Success story: Opportunities are numerous both at home and abroad

Home to some of the UAE’s most prominent Islamic banks and takaful (sharia-compliant insurance) operators, Abu Dhabi has long been a regional centre for Islamic financial services. Strong capital bases have raised the possibility of international expansion in recent years, while in the UAE Abu Dhabi-based institutions continue to develop market-defining products and services. A competitive market and the lingering effects of the 2008-09 global economic crisis remain as systemic challenges, but to date the Islamic finance sector has shown its resilience, as well as its eagerness to capitalise on the opportunities provided by evolving regional economic and political circumstances.

Market Structure

The two Islamic banks headquartered in Abu Dhabi – Abu Dhabi Islamic Bank (ADIB) and Al Hilal Bank – compete not only with each other, but also within a rapidly expanding regional market. The GCC Islamic banking sector has established itself as the fastest growing segment in the international finance system, with a compound annual growth rate (CAGR) of 21.1% between 2007 and 2011, according to a recent report by Kuwait Finance House. The UAE has played a significant part in this expansion, and its Islamic banking sector currently ranks as the fourth largest in the world, accounting for around 8% of Islamic banking assets globally. As the UAE’s banks operate on a border-free basis within the country, the two sharia-compliant lenders based in Abu Dhabi compete on equal terms with six other Islamic banks, four of which are located in Dubai (Dubai Islamic Bank, Emirates Islamic Bank, Noor Islamic Bank and Dubai Bank – although the latter has recently completed a merger deal with Emirates Islamic). Two additional banks, Sharjah Islamic Bank and Ajman Islamic Bank, also offer sharia-compliant financing from their respective emirates. The result is a highly competitive sector in which lenders’ branch networks, although usually concentrated in their home emirates, span the entire federation.

Other Competitors

Another layer of competition comes from the 17 locally registered conventional banks. An additional 28 foreign banks, eight of which maintain head offices in Abu Dhabi and all but three of which have branches in the emirate, add to the mix.

Abu Dhabi’s Islamic banks therefore face direct competition from conventional multinationals that provide sharia-compliant financing, such as Standard Chartered, Barclays and Deutsche Bank, as well as local giants such as the Islamic banking division of the National Bank of Abu Dhabi (NBAD) and its finance firm, Abu Dhabi National Islamic Finance (ADNIF).

The market has, however, witnessed one recent change that has temporarily reduced competition. In October 2012, HSBC Amanah, the UAE-based Islamic subsidiary of HSBC, announced that after a strategic review of its global operations it had taken the decision to withdraw its sharia-compliant products and services from the UAE, the UK, Bahrain, Bangladesh, Indonesia, Singapore and Mauritius, maintaining them only in Malaysia and Saudi Arabia.

Original Player

With total assets of Dh85.7bn ($23.3bn) at the close of 2012, ADIB is the largest sharia-compliant bank headquartered in the capital, and the second largest in the UAE. It is also one of the older players in the industry, having been incorporated in 1997 to serve as the first Islamic bank in the emirate.

Commencing operations in the following year, by 2000 it had listed on the Abu Dhabi Securities Exchange (ADX). Today, the bank is linked to the ruling family through a 40.6% stake held by their private holding company, Emirates International Investment Company (EIIC), and a number of smaller stakes maintained by 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%) and Abu Dhabi Investment Council (7.6%).

In 2008, the arrival of a new management team resulted in the implementation of a growth strategy built around three pillars. The first was to establish ADIB as a market leader in the UAE by developing its primary customer service sectors – private, personal, business and wholesale banking – as well as by supporting activities of transaction banking, treasury, cards, investment banking and wealth management. The second pillar was to create an integrated financial services group and capitalise on the synergies to be found within the bank’s diversified offerings. The acquisition in 2012 of a 51% stake in a sharia-compliant consumer financing outfit, Saudi Installment House, can be seen in light of this objective. The final pillar focused on pursuing growth opportunities outside the bank’s home market. In regard to the latter ambition, recent years have seen the bank make a major move into Egypt through the purchase of a 49% stake in the National Bank for Development, which the bank has followed with the opening of branches in Iraq, Sudan, the UK and Qatar (see analysis).

