Islamic banks in the UAE now almost one-fifth of financial sector

The number of Islamic banks operating in the UAE now stands at eight (not including those conventional institutions operating Islamic ‘windows’) with some 260 branches. The figures were given by the Governor of the Central Bank of the UAE (CBUAE), HE Sultan Bin Nasser Al Suwaidi, in his opening remarks to a seminar entitled Islamic Finance in a global perspective, held by the CBUAE on 2 June 2011. The Governor also congratulated the Sultanate of Oman on the licensing of its first Islamic bank and welcomed the Central Bank of Oman to the Islamic finance community of regulators.

However, Al Suwaidi directed the majority of his remarks to the state of Islamic finance within the UAE itself. He said, "The subject I want to raise is our experience with Islamic banking in the UAE, and the challenges we faced or still face.”

Reviewing the historical development of Islamic banking in the UAE, Al Suwaidi noted the establishment and incorporation of Dubai Islamic Bank (DIB) in 1975 as the starting point for Islamic finance in the country.DIB was, of course, not just the UAE’s but the world’s first full-service Islamic bank.

"Dubai Islamic Bank was the only Islamic bank for many years until the incorporation of Abu Dhabi Islamic Bank in 1998", said Al Suwaidi. However, since 2000 six more Islamic banks have been created either through conversion from conventional to Islamic finance or through the incorporation of new institutions.

"Deposits at Islamic banks were AED 198 billion ($53.8 billion) as at the end of the year 2010, which represents 18.7 per cent of total deposits of the banking system,” Al Suwaidi disclosed. Loans and advances are AED 169 billion ($46 billion) as at the end of 2010, which represents 16.4 per cent of total loans and advances of the banking system.

Annualised growth of assets and liabilities of Islamic banks was 10.9 per cent in 2010. Deposits grew by 7.6 per cent while loans and advances grew by 5.6 per cent.

Al Suwaidi described the performance of the UAE’s Islamic financial institutions as ‘impressive’ but went on to talk of three ‘challenges that would need the focused attention of the scholars’.

"The first such challenge is the short-term liquidity management at Islamic banks and other Islamic financial institutions. This is not a straight forward issue and has been under discussion between Islamic banks and Central Bank of the UAE for several years before we were able to produce any instrument," he said.

However, during Q4 2010, the CBUAE created Islamic CDs (Certificate of Deposit) on the basis of Murabaha. Banks participating in the program were required to sign a Commodity Murabahah Deposit Master Agreement with the CBUAE and to install Shari’ah-compliant CDs auction systems.

Al Suwaidi described the CDs, launched in November, as ‘very successful’ and noted that by the end of Q1 2011, the CBUAE had sold CDs to the value of AED 12 billion ($3.27 billion). The Governor also noted the broader global initiative that the launch of the International Islamic Liquidity Management Corporation in Kuala Lumpur in October last year represents.

Al Suwaidi then raised two issues that continue to exercise Islamic financiers around the world, the potential ambiguities surrounding credible Shari’ah standards and the allocation of profits between shareholders and depositors.

"Another challenge for Islamic finance is the distinction between profit to shareholders and profit to investors/depositors, which is not a clear-cut issue at the moment. We need a standard formula to calculate profit in an equitable and fair way at all Islamic banks", said Al Suwaidi.

Finally, Al Suwaidi identified the issues surrounding differing interpretations of Shari’ah, “The third challenge is the rulings by the various Shari'ah boards of Islamic banks, which should be better coordinated and harmonised. This will satisfy an important requirement, i.e, setting of credible standards for Islamic banks."