Dubai maintains its strong position in the Islamic financial services sector


The status of Dubai as a global financial centre means that it plays a central role in the domestic Islamic financial services (IFS) sector. Thanks in large part to an ambitious government strategy, the sharia-compliant financial industry has emerged as a globally significant player. The combined assets of the world’s Islamic finance market have surpassed $2trn, and the UAE is home to around $222bn of that total. This establishes the country as the fourth-largest Islamic finance arena in the world, behind Iran, Saudi Arabia and Malaysia.

Market Structure

Sharia-compliant banks have historically driven growth in global markets, today accounting for around 72% of worldwide Islamic financial assets. Capital market instruments, including sukuk (Islamic bonds), shares, real estate investment trusts and exchange-traded funds, account for approximately 27% of total assets, while takaful (Islamic insurance) makes up a modest 1.3%. In the UAE, Islamic banks accounted for about 23% of financial sector assets at the outset of 2019.

Offering sharia-compliant alternatives to conventional finance does not violate the religion’s prohibition on charging or investing in proscribed economic activities. Sovereign and corporate sukuk issuances from individual emirates make up the bulk of the Islamic capital markets component, while takaful companies operate in the sector either as standalone entities or as part of larger banking groups. Dubai-based institutions play a prominent role within this increasingly complex ecosystem. The emirate’s IFS market features an onshore component, populated by companies transacting directly with the domestic market; and an offshore component, operated by the Dubai International Financial Centre (DIFC), from which IFS firms cover both regional and global markets. As a financial freezone, the DIFC has emerged as a popular arena for takaful operations and the trading of sharia-compliant risk-management instruments. The DIFC will soon host its first home-grown Islamic financial institution: Arkan Bank is being launched with $100m in paid-up capital sourced from a consortium of investors led by Dubai Investments.


The government has intensified efforts to develop the segment in recent years. The Dubai Islamic Economy Development Centre (DIEDC) was launched in 2013 and tasked with establishing Dubai as the epicentre of the Islamic economy. The DIEDC’s Dubai: Capital of Islamic Economy initiative, also launched in 2013, is a broad-based effort to boost sharia-compliant activity in the fields of finance, halal food, tourism, digital economy and fashion. The project has spawned a number of platforms which have a direct impact on the development of IFS both domestically and globally. These include the Global Islamic Portal, which was created as a digital reference for the Islamic economy; the publishing of the annual “State of the Global Islamic Economy Report”; and the establishment of a global sukuk centre by Nasdaq Dubai, the Dubai Centre for Excellence in Islamic Finance, and the Dubai Technology Entrepreneurship Centre.

In 2017 the DIEDC launched its strategy for the 2017-21 period, which focuses on identifying new key performance indicators for monitoring the growth of Islamic finance, and halal and Islamic lifestyle products. The primary goals with regard to IFS include increasing the segment’s contribution to Dubai’s GDP and developing a global framework for Islamic finance. Additionally, the DIEDC is looking to develop strategic partnerships with international organisations. Recent agreements signed with global partners include a memorandum of understanding (MoU) with Bosna Bank International, the first sharia-compliant institution in Bosnia and Herzegovina, to foster development in each country, as well as an arrangement with the Hong Kong Trade Development Council to conduct joint research, and share workshops and training courses.


IFS institutions and their conventional counterparts are overseen by the same entities. The Central Bank of the UAE is charged with regulating onshore banking, the Securities and Commodities Authority of the UAE is tasked with overseeing securities and the UAE Insurance Authority regulates takaful. All onshore banking institutions are subject to the federal laws established by the government of the UAE, under which firms can be licensed as standalone institutions or as Islamic windows of conventional banks. Unlike their banking counterparts, conventional insurers are not permitted to offer sharia-compliant coverage through Islamic windows. However, takaful companies are permitted to pass on risk to conventional insurers, if it can be proved necessary.


