Islamic finance services providers in Abu Dhabi grow faster than conventional counterparts

Abu Dhabi is a prominent player in Islamic finance and is active in markets for sharia-compliant debt; deposit, lending and investment schemes; and risk-management through takaful (Islamic insurance). Acting through the Abu Dhabi Global Market (ADGM), the emirate’s financial free zone, the sector has access to domestic as well as offshore service providers.

Together with the six other emirates of the UAE, Abu Dhabi participates in a national level market, which is the world’s fourth-largest in terms of Islamic finance assets, at $203.2bn. The emirate holds just over 9% of the $2.2trn total global sharia-compliant assets, 72% of which is held by banks. Approximately 32% of worldwide Islamic finance assets are domiciled in the UAE, spread among an increasingly diverse combination of lenders, finance companies and investment firms.

In terms of expansion, Islamic financial services providers have also been growing faster than their conventional counterparts in the UAE. According to a report published in 2017 by the Central Bank of the UAE (CBUAE), between 2014 and 2017 Islamic banks experienced a compound annual growth of 10.9% for assets and loans, while conventional institutions grew by only 4.4%. Approximately 52% of UAE customers used at least one Islamic financial service in 2017, a 13-percentage-point increase from 2015. When it comes to legislation, sharia-compliant financial services in Abu Dhabi are governed by the same federal-level laws that regulate conventional finance. Banks in the UAE can be designated solely sharia-compliant, or they can offer Islamic products in a separate line called an Islamic window. In each case the relevant regulator remains the same: the CBUAE covers banks, the Emirates Securities and Commodities Authority (ESCA) covers securities, and the UAE Insurance Authority covers takaful. However, the CBUAE has stopped issuing licences to conventional banks that wish to establish windows, and such windows as already exist cannot offer more than five products or services at one time.

Higher Ground

As the global market for Islamic financial services developed, the six countries in the GCC formed one major hub, and Malaysia another. With an increasing focus on standardisation of how Islamic financial services products are structured and delivered across these regions, Abu Dhabi’s investor pool has potential for further growth. To this end, in early 2018 the CBUAE established the Higher Sharia Authority (HSA), a board of sharia scholars charged with overseeing and supervising standardisation in the UAE. The HSA held its first meeting in February of 2018.

Decisions on sharia compliance will remain within the purview of Islamic finance institutions and the scholars that form sharia boards, but the HSA will provide guidance and work towards harmonisation within product lines. Sharia scholars are a vital part of Islamic finance, and although product cost and complexity is a primary concern for many consumers, they may choose Islamic providers based on scholars they are familiar with or who make decisions in line with their beliefs. The industry is constrained by a shortage of experts who are well-versed in both sharia and finance. Hence there are a small number of leading scholars who are in high demand, but that number may be required to increase with the size of the market, as challenges like cryptocurrencies and other financial technologies become more common (see analysis).

Banking Sector

The UAE has eight Islamic banks, 26 lenders with Islamic windows, 12 Islamic finance companies and one Islamic investment company. Together these contribute to the 47 licensed entities that provide banking and finance in the region. According to the CBUAE, this group accounted for 23% of total bank deposits at the end of 2017; however, the figure varies across specific market segments. For example, Islamic banks processed 30.6% of deposits from government-related entities, and only 6.7% of deposits for non-residents. Sharia-compliant lenders were responsible for 22.4% of outstanding credit, and with the exception of private-sector lending, in 2017 their market share grew across all customer categories. For conventional banks, the private sector was the main driver of credit growth, expanding by a total of 2.8%. In terms of assets, the largest Islamic lender in the emirate is Abu Dhabi Islamic Bank (ADIB), which reported a net profit of Dh2.3bn ($626m) in 2017 – up 17% from 2016. Revenue increased by 4.6% from Dh5.3bn ($1.4bn) in 2016, with credit provisions and impairments dropping by 18.5%. Major conventional lenders such as First Abu Dhabi Bank and Abu Dhabi Commercial Bank (ADCB), the largest and second-largest by assets, offer sharia-compliant services through Islamic windows. At the end of 2017 ADCB’s income from Islamic financing represented 14% of lending income, compared with just 2% five years previously.

Consistent with trends across Abu Dhabi’s banking sector, ADIB is focused on increasing efficiency and is using financial technology (fintech) as a key tool – 67% of ADIB transactions in the first half of 2017 were completed using digital platforms, including an average of 1.7m mobile transactions per month.

ADIB has also partnered with the Abu Dhabi Global Market (ADGM) to work on fintech incubation. The ADGM is a financial enclave that has its own regulatory environment and regulator, called the Financial Services Regulatory Authority (FSRA). Their ongoing partnership will include additional collaborations in areas that include digital and mobile payments, blockchain technologies and artificial intelligence.


Bloomberg Intelligence reports that the UAE has the richest concentration of Islamic financial technology start-ups in the region, placing it third globally in that category behind Malaysia and the UK. While Islamic offerings and new financial technologies appeal to a rising number of UAE consumers, sharia compliance is just one of multiple factors influencing the highly competitive retail market. Costs, promotions and service levels are also important factors.

