With global Islamic financial assets worth some $1.2trn at the end of 2011 and growth of 150% over the previous five years, according to the UK Islamic Finance Secretariat, Dubai has long been eager to take a bigger share of this rapidly expanding market.
Indeed, the emirate has long been home to some of the region’s stand-out Islamic banks and insurers, with its sukuk – Islamic bond – market also of highly prominent international standing.
Yet the global financial crisis and its knock-on effect on Dubai, coupled with the bursting of the emirate’s real estate sector bubble, delivered some major challenges to Islamic finance in 2008-09. Nonetheless, there are signs of an older and wiser Dubai on a path back to growth, and so is its Islamic finance sector.
REGULATION: As with Dubai’s conventional banks, the emirate’s Islamic banks are subject to the regulation of the federal, Central Bank of the UAE (CBUAE), headquartered in Abu Dhabi. Those banks based in the Dubai International Financial Centre (DIFC), however, come under the regulation and supervision of Dubai Financial Services Authority (DFSA).
The DFSA follows UK law in financial matters, and banks located within it can be 100% foreign-owned, while those based outside must be majority-owned by UAE nationals or companies. DIFC-based banks with Category 1 licences, however, cannot do business with UAE residents, or from collecting deposits in dirham.
The UAE Ministry of Finance, as well as the government of the UAE and the government of Dubai, all have a key role to play in the sector too, having intervened after 2008-09 to support local banking operations.
The UAE only recently established a unified sharia board. As far back as 1985, however, the UAE passed Federal Law No. 6, setting the legal framework for Islamic banks, financial institutions and investment companies, with this law also seeking the creation of a Higher Sharia Authority (HSA) – attached to the ministries of justice and Islamic affairs – to supervise the sector. As of yet, the HSA is still awaiting its debut.
Standardisation is the preferred direction for the sector as it would significantly facilitate cross-border transactions and the growth of Islamic banks overall. However, the law requires each bank to set up its own sharia supervisory authority, with this requirement having been implemented across the UAE. One result of this has been a much more diverse Islamic banking sector in terms of the relative strictness of sharia interpretations. This has given Dubai’s Islamic banking clients a much greater choice of products, from the more conservative end of the spectrum, to the more liberal.
SECTOR PLAYERS: Amongst the eight UAE-registered banks with their headquarters in Dubai, three are Islamic: Dubai Islamic Bank (DIB), Emirates Islamic Bank (EIB), which recently announced full integration of Dubai Bank, and Noor Islamic Bank (NIB). In terms of numbers of total branches in the UAE at the end of 2012, DIB led with 75, then EIB with 45 and NIB had 11.
At the same time, two conventional banks in Dubai operate Islamic banking divisions. Commercial Bank of Dubai (CBD) launched Attijari Al Islami back in 2008, while Mashreq Bank launched its Islamic banking division, Mashreq Al Islami, back in 2010. Meanwhile, a third conventional bank, Emirates National Bank of Dubai (ENBD) owns one of the above Islamic banks.
MARKET LEADERS: Of the four, DIB was the first on the scene, established in 1975. It is also currently the largest Islamic bank in the UAE, its annual report giving total assets of Dh90.59bn ($24.66bn) at the end of 2011, up from Dh89.88bn ($24.47bn) year-on-year ( yo-y) from 2010. DIB is a listed company, with the largest single shareholder the Investment Corporation of Dubai, the government of Dubai’s sovereign wealth fund, which at the time of writing held a 29.8% stake.
The next largest, the neighbouring emirate’s Abu Dhabi Islamic Bank, had assets of Dh74.34bn ($20.23bn) as of end-2011, down from Dh75.26bn ($20.49bn) yo-y from 2010, according to the bank’s fourth-quarter 2011 report. DIB also reported that its total liabilities had gone up in 2011, from Dh79.61bn ($21.67bn) at the end of 2010 to Dh80.42bn ($21.89bn) y-o-y in 2011. Income, meanwhile, had also risen – from Dh4.7bn ($1.28bn) to Dh5bn ($1.36bn) – although expenses had grown from Dh2.25bn ($611.63m) to Dh2.58bn ($703.09m) over the same period. This meant a slight decline in profit before depositors’ share and tax, from Dh2.46bn ($669.88m) to Dh2.42bn ($659m), yet after adjustments, overall net profit for the year rose from Dh559.26m ($152.16m) to Dh1.06bn ($287.44m).
