Dubai’s drive to develop its Islamic finance sector is fuelling growth of sharia-compliant banking but the benefits are unevenly distributed, with some lenders struggling to compete against burgeoning competition.
In 2013, Dubai’s government announced plans to turn the emirate into a center for an “Islamic economy” with sharia-compliant businesses ranging from banking to asset management, trade, food preparation and certification, fashion, education and tourism, Arabian Business reported.
This looked like good news for Islamic banks in the United Arab Emirates, and over the past 18 months, some have appeared to benefit. But others have not, underlining the sometimes unpredictable consequences of government efforts to develop Islamic finance in the Persian Gulf.
Tirad Mahmoud, chief executive of Abu Dhabi Islamic Bank, said conventional banks had moved strongly into Islamic banking through sharia-compliant “windows” – departments which offer Islamic services while segregating their funds from the bank’s conventional operations.
“Lately, conventional banks have become much more aggressive in the Islamic banking space, which makes our business equally sensitive to competitive pressures,” he told Reuters.
Several initiatives announced by Dubai could have a big impact on the Islamic banking sector but have not yet materialized.
Impact in Two Areas
Another project still in the planning stage is the world’s first fully sharia-compliant export-import bank, which could spur the growth of Islamic trade financing.
But Dubai’s drive does appear to be having an impact in at least two areas. An aggressive publicity campaign seems to have pushed more consumers and companies to favor Islamic banking products, or to at least become more open to them.
Assets in the UAE’s Islamic banking sector expanded 11.4 percent last year to $127 billion in 2014, and could reach $263 billion by 2019, consultancy EY estimates. It said Islamic assets accounted for about a fifth of the country’s total banking assets, which according to central bank data grew 10.6 percent in 2014.
The second way in which Dubai’s Islamic economy drive is benefiting banks is an increased emphasis on sharia-compliant financing – bond issues and loans – by the Dubai government and big companies related to it.
For example Dubai’s Noor Bank, whose owners include state funds Investment Corporation of Dubai and Dubai Holding, is launching roadshows for a debut sukuk issue. Lead managers from the UAE include three full-fledged Islamic banks – Al Hilal Bank, Dubai Islamic Bank and Sharjah Islamic Bank – plus Emirates NBD, a top conventional bank.
Such deals create more capital markets business for Islamic banks and increase the supply of sukuk which they can use to manage their liquidity, potentially aiding their bottom lines.
Gap Shrinking
The UAE central bank took an important step towards improving Islamic banks’ liquidity last month, making it easier for them to access its special lending facility by expanding the range of collateral they can use.
Some of the UAE’s six full Islamic banks are clearly benefiting. Historically, a lack of scale has made them less profitable than conventional banks, but for some the gap is shrinking. Noor Bank reported a record net profit of 678.1 million dirhams ($184.6 million) for 2014, a 166 percent leap from 2013.
Last year, Abu Dhabi Islamic Bank bought the UAE retail operations of Barclays in a $177 million deal.
Other Islamic lenders are not faring so well, however. Al Hilal posted just 2.1 percent growth in total income in the first half of 2014, with a 15.5 percent drop in the second quarter, its latest financials show. The lender did not respond to a request for comment.
One risk in Dubai’s drive is that it whips up so much enthusiasm for Islamic banking, causing so many conventional institutions to pour into the sector, that competition starts to hurt profit margins and the market quickly becomes saturated.