Until recently, the authorities have been content to defer to the proprietary sharia supervisory board of IFS institutions on matters of Islamic compliance – a decentralised approach which is practised across the Gulf. However, in May 2016 the UAE Cabinet approved the establishment of the Higher Sharia Board for Banking and Finance. (HSABF), a centralised authority to monitor and set standards for the nation’s Islamic finance industry, as well as issue rulings on sharia-compliance. The announcement was broadly welcomed as a useful step towards regulatory harmonisation in an increasingly complex IFS segment.

While the HSABF is a relatively new organisation, in 2018 it made its first significant move in adopting the sharia standards of the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The HSABF met a number of times during 2019 to discuss prudential standards and guidelines, such as new standards for murabaha (cost-plus financing) and ijara (leasing). OBG understands from its conversations with sector leaders at the UAE Federation of Banks, which is cooperating with the HSA in multiple areas, that the authority may appoint a fatwa (Islamic ruling) committee to give the definitive judgement in sector disputes, while allowing institutions to retain their proprietary sharia supervisory boards.

The DIFC, meanwhile, maintains its own legal and regulatory system based on common law, and civil and commercial courts. Operations at the DIFC are overseen and regulated by the Dubai Financial Services Authority (DFSA). The freezone is an active member of both the Islamic Financial Services Board (IFSB) and the AAOIFI, and looks to both bodies when it establishes its IFS regulations, such as minimum capital requirements. Under the DFSA’s framework; any entity that claims to be operating under Islamic principles must have a sharia supervisory board staffed by competent scholars, as well as adequate systems and controls to implement rulings. IFS companies and must also perform annual reviews and audits in accordance with the AAOIFI’s standards.


Islamic banking penetration in the GCC has increased significantly over the past decade, according to the DIEDC, rising from 31% in 2008 to 45% in 2017. With nearly a quarter of its banking assets now classified as sharia-compliant, the UAE is a notable player in the global arena.

Dubai is home to three banking institutions that operate entirely according to the principles of sharia: Dubai Islamic Bank (DIB), Emirates Islamic and Noor Bank. DIB is the largest sharia-compliant institution in the UAE and the second-largest Islamic bank in the world. In June 2019 DIB directors announced it would be acquiring 100% of UAE-based Noor Bank. After obtaining the necessary regulatory approvals, the merger will see Noor Bank’s operations integrated within DIB, expanding the latter’s assets to Dh275bn ($74.9bn). This would allow DIB to pursue business on equal terms with five other UAE Islamic banks: Abu Dhabi Islamic Bank and Al Hilal Bank in Abu Dhabi; Sharjah Islamic Bank and Ajman Islamic Bank in Sharjah; and National Bank of Fujairah, the most recent market entrant.

Another layer of competition comes from sharia windows operated by the majority of the conventional UAE national banks. Foreign multinationals such as Germany’s Deutsche Bank and the UK’s Standard Chartered have also successfully entered the domestic sharia-compliant arena. Islamic financing options also come in the form of a number of sharia-compliant finance companies, such as Middle East real estate financier Amlak Finance and Osool Finance. As such, Dubai is home to one of the most crowded and competitive markets in the region.


The majority of insurance activity in Dubai and the wider UAE is carried out along conventional lines, but a notable sharia-compliant segment is gradually emerging. Dubai’s institutions account for a significant proportion of takaful activity in the country. The Dubai-headquartered Islamic Arab Insurance (Salama) is the world’s oldest and largest takaful company by assets, and was the first to introduce takaful concepts in general, family and health coverage. It is listed on the Dubai Financial Market (DFM), the emirate’s primary onshore trading platform, and, according to its website, has paid-up capital of Dh1.21bn ($329.4m).