In common with other UAE-based banks – both conventional and Islamic – recent times have seen a steady increase in net impairments, as the legacy of the 2008-09 crisis works its way through the emirate’s economy. The net impairment loss on financial assets rose from Dh801m ($218.03m) in 2010 to Dh994.96m ($270.83m) in 2011, while the net impairment loss on non-financial assets rose from around Dh62.82m ($17.1m) to Dh91.95m ($25.03m), respectively.
OTHER KEY PLAYERS: EIB, which is a subsidiary of the largest bank in the UAE – ENBD – saw its total assets decline in 2011, according to year-end statements to the Dubai Financial Market (DFM). EIB is also listed on this exchange, which merged with NASDAQ Dubai in 2010. At the end of 2010, the bank’s total assets stood at Dh32.74bn ($8.91bn), with this falling to Dh21.48bn ($5.85bn) y-o-y from 2011. EIB also posted a net loss on the year, with the Dh59.34m ($16.15m) net profit from 2010 turning to a Dh448.55m ($122.1m) net loss by year-end 2011. Breaking this down, income from financing activities declined from Dh919.88m ($250.39m) in 2010 to Dh699.95m ($190.53m) in 2011, while the bank also made a loss from its investments in securities of Dh45m ($12.25m). This picture was largely as a result of increased impairments. The EIB’s allowances for these rose from Dh530.5m ($144.4m) in 2010 to Dh783.3m ($213.21m) in 2011, significantly effecting overall yields. Net impairments on financial receivables jumped from Dh283m ($77.03m) to Dh529m ($143.99m) over the same period, a hike of 86.8%.
DB also experienced a rocky 2011, being eventually taken over by EIB in October that year. Prior to that, the bank, which was established in 2002, was owned by Dubai Holding – which had a 70% stake – and property developers Emaar, with the remaining 30%. The bank had been in trouble for some time, with 2009 the last year for which it had posted full financial results. Total assets back then were Dh17.4bn ($4.74bn), down from Dh18.49bn ($5.03bn) in 2008.
The bank posted losses for 2009 of Dh290.6m ($79.13m), down from a profit of Dh226m ($61.5m) the year before. Behind those losses were some major net impairments – losses on Islamic financing and investing assets rose from Dh169.8m ($46.2m) in 2008 to Dh371m ($101.02m) in 2009, while impairment loss on available for sale investments went up from Dh29m ($7.89m) to Dh100m ($27.23m).
Established in 2007, NIB is owned by the government’s Emirates Investment Authority and the Noor Investment Group LLC. It reported total assets of Dh21.8bn ($5.94bn) in 2009, the most recent figures available in this category. The most recent results available for NIB are for the first half of 2011, when the company posted a Dh207m ($56.35m) net operating profit for the first six months of that year and a net profit of Dh85m ($23.14m). The bank reported its revenue as Dh386m ($105.07m) for the first half of 2011, with a capital adequacy ratio of 18.36%. These numbers represent a significant improvement for the bank on the first half of 2010, which ended with NIB posting a net operating loss of Dh9m ($2.45m). The bank undertook a strategic consolidation that year, cutting costs while boosting the deposit and client base – the former rising 40% between the first half of 2010, and 21% for the same period of 2011, according to press statements by bank executives.
CONVENTIONAL BANKS: According to CBD’s 2011 annual report, Islamic assets for CBD increased 70% in 2011, y-o-y, while Islamic deposits accounted for 11% of CBD’s total of Dh28.4bn ($7.73bn). The bank had 20 Attijari Al Islami centres within its CBD branches, and five Attijari Al Islami branches at the end of 2011.
For Mashraq Al Islami, meanwhile, its parent bank’s 2011 annual report stated that Islamic financing and investment (measured at amortised cost) accounted for Dh5.03bn ($1.37bn) of Mashreq Bank’s assets that year, slightly down on the end of 2010’s Dh5.29bn ($1.44bn). Islamic customers’ deposits had risen though, from Dh4.49bn ($1.22bn) at the end of 2010 to Dh5.24bn ($1.43bn) at the end of 2011.