A 2017 survey from online financial services information portal yallacompare found that although figures vary by product line, consumers are still 10% less likely to select an Islamic product over a conventional one. Yallacompare’s data also showed that there demand for car and personal loans from conventional lenders was higher, whereas Islamic banks have proved more popular for credit cards.

Islamic banks may be growing faster than their conventional counterparts, but they lag behind the wider market in indicators of financial soundness. At the end of 2017 the average capital adequacy ratio (CAR) was 17.2% for Islamic banks and 19.4% for conventional institutions, while Tier-1 capital was at 16.6% and 17.6%, respectively. According to the CBUAE annual report for Islamic banks, both indicators have trended positively in Abu Dhabi and the UAE, with four consecutive years of gains in both CAR and Tier-1 capital. A similar pattern may be observed at a global level, as reflected in reporting from the Islamic Financial Stability Board (IFSB). Its survey of 17 major Islamic-finance jurisdictions, including the UAE, found a year-to-year improvement from 2016 to 2017: CAR increased its average from 11.9% to 12.5%, and Tier-1 capital rose from 9.6% to 9.9%.

Overall, however, asset growth has slowed across the region, including in Abu Dhabi and the UAE, with the total dropping from 10.7% in 2014 to 5.3% in 2016. According to a report from global ratings agency Standard & Poor’s (S&P), it is likely that full-year figures for 2017 will show a continuation of this trend. “We see banks becoming more cautious and selective in their lending activities, triggering stiffer competition,” it reported. This situation might suggest that some smaller or struggling lenders could be candidates for consolidation. “The region is going through a macro form of corporate restructuring,” Khalid Howladar, managing director of Acreditus, a GCC-wide credit and sukuk (Islamic bonds) advisory firm, told OBG.

There are some who consider the UAE to be overbanked, and authorities in Abu Dhabi have focused on mergers as a method with which to drive efficiencies – which led in early 2018 to several Islamic lenders’ parent companies joining forces themselves. However, lenders under the corporate umbrellas of other companies may not completely merge until after the larger organisations are finished integrating completely. “Although consolidation might be a way forward in some GCC markets, we expect that in 2017 and 2018, mergers will remain an exception rather than the norm,” S&P said.


While banking dominates the global Islamic finance sector with a 72% share of overall assets, sukuk are the second most popular type of product, accounting for about 15%, or $344bn, of the $2.2trn asset total. Sukuk are among the most popular Islamic products for non-Muslims across all types of transaction. Sovereign issuers such as the UK, Singapore and Hong Kong have sold sukuk, and the securities have been highly favoured by international bond purchasers, as they allow for portfolio investment exposure to Abu Dhabi and other low-risk markets in the region. Indeed, for global emerging markets investors, both Abu Dhabi and the broader GCC offer a risk profile that is quite different – and often of higher credit quality – than what is available in established markets with greater levels of diversification. Sukuk issuances from non-Muslim countries continued to rise throughout the course of 2017, and reached $2.25bn in the first 11 months of the year, as compared with $2bn and $1bn for 2016 and 2015, respectively.

However, sukuk have also presented some challenges, with defaults and struggling issuers raising concerns and points of confusion with regard to the nature of the securities. Since Islamic law forbids the charging of interest, sukuk structures essentially function by mimicking the fixed financial return of a bond by using tangible assets to give the form of asset-backed deals without the economic substance.


While the many diverse structures based on this principle have effectively provided versions of fixed-income securities that are sharia-compliant, their underlying complexity in some cases increases the cost of issuance and has occasionally resulted in legal challenges. In the past, scholars have therefore willingly moved away from certain structures that had once been considered sharia compliant.

A recent test case that may be diminishing demand and causing issuers uncertainty is that of energy company Dana Gas, which is based in the emirate of Sharjah but has operations throughout the Middle East. Dana Gas announced in 2017 that outstanding sukuk were no longer considered sharia compliant, and therefore the company considered itself at risk of violating religious principles if it continued to pay bondholders the $700m owed to them according to the original terms of agreement. The case was brought to a close with Dana Gas refinancing the Islamic bond instrument, which has been sized down to $530m.

“The cost and complexity of sukuk is very high relative to bonds,” Howladar told OBG. He points to the newly formed HSA as having the potential to reduce expense and complexity in the industry. “Ideally the HSA could sponsor sukuk template structures made available for private sector corporates to use. If issuers can use a template, sukuk should cost much less and be faster to process, thereby reducing market friction. Some people think that standards could limit innovation and flexibility, However, it is not innovative to have an endless variety of bond replication structures.

Maturing Market

Mindful of the damage this uncertainty may have caused for the long-term popularity of the product, sharia scholars have been considering ways to avoid similar uncertainties in the future. For example, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions has been finalising a standard to which market participants can refer to on sukuk. Crucially, this standard includes governance standards, meaning that governance around sharia compliance in the industry could be significantly improved. There has also been debate about whether it is acceptable for scholars to recognise sukuk that allow for future amendments without adequate adherence to sharia rulings. Exposing scholars or companies who act in bad faith is an option that is also under consideration, and this is currently an option that is sometimes applied in Malaysia. However, it is considered difficult to prove that a body acted with such an intent.

