A significant proportion of the UAE’s Islamic financial services (IFS) sector is based in Abu Dhabi. Home to two of the three largest Islamic banks in the country, three of its most successful takaful (Islamic insurance) firms and a multitude of sharia-compliant investment funds, the emirate is also emerging as an important regional centre of Islamic financing.
MARKET STRUCTURE: Abu Dhabi’s two sharia-compliant lenders operate within a rapidly evolving, multi-layered market. At the regional level, the GCC Islamic banking sector has experienced a decade of development which has seen it emerge as the fastest-growing segment of the finance industry. According to the IMF, Islamic banks accounted for 24% of total GCC banking assets in 2010.
The intervening years have brought double-digit growth in the sector, fuelled by regional economic expansion and a rising appetite for sharia-compliant products, particularly from the retail segment. According to a recent report by professional services firm Ernst & Young, by the start of 2011 Islamic banking activity accounted for 26% of the GCC banking market, with more than 40 Islamic banks competing for business across the region.
DOMESTIC COMPETITION: Eight of these banks are situated within the UAE, making up a domestic market that represents a second level of competition for Abu Dhabi’s two Islamic banking institutions, Abu Dhabi Islamic Bank (ADIB) and Al Hilal Bank. Dubai is home to the largest concentration of Islamic banks in the UAE, comprising Dubai Islamic Bank, Emirates Islamic Bank, Noor Islamic Bank and Dubai Bank, although the latter was taken over by the leading retail banking franchise in the UAE, Emirates NBD, in late 2011. Sharjah Islamic Bank and Ajman Islamic Bank, meanwhile, offer sharia-compliant financing from their respective emirates as well.
Excluding Dubai Bank, the combined assets of the UAE’s sharia-compliant banks totalled Dh257.22bn ($70.02bn) at the close of 2011, according to their fiscal year (FY) financial statements, of which Abu Dhabi’s sharia-compliant banks accounted for Dh107.16bn ($29.17bn), or 41.7%.
EQUAL FOOTING: The UAE’s Islamic banks operate on a border-free basis within the country and compete for business with each other on equal terms under a unified regulatory structure. While branch networks are generally weighted to their home emirates, all of the nation’s sharia-compliant banks maintain a presence across all UAE jurisdictions. Dubai Islamic Bank, for example, operates 32 branches in its home emirate, but also nine in Abu Dhabi and a further 27 across the emirates of Sharjah, Ras Al Khaimah, Ajman, Umm Al Quwain and Fujairah.
Islamic banks in the UAE also compete on equal terms with 43 conventional counterparts, many of which operate Islamic windows or subsidiaries. As of March 2012, 23 domestic banks operated 794 branches across the UAE, according to the central bank, as well as six GCC banks (with a branch each) and 22 foreign banks (with a main branch each and a further 82 additional units). Abu Dhabi’s Islamic banks therefore face direct competition from conventional multinationals with sharia-compliant subsidiaries, such as HSBC Amanah, as well as local giants such as National Bank of Abu Dhabi’s (NBAD) Islamic banking division and its finance firm, Abu Dhabi National Islamic Finance (ADNIF).
LARGEST PLAYER: With total assets of Dh74.3bn ($20.22bn) at the close of 2011, ADIB is the largest sharia-compliant bank based in the capital and the second largest in the UAE. It is also one of the older players in the industry, having received its licence from the central bank in 1997. Two years later it listed on the Abu Dhabi Securities Exchange (ADX).
Today, the bank is majority-owned by members of the ruling family through a 40% stake held by the private holding company Emirates International Investment Company (EIIC) and a 10.1% stake made up of Abu Dhabi royal family members and associates. EIIC remains actively involved with the bank’s management, while more quasi-sovereign backing comes from stakes held by the UAE General Pension and Social Security Authority (2.3%) and Abu Dhabi Investment Council (7.6%). From 2001 to 2007 ADIB diversified in terms of both activity and geography, establishing the Abu Dhabi Islamic Securities Company and the real estate operation Burooj Properties in 2005, and in 2007 acquiring 49% of Egypt’s National Bank for Development. In 2008 the arrival of a new management team marked the beginning of an added period of growth, and the implementation of an updated strategy, which sought to capitalise on the aforementioned diversification and external expansion it had completed (see analysis).
ANOTHER JOINS IN: After a decade as the sole Islamic lender based in Abu Dhabi, ADIB was joined in 2008 by Al Hilal Bank, a public joint stock company which is wholly owned by the Abu Dhabi Investment Council, an investment arm of the Abu Dhabi government. Operations began in June 2008 with an authorised capital of Dh4bn ($1.09bn), and in the short time since the bank has established a network of 24 branches (compared to ADIB’s 73) and 117 ATMs (compared to ADIB’s 500).