BEYOND THE LEGACY: Islamic and conventional banks in Dubai are now having to make extra provisions for the effects of debt restructuring by the emirate’s government-related entities – large holding companies such as Dubai World, Dubai Holding and others – which found themselves overexposed by the global financial crisis. Indeed, Dubai’s banks were particularly affected by the property bubble bursting, as real estate had been the primary underlying asset for many of their sharia-compliant financing contracts.
EIB announced its highest operating profit in two years in the first-quarter 2012 results in May of that year, with a net operating profit of Dh138m ($37.68m), some 56% up y-o-y from 2011. DIB also posted impressive numbers for most of 2012. In the first nine months of the year the bank saw a net profit of Dh854m ($232.46m), compared to Dh850m ($231.37m) for the first nine months of 2011. The bank also launched the Shaatir savings account in the third quarter of 2012, which is specifically designed to help teach children the importance of responsibility starting at an early age.
For DB, now that it is under the wing of EIB, the future is also more secure. The takeover provides ENBD with two Islamic banking outfits, however, with obvious synergies resulting. In April 2012 the two announced that they had unified their top management teams, with Jamal bin Ghalaita now CEO of both EIB and DB. A survey has also been conducted to ascertain how the two banks are viewed, with the results of this to feed in to any future moves, with merger the most likely outcome, according to a number of bank insiders.
REAL ESTATE’S ROLE: DB’s troubles were largely the result of its overexposure to real estate, with Dubai Holding and Emaar, its co-owners, both heavily leveraged in that sector. Now though, Emaar has emerged from the storm in a healthy position, as evidenced by the success of its recent sukuk issues (see analysis), while Dubai Holding has been making progress with debt restructuring, although Dubai Group, one of its arms, was still facing challenges in this area as of mid-2012. Indeed, ENBD’s profits were down in the second quarter of 2012, partly as a result of its provisioning for Dubai Holding, as well as to meet the extra cost of the DB takeover. According to figures posted by ENBD, its costs were up 8% in the second quarter of 2012 compared to the same period of 2011, with four percentage points of this accounted for by DB.
Nonetheless, the success of companies such as Emaar in overcoming the legacy of 2008-09 have given a positive impetus to the sector, as Dubai’s economy picks up. This has also been evident in 2012 too, with Emaar’s second-quarter 2012 profit doubling y-o-y from 2011, with retail and hospitality leading the surge.
DIVERSIFICATION: Islamic banks are also moving to diversify their exposure, while tightening the rules on real estate financing, still the main asset base. EIB, for example, is looking to expand its home financing business, but only for existing homes or ones under construction, rather than the riskier off-plan mortgages that were common before the crash.
A more conservative policy overall is being implemented, with stronger background checks and monitoring. Banks are also now looking for more diversified income streams amongst their customers. The creation of a new UAE-wide credit bureau should help assist in mitigating risk (see Banking chapter).
REGULATORY REGIMES: Islamic banks in Dubai are regulated under the same CBUAE rules as conventional ones – indeed, they must also abide by the same international rules, when it comes to Basel II and Basel III.
In recent times, however, there has been increased discussion as to the benefits of more regulations being specifically tailored to Islamic financial practices. One example of this is the interbank market. Currently, there is one interbank market within the UAE for all banks, conventional and Islamic, with many Islamic institutions uncomfortable with this. In consequence, according to some in the sector who spoke to OBG, plans are now afoot to set up an Islamic interbank market.
Separating out Islamic and conventional banks may also address some concerns over standards of sharia compliance. Co-mingling of laws may, some Islamic bankers feel, be as challenging as co-mingling of funds.
TAKAFUL TRENDS: Dubai is also the home to a number of takaful, or Islamic insurance, companies. Those operating within the UAE market are regulated by the UAE Insurance Authority (IA), which operates according to the 2007 Insurance Law. Those based in the DIFC, however, are subject to the regulations of the DFSA. Companies registered within the DIFC are largely limited to reinsurance activities within the UAE, however, with companies such as Takaful Re acting as reinsurers to national takaful companies.