The company operates in an increasingly crowded market. As of October 2019 the five takaful providers listed on the DFM were Orient UNB, Takaful Emarat, Salama, Dar Al Takaful, and Dubai Islamic Insurance and Reinsurance Company. Around a dozen takaful players operate in a wider UAE market made up of more than 60 insurance firms, according to the UAE Insurance Authority’s latest data. Despite the high levels of competition, however, takaful players are gradually increasing their market share. In 2018 sharia-compliant insurance accounted for approximately 17% of the nation’s total gross written premium (GWP), up from 15% in 2017.

Working with the DIFC, the DIEDC is promoting Dubai as a centre for takaful and retakaful activity by regularly participating in a number of regional events. This includes the World Takaful Conference as well as the Global Islamic Economy Summit, both of which take place in the UAE. The DIFC has also used the DIFC Insurance Association to collaborate with takaful and retakaful companies in the development of a commercial plan.


The assets of the UAE’s sharia-compliant banks have increased steadily over the years. According to data compiled by the IFSB, assets grew from Dh377.6bn ($102.8bn) in the first quarter of 2014 to Dh578.5bn ($157.5bn) in the first quarter of 2019 – representing a gain of more than 53% in the five-year period. All three of Dubai’s Islamic banks succeeded in expanding their assets and customer deposits in the first half of 2019 on a year-on-year basis, with their aggregate net profit increasing by 18.2% over the period.

Dubai’s takaful providers, meanwhile, are benefitting from tighter regulatory supervision of technical standards, which has reduced the tendency of providers to seek market share at the expense of underwriting sustainability. As a result, global insurance industry ratings agency AM Best reported that Dubai’s takaful providers’ return on equity had become more comparable to their conventional peers in 2017 and 2018 than in previous years. Moreover, in 2018 a modest decline of 0.5% in conventional insurers’ GWP was offset by a 5.8% increase in takaful operators’ gross written contributions – the sharia-compliant equivalent of GWP.

The most recent data from the Dubai Statistics Centre, released in July 2019, showed that the size of the Islamic economy in relation to the emirate’s GDP had expanded by 2.7% in 2017, to account for approximately 10% of the total. However, the true figure is likely to be higher, as conventional banks operating Islamic windows do not separate Islamic and conventional assets in their reporting.

Islamic Assets

The DFM claims to be the first financial market in the world to operate in accordance with the provisions of Islamic law. To do so, it maintains a Fatwa and Sharia Supervisory Board, and has developed sharia-compliant standards for core market activities, such as acquiring and trading shares, issuing sukuk, and hedging against investment and financial risks. The establishment of Dubai as a centre of sukuk trading has been part of the emirate’s development strategy since the launch of the DIEDC in 2013. The Dubai Global Sukuk Centre initiative forms part of the broader Dubai: Capital of Islamic Economy Strategy, and has helped to transform the domestic sukuk market into one of international significance.

However, the DFM was home to just three sukuk as of late 2019, meaning Dubai’s reputation as a centre for sukuk largely rests on the Nasdaq Dubai, which is located in the DIFC. In recent years the offshore freezone has emerged as the city’s leading sukuk-listing venue, thanks in large part to its well-regarded regulatory framework and its growing reputation among international investors as a premier trading platform.

Building on this momentum, in 2018 the DIEDC announced a new collaboration with Nasdaq Dubai aimed at further developing the emirate as a sukuk centre. According to the agreement, both parties will work to produce new propositions, with a focus on retail instruments to allow individuals to invest in the sukuk market. Developing retail-friendly sukuk products could help boost the market’s turnover, which has traditionally been slowed by the buy-andhold behaviour of institutional investors.

At the outset of 2019 a total of 14 sukuk were listed on Nasdaq Dubai, with a combined nominal value of nearly $12bn – making Dubai the largest centre in the world for sukuk by listed value. The platform has succeeded in attracting issuers from across the globe. The largest sukuk issuer on Nasdaq Dubai – in terms of both value and number of listings – is the Indonesian government. In May 2019 it lengthened its roster of Dubai listings with two issuances, one valued at $1.25bn and the other at $750m. Notably, both instruments were green sukuk, and the capital raised was directed at a range of projects emphasising sustainable development.