New Addition

ADIB enjoyed a decade as Abu Dhabi’s sole Islamic bank, until Al Hilal Bank joined the sector in 2008. Established as a public joint stock company and wholly owned by the Abu Dhabi Investment Council, Al Hilal posted assets of Dh32.1bn ($8.73bn) at the close of 2012, and had by mid-2013 opened 21 branches across the UAE – the majority in Abu Dhabi, with smaller numbers in Dubai (seven), Sharjah (one) and Ras Al Khaimah (one). 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, and 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.


Both ADIB and Al Hilal have performed well in comparison to their peers, despite the competitive nature of the market and the more challenging global economic environment that has prevailed since 2008. ADIB’s sustained growth over recent years can be traced back to its change of management in 2008. From the close of that year until the end of 2012, total assets expanded from Dh51.2bn ($13.9bn) to Dh85.7bn ($23.3bn), a CAGR of 14%, while over the same period customer deposits and customer financing had CAGR of 13% and 11%, respectively.

The positive progression of the bank’s financial performance is reflected in its profitability data: over the same period revenues increased at a CAGR of 13% to reach Dh3.57bn ($971.7m), net profits at a CAGR of 9% to hit Dh1.2bn ($326.6m), while return on equity (ROE) has remained in the strongly positive territory of between 17.7% and 18.2% since 2010.

While full-year results for 2013 are not yet available, data for the first half of the year show the continuation of growth across key economic indicators: total assets at the close of the first half of 2013 increased by 15% over the first half of 2012; net customer financing expanded by 12% to reach Dh56.2bn ($15.3bn); and customer deposits increased by 10% over their second-quarter 2012 levels to reach Dh66.9bn ($18.2bn). On the income side, revenues grew by 6% to reach Dh1.87bn ($509m), which, after the deduction of expenses and provision for impairment, resulted in an operating profit for the first half of the year of Dh711.4m ($193.6m), a year-on-year (y-o-y) rise of 13%.

Al Hilal, in its third annual report since its inception, also posted positive growth across all key indicators: total assets in 2012 reached Dh32.1bn ($8.73bn), a yo-y increase of around 13.7%, total customer financing grew to Dh22.9bn ($6.23bn), an increase of around 18.7%; and customer deposits expanded to Dh25bn ($6.8bn), up 27.6%. On the income side, consolidated net profit rose from Dh202.3m ($55m) in 2011 to reach Dh310.3m ($84.5m) in 2012, a gain of 53.4%, while total ROE in 2012 stood at 10.1%.

The bank continued to develop its infrastructure, an important aspect of the more retail-focused sharia-compliant sector – retail assets account for 30% of their total asset base in comparison to 22% for their conventional peers, according to global accountancy firm Ernst & Young – adding three new branches to its UAE network to bring the total to 22. As with ADIB, Al Hilal’s profitability extended into the first half of 2013, as profits grew around 132% to reach Dh217.4m ($59.2m).

Sector Strength

 Importantly, profitability in the Islamic banking sector has not come at the expense of stability, with both of Abu Dhabi’s players maintaining a strong capital base. ADIB’s capital adequacy ratio (CAR) as per Basel II stood at 17.3% in 2012, rising from 16.6% the previous year and comfortably exceeding the central bank’s CAR requirement of 12%. On the liquidity side, the bank has maintained a liquidity ratio ( liquidity as a percentage of total assets) of over 24% since 2008, and by the second quarter of 2013 it stood at a healthy 25.9%. Similarly, Al Hilal’s CAR rose from 13.4% in 2011 to reach 14.7% in 2012, as measured by Basel II precepts. Nevertheless, both institutions, like other banks in the region, have faced an increase in non-performing assets since the onset of the global economic crisis, and an incipient plateau in this trend, first seen in 2011, has yet to develop into a sustained reversal.

The speed at which the provisioning cycle will move to a more favourable stage is linked to the rate of recovery in the real estate sector in Abu Dhabi and the wider UAE. “The pressure on collateral as a component in the provisioning calculations is starting to ease but has not yet eased completely. We have seen some real estate prices tracking up … but we still think there is another year to go in terms of certainty across all sectors of the real estate market before one can really start calling a clear easing on provisioning,” Andrew Moir, global head of strategy and finance at ADIB, told OBG.