THE PLAYERS: All insurers in the UAE are required to be listed, either on the Abu Dhabi Stock Exchange or DFM. The DFM insurance board currently holds 13 companies, several of which are Dubai-based takaful outfits. The largest by asset size is the Islamic Arab Insurance Company, which was incorporated in Dubai back in 1979. It has worldwide operations and is a leading takaful and re-takaful group globally, in terms of coverage and capitalisation. Its annual report for 2011 gave it assets of Dh4.68bn ($1.27bn), up from Dh3.68bn ($1bn) in 2010. Gross written contributions also went up, from Dh1.84bn ($501.12m) to Dh2.27bn ($617.35m) over the same period, with net profit up from Dh55.3m ($15.05m) to Dh60.04m ($16.34m), respectively.
The Dubai Islamic Insurance and Reinsurance Company (AMAN) is also listed on the DFM. Dubai Islamic Bank and Dubai Group – then known as The Investment Office – were key in its creation in 2002, although since listing, it has acquired several different shareholders.
AMAN’s total assets stood at Dh475.18m ($129.34m) at the end of 2011, according to non-consolidated figures on the EMIS financial data website. The company’s last available annual report, for 2010, showed total assets of Dh523.53m ($142.51m), up on Dh513.04m ($139.7m) in 2009. Total liabilities stood at Dh353.44m ($96.21m) at the end of 2011, according to EMIS, while the annual report noted Dh373.07m ($101.55m) for 2010 and Dh373.06m ($101.59m) for 2009. Annual profits increased from Dh20.57m ($5.6m) in 2009 to Dh21.18m ($5.76m) in 2010, while the EMIS figures showed a loss in 2011 of Dh19.17m ($5.22m).
Also listed is Dar Al Takaful PJSC (formerly Takaful House PJSC), with total assets of Dh144.84m ($39.42m) at the end of 2011, as per its 2011 annual report, up from Dh123.49m ($33.61m) in 2010. Total liabilities went from Dh2.86m ($779,309) to Dh3.73m ($1.02m) over the same period, while net underwriting income rose from Dh3.33m ($906,698) to Dh37.73m ($10.27m).
Finally, Takaful Emarat is listed. Established in 2008 in Dubai, this Islamic insurer was founded by Sharjah’s Al Buhaira National Insurance Co. and UNIQA Group Austria. An independent auditors’ report for 2011 showed assets of Dh117.5m ($31.98m) at year-end, down from Dh138.2m ($37.62m) y-o-y in 2010. Total liabilities, went from Dh17.55m ($4.78m) to Dh16.83m ($4.58m) over the same period. Takaful income jumped from Dh1.48m ($401,495) to Dh3.64m ($990,808), while takaful expenses als o rose, from Dh994,293 ($270,647) to Dh2.02m ($549,844), respectively.
OUTLOOK: The future of sharia-compliant financial services appears to be strong, due to both domestic advantages and international trends. Malaysia, Indonesia and the GCC are expected to account for 85-90% of sukuk issuance in the future, with Islamic banking assets in the UAE expected to account for at least 20% of the banking sector by the end of 2012. Indeed, Jamal bin Ghalaita, the CEO of the Emirates Islamic Bank, told OBG, “There is no reason to believe that strong sukuk issuance trend that occurred globally in 2011 and 2012 will not continue in 2013, especially with the increased regulations on the concentration of large exposure and the increasing number of large projects being announced. The UAE is well positioned to increase its stake and capture a larger percentage of this market..” Industry growth is projected to expand by 15-20% over the course of 2012-15. Deposit flows also appear solid. In 2012 Islamic banks saw annual growth rates for deposits of around 15%, compared to 5% for conventional banking in the region. The financial picture for Dubai’s takaful companies is one of narrow margins and opportunities for future consolidation, as with the insurance sector (see insurance chapter). Given low penetration rates, there is potential for future expansion. Islamic banks are likely to partner with takaful companies, while widening their own product range. As these banks get support by a stronger regulatory framework, Islamic finance looks set for a more prominent role.
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