As with ADIB, Al Hilal has pursued a strategy of establishing itself as a platform for diverse sharia-compliant financing activities: in 2008 it established Al Hilal Takaful, while in 2009 operations at Al Hilal Auto, a vehicle financing entity, commenced. The bank’s strategy also incorporates the expansion of its geographical footprint, although it has chosen a different market for its first foreign venture: in 2010 Al Hilal Islamic Bank Kazakhstan officially opened for business, establishing Al Hilal as the first Islamic bank in the hydrocarbons-rich and predominantly Muslim state. With total assets of Dh28.3bn ($7.7bn) at the close of 2011, Al Hilal is the second-largest Islamic player in Abu Dhabi and the third largest in the broader UAE.
PERFORMANCE: Both of Abu Dhabi’s Islamic banks have equipped themselves well for the challenging economic environment that has prevailed since the onset of the global economic crisis. ADIB’s recent trajectory of growth can be traced back to its change of management in 2008. Using the 2007 financial year as a benchmark, by the close of 2011 it had increased its total assets by approximately 10%, its customer deposits and financing by 13% each, and its capital resources by around 11%. The positive progression of its financial performance is reflected in its profitability data: over the same period revenues increased by 24%, net profit was up 11% and, apart from a dip in 2008 and 2009, return on equity (ROE) has remained above 18%.
The FY 2011 saw a slight decline in assets and customers’ deposits as a result of deleveraging and derisking activity, but by the second half of 2012 the upward trend across key indicators had been restored: Total assets grew from Dh74.3bn ($20.22bn) at the close of 2011 to reach Dh78.9bn ($21.48bn; up 6.2%), customer financing rose from Dh48.8bn ($13.28bn) to Dh50.3bn ($13.69bn; up 3.1%). Net profit, which expanded from Dh1.02bn ($277.65m) to Dh1.16bn ($315.75m; up 13.7%) for the 2011 FY, continued to rise in 2012 to show 1.6% growth in group net profit during the first half of the year.
This has been achieved while maintaining a strong capital base: capital adequacy stood at 16.6% in the second quarter of 2012, comfortably above the central bank’s capital adequacy ratio requirement of 12%. Within this figure, tier 1 capital accounted for 13.5%, as against the central bank’s minimum tier 1 requirement of 8%. On the liquidity side, a liquidity ratio (liquidity as a percentage of an institution’s total assets) of 24% or more has been maintained since the second quarter of 2008, and stood at 25.2% in the same period of 2012.
Al Hilal, in its second annual report since its inception, also showed positive growth across key indicators. Total assets reached Dh8.3bn ($2.26bn) as of the close of 2011, an increase of 9.5% over 2010, while financings reached Dh19.3bn ($5.25bn), an expansion of 26.2% over the previous year. In terms of profitability, its total revenues rose by 24.2% to Dh1.7bn ($462.74m), while net profit grew by more than 50% year-on-year to reach some Dh202.3m ($55.07m). Al Hilal’s ROE, meanwhile, jumped 1.56% to reach 8.94%, and pushing this figure upwards is one of the central aspirations of an overall strategy finalised earlier in 2012 (see analysis). The infrastructural expansion of Abu Dhabi’s second Islamic financier also continues apace: two new local branches and one more in Kazakhstan brought the total to 24 at the close of 2011, while 22 ATMs were added to a system that now counts 117 machines.
NPAS: Like all banks in the region, ADIB has seen an uptick in non-performing assets (NPAs) since the economic crisis, but this trend showed signs of having reached a plateau during the second half of 2011. By the end of the first half of 2012, NPAs had decreased by Dh318m ($86.56m) on the start of the year, to reach Dh5.67bn ($1.54bn). “We are not seeing new entrants into the non-performing category, just a deterioration of existing cases,” Andrew Moir, global head of strategy and finance at ADIB, told OBG. “We have worked with customers that have recovered, but it will take a while. I think we are probably two years from recovery.”
Similarly, Al Hilal saw NPAs and impaired assets increase over the last financial year, from Dh50.4m ($13.72m) at the close of 2010 to Dh106.5m ($28.99m) for FY 2011, although with a total cover of 220%, the bank maintains adequate coverage of its non-performing financing.
TAKAFUL: Along with its thriving Islamic banking segment, Abu Dhabi also contributes to a global takaful industry, which expanded 19% to reach a value of $8.3bn in 2011, according to the Ernst & Young “World Takaful Report 2012”.
The takaful industry has existed in the UAE since the mid-1990s and, like its conventional insurance counterpart, expanded rapidly in the years leading up to the global economic crisis on the back of the nation’s rapid economic and infrastructural development. Between 2005 and 2009 the domestic takaful market grew at a compound annual growth rate of 98%, according to Ernst & Young and, despite the more challenging environment that prevails today, enjoys with the wider insurance sector considerable potential for future growth (see Insurance chapter).