Socially responsible investing is an emerging trend on local and global markets. In May 2019, for example, Dubai-based retail and real estate conglomerate Majid Al Futtaim used Nasdaq Dubai to list the world’s first benchmark corporate green sukuk valued at $600m with a tenor of 10 years.

Product Expansion

Various steps have been taken to boost both the diversity and scale of Islamic financial markets. Nasdaq Dubai has operated its murabaha platform since 2014, and in 2015 received an award for innovation in Islamic finance at the Euromoney Islamic Finance Awards for its efforts. The platform allows companies and individuals to raise capital using sharia-compliant certificates based on wakala (agency) investments, such as sukuk, developed by local financial institutions and traded in Nasdaq Dubai’s Central Securities Depository. In October 2018 the platform surpassed $100bn in Islamic transactions. This coincided with Dubai’s Islamic Economy Week, during which the emirate highlighted its progress in developing sharia-compliant financial products and held discussions regarding how to further develop the sector.

The Dubai Islamic finance industry is also witnessing innovation in different subsegments, in particular with relation to gold. The Dubai Gold and Commodities Exchange (DGCX) signed an MoU with the DIEDC in August 2018, whereby the two organisations agree to promote the exchange’s sharia-compliant spot gold contract, as well as any other Islamic commodity product subsequently developed by the DGCX. Prior to this, gold could only be used for payment or as jewellery. In a statement released at the signing ceremony, Les Male, CEO of the DGCX, highlighted the significance of the new deal. “Not only will it be a crucial building block towards introducing other successful sharia-compliant products on our trading platform, but it will also help shape the progressive role Dubai is playing in developing the Islamic finance sector as a whole.”


The increasing size and complexity of Dubai’s IFS sector raises a number of questions. On the regulatory front, the extent to which the emergence of the HSABF as a regulatory force will affect IFS companies in areas such as product development remains to be seen. The sector’s adoption of financial technology (fintech) also poses an interesting question for the short term. Blockchain, for example, offers the possibility to verify halal compliance at each stage of production, and has been identified by the DIEDC as a potential driver of sector expansion. Automation and machine learning, meanwhile, are expected to help to mitigate the cost of transaction and verification processes.

“Basic fintech applications are already being used by the UAE’s sharia-compliant banks,” Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, told OBG. “However, when it comes to more complex applications, such as cryptocurrency, there are a number of regulatory issues that need to be addressed by both conventional and Islamic banks – and then there is the added question of how quickly sharia boards can adopt them.”

The DIEDC has also identified Islamic trade finance as a potential area of growth. The segment accounted for a modest $186bn of an estimated $12.3trn in global trading activity in 2018, primarily due to a lack of product variety. A number of organisations look to tackle this challenge. The Bankers Association for Finance, a global trade association for transaction banking, and the International Islamic Financial Market, which sets global standards for Islamic finance, are developing documentation for sharia-compliant trade finance deals. Meanwhile, the International Islamic Trade Finance Corporation agreed to provide a grant to the University of Cambridge’s Institute for Sustainability Leadership to establish a sustainable trade and innovation centre in Dubai. The amount has yet to be disclosed.

For Dubai’s well-capitalised Islamic banks, the short-term outlook is a positive one. With Dubai hosting the Expo 2020 trade show for over 170 days, non-oil sector growth is expected to mitigate any oil market sluggishness, and some market observers have forecast that the UAE will be the fastest-growing economy in the Gulf that year. Dubai’s takaful segment stands to benefit in such a scenario, but remains small and will likely require further measures to encourage its development. Additionally, some will face a regulatory challenge in the short term, with S&P Global Ratings estimating that 40% of the UAE’s takaful operators had yet to comply with a set of solvency requirements that came into force in January 2018, a state of affairs which may compel a number of companies to consider mergers.

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The Report: Dubai 2020

Islamic Financial Services chapter from The Report: Dubai 2020

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