instruments that exists in the market. But as well as strengthening its position amongst Muslim communities in the UK, the appeal of Islamic finance is growing with a wider audience. Over a third of Al Rayan Bank’s customers are currently believed to be non-Muslim, and in certain products categories the proportion of non-Muslim customers is far higher.  Indeed, we believe that over 80% of all fixed term deposit (FTD) customers are not of the Muslim faith. But while Al Rayan Bank has made great strides in raising awareness and understanding of Islamic finance in the UK, there’s more to be done to maintain engagement with non-Muslim audiences. With its underlying principles of equitable distribution for all, fair trading, judicious spending of wealth and the well-being of the community as a whole, Islamic finance presents an ethical banking alternative for anybody, not just for Muslims. Increasingly, customers want to know where their deposits are being invested and the ethical and responsible nature of Islamic banking presents a genuine alternative. Islamic banks can only invest in activities backed by a tangible asset, which means highly speculative investments are not permitted – this reassures a lot of people who have grown weary of the sometimes abstract nature of conventional banking. Likewise, the fact that investments can only be made in activities in keeping with the ethical values of Islam appeals to people of all faiths and none.

Al Rayan Bank is committed to making Islamic banking products as widely available as possible. The Bank was the first Islamic bank in the UK to offer a home finance product designed to support first-time buyers. Islamic finance is evidently growing in appeal among Muslims and non-Muslims alike. As awareness and understanding of Islamic finance improves, it is incumbent on us to promote the opportunities that Islamic finance provides to new audiences. This will ultimately help to sustain growth in the sector and strengthen the UK’s position at the forefront of global finance.

China Using Islamic Finance to build its Silk Road

Shariah-compliant financing plays a steadily growing role in China’s New Silk Road project, also known as Belt and Road Initiative, a mega-development plan for infrastructure and economic development currently involving more than 70 countries in Asia, the Middle East, Europe and Africa at a combined investment volume of up to $8tr until 2030. A particular economic corridor planned by the Chinese runs from Xinjiang, China’s autonomous Muslim province in the country’s northeast, across Central Asia to Western Asia and crosses a number of predominantly Muslim countries, namely Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, Turkmenistan, Iran and Turkey and will be connected to Pakistan and the Gulf Cooperation Council (GCC) countries through a linkage. Another maritime corridor will connect Muslim countries in Southeast Asia, namely Malaysia and Indonesia, with other predominantly Muslim jurisdictions including Bangladesh, Tanzania, Djibouti, Sudan and the Arabian Peninsula.
Analysts assent to the view of regional bankers that the Belt and Road Initiative represents a massive opportunity for Islamic financing institutions to get involved on a large scale with long-term infrastructure funding and other economic contributions to the region.
After all, of the total number of nations involved in the Belt and Road initiative, around 30 have predominantly Muslim populations, including some in Africa. To get them involved, China-lead Asian Infrastructure Investment Bank (AIIB) has been approaching Islamic banks in the countries and encouraged them to take part in the initiative across the region.  Particularly, the AIIB strongly recommends the use of Islamic bonds, or sukuk, as a means of structuring investment into infrastructure development since those bonds have been recognized not just by the Islamic financial world, but also the conventional banking sector, as a successful financing structure for large-scale, long-term infrastructure projects.  Alongside sukuk, Islamic finance’s contribution to the initiative would also comprise of bridge financing, private equity for private-public partnership projects, as well as green sukuk issuance for renewable energy projects, among others. Since the unveiling of the Belt and Road Initiative in 2013, the AIIB also approached the Islamic Development Bank to discuss the use of Islamic finance for the Belt and Road Initiative. A sizeable number of the 57 member countries of the Islamic Development Bank with its 1.8bn-strong Muslim population is involved, which means that Islamic finance may well find a prominent role in the initiative’s funding. “Modern Islamic economies will exert considerable impact on the Belt and Road Initiative development programs,” Travis Selmier, professor at the political science department at Indiana University, wrote in a recent research paper on the influence of Islamic economies on the New Silk Road.  “Although a non-Muslim majority country, China has a longer, deeper and more influential history of cultural interaction with Islam than any other large country or major culture,” he added.


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