Islamic finance holds promise for Dubai

Increasing consumer awareness and growing demand for retail products are set to drive activity in Dubai’s Islamic financial services (IFS) sector, offering scope for sustainable expansion despite forecasts of slower short-term economic growth.

According to a recent report by the London-listed asset management group European Islamic Investment Bank, as Dubai pushes ahead with plans to expand its offering in sharia-compliant financial services, it will be tapping into significant pent-up global demand for Islamic asset management, which could reach as high as $185bn by 2019.

Market opportunities

The study, issued in mid-October, highlighted additional measures that could be considered in order to raise Dubai’s profile as a centre for IFS.

Industry growth could be accelerated through wider consultation between fund managers and the authorities, with a focus on identifying ways to spur the creation of multi-asset-class, multi-geography funds.

In addition, the report notes that closer interaction between the UAE’s state-owned savings institutions and sovereign funds, such as the Investment Corporation of Dubai, could influence the kind of private sector asset managers appointed going forward, helping engineer a shift towards more IFS-minded asset management.

In particular, the emirate would benefit from the creation a GCC-wide pension fund framework, the bank noted.

Although Islamic financial institutions are rapidly growing their market share, conventional banks continued to dominate in categories such as payroll, credit cards and personal finance. The expansion of IFS into other areas could help to unlock a wider variety of revenue streams.

According to local media reports, some initiatives being considered include a central sharia board of Islamic scholars, charged with overseeing the sector, along with the first fully sharia-compliant import-export bank in the world, which in turn would foster an IFS trade finance segment.

Hussain Al Qemzi, CEO of Noor Islamic Bank, highlighted other promising growth avenues for the sector. “Diversifying the products and institutions in place is crucial for the sector’s expansion,” he told OBG. “For example, sukuk issued in lower denominations could help attract more retail investors.”

Growing acceptance

New research from Dubai-based Emirates Islamic Bank (EIB), released in early October, has underscored the segment’s growth potential, while also highlighting the need to increase the uptake of the full range of IFS products on offer in the UAE.

According to the EIB’s findings, while nearly half of all bank customers in the UAE have at least one Islamic banking product, much of this was focused in the auto finance and savings account segments. The survey did, however, find a high level of openness to other IFS products.

Growing acceptance of sharia-compliant finance suggests the government’s bid to establish Dubai as an Islamic banking centre, launched in 2013, is already having a measurable effect on the industry.

According to a report released by consultancy EY earlier this year, the UAE’s Islamic banking sector expanded by 11.4% in 2014, taking assets to $127bn, with the sector’s portfolio forecast to reach as high as $262.9bn by 2019. For its part, Dubai’s Noor Bank reported record net profits last year, up 166% at around $185m.

A sharper focus on Islamic finance has also led to a marked increase in the number of people looking to gain the qualifications needed to work in the sector, according to recent figures from the Chartered Institute for Securities & Investment (CISI), with a 35% year-on-year jump in the number of exams sat as of August.

Interest was especially strong in Dubai, Matthew Cowan, the CISI’s regional director for the Middle East, noted in early October, which he expects will pay dividends for the broader GCC market.

According to Abdulla Mohammed Al Awar, CEO of the Dubai Islamic Economic Development Centre (DIEDC), more can still be done to standardise the sector and integrate it with other emerging sharia-compliant industries.

“The creation of a unified sharia board to standardise IFS products across the UAE could help to harmonise practices and amplify Dubai’s global standing as an Islamic financial centre,” Al Awar told OBG. “This would also have knock-on benefits for burgeoning sectors like halal food production.”

Growth hurdles

While the long-term potential for the industry remains solid, Dubai’s IFS sector may find itself faced with a moderate cooling of the operating environment in the nearer term.

A combination of lower oil prices and the prospect of higher benchmark interest rates in the US is likely to see sharia-compliant asset growth ease from the double-digit expansion recorded in recent years, according to the “State of the Global Islamic Economy” report issued in late September by Thomson Reuters in collaboration with the DIEDC.

The report said it expected the sector to slow to a compound annual growth rate of 9.8% through to 2020, down from a 17% average between 2008 and 2013.

However, this is likely to form part of a broader industry trend across the GCC region, affecting conventional and Islamic lenders alike.

A report by Standard & Poor’s published at the beginning of October said net income growth for the majority of banks in the Gulf was expected to ease somewhat in 2015 and 2016, as weaker oil prices and greater market volatility trigger an increase in credit losses.

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