Interview: Adnan Chilwan

How will the consolidation of the financial services sector affect operating costs for Islamic banks?

ADNAN CHILWAN: Given that more than 50 banks are operating in the UAE, and given the current financial landscape, consolidation makes complete sense. That said, I do not foresee the competitive landscape in the sector changing dramatically as a result. As long as there are clear synergies and greater efficiencies, these changes will simply make the market more robust. Furthermore, the four largest banks control nearly two-thirds of the sector, so these banks will remain dominant in the industry, due to their scale.

Taking into account the size of the market, I believe that the trend towards consolidation will have a positive effect by lowering the pressures on funding costs, increasing the revenue base and strengthening banks’ abilities to meet substantial investment requirements. Competition could be affected primarily by the digital revolution, as more and more non-traditional players enter the banking market. The financial technology (fintech) industry, which is growing globally at a staggering pace and is expected to triple in value to $150bn in the next five years, has left banks at a crossroads. However, I am convinced that complementarity, rather than competition, will create more opportunities for incumbents and newcomers alike. Whether Islamic or conventional banks, the opportunity is there. The future is bright for partnerships between fintech companies and banks, and I foresee the industry evolving at an unprecedented pace in the medium term.

How will the increasing demand for sharia-compliant products among non-Muslims affect competition between conventional and Islamic banks?

CHILWAN: The popularity of sharia-compliant banking is undeniably on the rise, not just in traditional markets, but around the globe. It is not the case that sharia-compliant banking is restricted to the Muslim community; it has a wide-growing appeal, and the model goes far beyond the niche. Today Islamic banks are competing with their conventional counterparts, and consumers are expecting nothing less from Islamic services than what they have gotten from traditional banks. Islamic banks are actively responding to this demand and are winning this race. We have witnessed long-established, global, conventional banking names opening up Islamic windows and subsidiaries.

While I expect the competition to continue, I believe sharia-compliant banks will be in an advantageous position in the short to medium term, and their growth will be spurred by the emergence of the halal economy. For instance, the Dubai government is working to develop various markets and attract investment into Islamic health care, fashion, cosmetics and other related products. The halal industry, which is projected to grow in the coming years, will naturally have a positive effect on sharia-compliant banking. This should also help to unlock new business possibilities for the expansion of Islamic finance in the world’s asset markets.

What strategies can sharia-compliant banks harness to maintain strong asset growth?

CHILWAN: I do not see this as a question of simply Islamic versus conventional banks. The strong asset growth seen over the last half decade is the effect of two clear strategic approaches. The first was pre-emptively creating capacity by making liquidity and capital readily available, in order to allow for growth. The second was avoiding restricting oneself to a niche and just going for the maximum therein.

Continuous innovation is vital for growth. Any digital transformation should be driven by a client-centric strategy, and this remains a fundamental element of achieving a sustainable growth agenda for 2019. Every new product or initiative included in a digital agenda must improve customer experience. The world is moving quickly through high-tech advancements, and as a result, we need to be quick and agile in our response.