MORE TO THE MARKET: The takaful subsidiaries of ADIB and Al Hilal form part of Abu Dhabi’s sharia-compliant insurance landscape, but the emirate has also produced a number of dedicated providers. For example, Abu Dhabi National Takaful Company, established in 2003, is the oldest of the locally based, dedicated takaful firms. It is also the largest, with Dh405.9m ($110.48m) in total assets at end-2011. Listed on the ADX in 2005, Abu Dhabi National Takaful Company’s operations cover the entire UAE, with offices in Abu Dhabi, Dubai, Al Ain and Sharjah.
In 2008 it was joined in the local market by Methaq Takaful Insurance Company, which, with total assets of Dh227bn ($61.79bn), is the second largest of the emirate’s takaful providers. After its 2008 ADX listing, real operations began in 2009 through its Abu Dhabi office, since which time it has established further branches in Dubai, Ras Al Khaimah and Al Ain.
Rounding out the local market is Watania, established in 2011 with a paid-up capital of Dh150m ($40.83m). The new entrant listed on the ADX in November 2011, with major shareholders including Abu Dhabi National Insurance Company, ADNIF, Abu Dhabi National Energy Company and ALDAR Properties. Watania currently operates out of its head office in Abu Dhabi, and at the close of 2011 recorded total assets of some Dh147.5m ($40.15m).
All three of Abu Dhabi’s takaful providers offer products across the corporate segment such as property, construction and engineering, marine, motor and employee benefits; small and medium-sized enterprise segment such as contents, employer’s liability, public/third-party liability, business interruption and machinery; and individual segment such as accident, health, travel, motor and home.
In doing so, they compete in a wider UAE market in which three Dubai-based, dedicated takaful providers also vie for business. Of these, Islamic Arab Insurance Company is the industry giant, with total assets of Dh4.7bn ($1.28bn) at the close of 2011, followed by Dar Al Takaful at Dh144.8m ($39.41m) and Takaful Al Emarat with $117.5m ($31.98m).
MUTUAL FUNDS: As Abu Dhabi’s banks and takaful operators expand their businesses and enter new markets, the IFS sector is deepening. According to data gathered by NBAD, 27% of the 89 mutual funds in the UAE were operated according to the principles of sharia, accounting for around 36% of the $876.9m of assets under management (AuM). Nine of these were locally incorporated while 24 were locally sponsored funds domiciled abroad.
Abu Dhabi is also playing a prominent part in the UAE’s Islamic fund activity: NBAD’s UAE Islamic Fund, with AuM totalling $32m, is the largest sharia-compliant fund domiciled in the country in terms of assets. The potential for future Islamic fund activity in the emirate is substantial. The GCC accounted for just over half (51.6%) of global sharia-compliant fund assets as of December 2011, according to NBAD, and Saudi Arabia and Bahrain have established themselves as the largest fund centres in the region. However, the expansion of Islamic banking activity in Abu Dhabi led by ADIB and Al Hilal, combined with the robust performance of the UAE’s economy and the growing depth of Abu Dhabi as a financial centre, mark the emirate out as a potential location for future Islamic fund growth.
SUKUKS: Demand for new investment products has also driven a rise in the sukuk (Islamic bond) market in the UAE since 2003. After a drop in issuance levels during 2008 and 2009 as the global economic crisis reduced investor appetite across the region, Abu Dhabi led a recovery in 2010, of which the centrepiece was a $750m sukuk issued by ADIB – the largest corporate issuance of the year to emerge from the emirate, and oversubscribed by 4.8 times.
The global sukuk market continued to recover in 2011, with issuances rising to $32.6bn, up from $14bn in 2010, according to Dealogic. The UAE was the second-largest contributor to the total in 2011 behind Malaysia, generating $2.6bn in issuances. Abu Dhabi’s largest corporate contribution to this came from First Gulf Bank, which offered a five-year, $650m note in August 2011 for a margin of 3.80%.
OUTLOOK: Abu Dhabi’s Islamic banks have made public their intention to continue expanding at home and abroad, and their strong performances over 2011 will facilitate this. ADIB has reportedly applied for several foreign licences, and an announcement regarding further overseas expansion is likely. Both banks continue to face the challenge of non-performing assets, yet have the resources to do so without a weakening of their balance sheets. Regulatory changes, particularly relating to the retail segment, form another issue, and a pipeline of proposed reforms suggests that this area will remain one to watch for the medium term (see Banking chapter).
Abu Dhabi’s takaful players also face potential challenges as a result of regulatory reform, particularly with regard to new solvency standards (see analysis). However, a low penetration rate and increasing awareness of insurance products’ utility shows the potential of the domestic takaful market.
Both banks and takaful providers, meanwhile, will continue to benefit from the ongoing economic expansion across the UAE and the steady procession of infrastructural projects generated by Plan Abu Dhabi 2030 and the wider Economic Vision 2030.
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