For Abu Dhabi, whether through sukuk or conventional bonds, debt sales are an important financial tool for its government-related entities (GREs). In the past, these GREs have received budget funds to use toward their corporate goals; however, in the future they are expected to increase self-reliance when it comes to accessing any funds they might require.

Despite uncertainties, the market for sukuk is a resilient one. In large part this is because Islamic banks value sukuk as a method with which to manage their liquidity. “There’s strong demand for sovereign debt from the Gulf,” Monica Malik, chief economist at Abu Dhabi Commercial Bank, told OBG. “Demand for sukuk tends to be strong given the ample liquidity looking for Islamic investment products.”

In 2017 the global sukuk market was dominated by sovereign issuers, which provided roughly 70% of the $95bn in global issuances – a steep increase from $85bn in 2016. Abu Dhabi’s most recent debt sales have taken place in the conventional market, but growth in the sukuk market was driven by other GCC sovereigns in 2017. Saudi Arabia sold $17bn in the first eight months of the year, and the sovereign trend is expected to continue throughout 2018 with Kenya, Ghana, Morocco, Tunisia and other countries indicating that they may consider a sale at some time in the near future. In February 2018 First Abu Dhabi Bank said that a sale was dependent on market conditions.

At the end of 2017 the global value of non-sukuk sharia-compliant capital markets funds was at a total of $91.2bn. In Abu Dhabi and the UAE, the federal-level ESCA said in October 2017 that it was developing a strategy for capital markets development of sharia-compliant instruments. This strategy would largely focus on the job of the agency itself as a regulator, while also looking at the role of self-regulatory organisations such as the financial markets.


Abu Dhabi and the UAE have emerged as early adapters of takaful, the sharia-compliant class of insurance. This is a practice which enables policy holders to pool their capital and share in the risks, with those filing claims drawing from the pool according to their takaful contracts. As with banks, takaful providers in Abu Dhabi are licensed by the UAE Insurance Authority at the federal level. In its recent 2017 annual report, the Insurance Authority noted the existence of 12 active takaful companies.

On a global level, takaful accounts for $42.5bn of the $2.2trn total Islamic finance assets. As of 2015 77.2% of existing worldwide capacity was domiciled in the GCC, as per a sector review by Alpen Capital. While in Saudi Arabia takaful is the only valid form of insurance, in other GCC countries this sharia-compliant alternative competes for business with conventional insurers. Takaful has a 44% share of the GCC insurance market overall, and in the UAE, the figure falls to just below 10%. Revenue rose in 2017 in response to a variety of regulatory factors, most notably the UAEwide implementation of a move towards risk-based underwriting of motor policies.

While popular lines of business such as auto insurance have not necessarily been underwritten according to the risks they present, the Insurance Authority’s Unified Motor Policy has moved insurers closer to risk-based underwriting by establishing mandatory minimum and maximum prices for motor coverage. In 2017 this boosted total premium by 15-20% for both conventional insurers and takaful providers. However, similar jumps in premium income are unlikely to be seen in 2018, as the regulated minimum price for a motor policy was set at a rate 20% lower than in 2017.

Previously, underwriting in the UAE had been driven by a desire to increase market share, rather than to price policies according to risk management. Offering lower rates for popular lines of business, such as motor insurance, was logical in the past because investment portfolios were dependable options in terms of their appreciation and ability to provide companies with reliable profits. In this operating environment, insurers and takaful companies engaged in price wars and still remained profitable. This was a business model which remained strong throughout the global financial crisis of 2008, before falling oil prices resulted in lower values for typical investment-portfolio asset classes.


The Islamic financial services market segment in Abu Dhabi continues to mature, with durable market trends resulting in faster growth when compared to conventional banking and insurance companies. However, many licensees are smaller companies that could be considered candidates for consolidation. Meanwhile, both banks and takaful providers could derive benefits from further development of the sukuk market, which would provide much-needed liquidity-management instruments.

Sovereign sukuk from the GCC is considered attractive because of strong balance sheets and a credit risk profile that differs from that of most emerging markets, as well as the sovereign wealth that characterises the region. Consequently, demand for sharia-compliant fixed-income securities is expected to remain healthy. When the latter is resolved and a precedent is established for similar cases, increasing confidence may provide a boost to sales. This could in turn be useful for banks like ADIB, whose reserve capital levels are above the minimum amount established by Basel III, but below current market averages.

Research by Fitch Ratings found that in 2018 various investors were monitoring the asset quality of Islamic banks across the GCC, with only a small decline expected. It also noted that the loan books of Islamic banks have smaller proportions of investment-grade debt than those of conventional banks, with some UAE lenders standing out as examples of this challenge.

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The Report: Abu Dhabi 2019

Islamic Financial Services chapter from The Report: Abu Dhabi 2019

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