Emerging Islamic Banking In The Uae

Islamic banking remains stable in the UAE despite the effects of the pandemic

COUNTRY PANORAMA 03.02.2022, 10:55
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Emerging Islamic Banking In The Uae

The COVID-19 crisis wreaked havoc on global economies. As everywhere, the pandemic has had a considerable impact on economic activities in the United Arab Emirates (UAE) and the Gulf region. The banking and financial sector, too, has not been immune to the pandemic’s effects, although the industry is now showing signs of a robust recovery, with banks in the UAE reporting strong results for the first half of 2021. In this environment of broad uncertainty, Islamic banking, one of the fastest-growing financial industry segments, has remained an oasis of stability, emerging relatively unscathed from COVID-19.

The rise of Islamic banking in the UAE has been steady and consistent. The penetration of Islamic banking products in the country has increased from 47 per cent in 2015 to 58 per cent in 2020, whereas conventional banking products have seen their penetration decline from 70 per cent to 64 per cent during the same period. According to the latest Islamic Banking Index from Emirates Islamic, 3 out of 5 respondents in the UAE now have at least one Sharia-compliant product. Meanwhile, the share of Islamic banks’ assets to total banking system assets in the UAE has increased from 17.3 per cent in 2013 to 19 per cent as of June 2021.

While the Index shows the overall penetration of Islamic banking products to have reduced from 60 per cent in 2019 to 58 per cent in 2020, the decline remains marginal relative to other sectors. Analysts expect the strong recent growth in the Islamic finance market to hold steady in the next few years, with growth in sectors such as halal food, halal treatments, and cosmetics expected to continue to spur demand. From a strategic perspective, a key factor driving this demand is the diverse range of initiatives launched by the UAE government to support the growth of Islamic finance. This includes the UAE Ministry of Finance’s plans to create a unified global legal and legislative framework for the Islamic banking sector and, most importantly, the establishment of the Higher Sharia Authority (HSA) by the Central Bank of the UAE (CBUAE). The steps taken by HSA to enforce the Sharia Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) have helped instil confidence in customers, assuring them that the products and services of the Islamic financial institutions they deal with are compliant with the rules and principles of Islamic Sharia as outlined in those standards. Overall, government measures aimed at standardizing Islamic banking practices have greatly improved the stability and resilience of the Islamic financial system.

A parallel development is the continued investment in fintech by Dubai International Financial Centre (DIFC) to facilitate the growth of the Islamic finance industry.
The DIFC FinTech Hive, the largest financial technology accelerator in the Middle East and Africa region, partners with various Islamic banks and specialist organizations such as the Dubai Islamic Economy Development Centre (DIEDC) to create innovative initiatives. Perhaps the most notable among these is the effort to promote the issuance of green sukuk in the UAE and across the world and develop the standards of certification for green sukuk along the lines of the Climate Bonds Standard and Certification Scheme.

The United Arab Emirates remains a key global hub for Islamic finance and, as the umbrella body representing 51 banks and financial institutions operating in the UAE and the common unified voice for the UAE banking sector, UAE Banks Federation (UBF) has been at the forefront of efforts to attract global interest in the country’s fast-growing Islamic banking and finance market, engaging at various levels and with diverse stakeholders to broaden the appeal of Islamic finance among investors. All six of the Islamic banks in the country are UBF members, and their contribution to the UAE banking market keeps growing year after year. Furthermore, most conventional banks in the UAE boast strong Islamic windows that have emerged as an influential driver of business growth. There has also been a steady increase in the number of Islamic finance companies that provide financial services and products that comply with Sharia. Fitch Ratings estimates that in 2020, Islamic financing and deposits accounted for 29% and 26% of total sector financing and deposits, respectively. As the world of Islamic banking keeps evolving, UBF remains dedicated to facilitating the continued growth of this all-important market segment and attracting new kinds of investors to Islamic finance by prioritizing concepts such as sustainable finance to grow the sector in harmony with the environment and build a better world for all.

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