As a prudential measure ADIB added a further Dh556.2m ($151.4m) in individual provisions in 2012, as well as an additional Dh52.8m ($14.37m) in collective provisioning. Consequently, the bank’s net credit provisions stand at Dh3.1bn ($843.8m), compared to Dh404m ($110m) in 2007, or 5.7% of gross customer financing assets. This translates to a robust pre-collateral non-performing ratio of 69.6%, a factor that has helped the bank maintain its favourable assessments from the major ratings agencies (a long-term rating of “A2” and “A+” from Moody’s and Fitch Ratings, respectively). Al Hilal, meanwhile, showed a total provision cover ratio of 231.9% in 2012, and in 2013 claimed the title of the only Islamic bank in the UAE to gain an “A1” rating from Moody’s and an “A+” from Fitch.


Both ADIB and Al Hilal have augmented their primary banking businesses with takaful subsidiaries, but over the past decade a number of standalone takaful providers have also set up shop in Abu Dhabi. The first to do so was Abu Dhabi National Takaful, which entered the market in 2003 and listed on the ADX in 2005. The company’s operations cover the entire UAE, with offices in Abu Dhabi, Dubai and Sharjah. With total assets of Dh462m ($125.8m) in 2012, it is the largest of the local firms. Methaq Takaful Insurance entered the market in 2008 and, with total assets of Dh186.7m ($50.8m) at the close of 2012, it is Abu Dhabi’s s second-largest takaful institution. A year after its 2008 ADX listing, operations began through its Abu Dhabi office, and the company has since established additional branches in Dubai, Ras Al Khaimah and Al Ain.

The most recent entry to the takaful market is Watania, established in 2011 with paid-up capital of Dh150m ($40.8m). The newcomer listed on the ADX in November 2011, with major shareholders including Abu Dhabi National Insurance, ADNIF, Abu Dhabi National Energy and Aldar Properties. Watania currently operates out of its head office in Abu Dhabi, and with total assets of Dh180.6m ($49.2m) at the close of 2012, it is the third-largest takaful operator in Abu Dhabi. All three providers offer products across the corporate, small and medium-sized enterprise, and individual segments.

As with their banking counterparts, takaful providers compete for business within a wider UAE market in which three Dubai-based, standalone takaful players also operate. The largest of these, with total assets of Dh4.7bn ($1.3bn) at the close of 2012, is Islamic Arab Insurance (SALAMA), followed by Takaful Al Emerat (Dh208.7m, $56.8m) and Dar Al Takaful (Dh149.7m, $40.7m).

Together with their Abu Dhabi counterparts, these Dubai companies make up a takaful sector that has grown rapidly over the last decade, posting a CAGR between 2005 and 2009 of 98%, although this has slowed somewhat in recent years, with a CAGR of 18% over 2010-12, according to Ernst & Young.

Deepening Sector

As Abu Dhabi’s banks and takaful operators expand their businesses in the domestic market, and in some cases look abroad (see analysis), the emirate is emerging as a regional centre for sharia-compliant funds. According to the Qatar Financial Centre’s “Middle East and North Africa Asset Management Survey 2012”, 25% of UAE funds assessed (mostly local and regional entities) are operated according to Islamic principles. Both conventional and Islamic banks have moved into the sharia-compliant fund market, and in Abu Dhabi it is the NBAD that operates the largest of them. NBAD’s Islamic fund, Al Na’eem, is the biggest in the country, investing predominantly in the UAE and posting assets under management (AuM) of Dh110.2m ($30m) at the close of 2012. ADIB’s offerings are concentrated on third-party sharia-compliant funds operated by local and regional institutions, and in 2013 it was directing its customers to 17 of them. Al Hilal, however, has launched two sharia-compliant funds of its own, which had a combined AuM of $31m in June 2012.

While the data on global funds is incomplete, that which is available indicates that fund managers in the GCC control over half of the world’s sharia-compliant assets. Abu Dhabi’s banks, both conventional and Islamic, are playing a significant part in this. Similarly, demand for more investment channels has driven the growth of the UAE sukuk (Islamic bond) market.

After a drop in issuance levels in 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 to emerge from the emirate that year. In 2012 Abu Dhabi was front and centre in the global sukuk market once again with the issuance of ADIB’s $1bn Tier 1 Perpetual Sukuk, the first sharia-compliant Tier 1 issue executed in the international markets and the first Tier 1 instrument issued by a Middle East bank in the capital markets.

The transaction, which was designed to comply with Basel III guidelines, was enthusiastically received by both regional and international investors, and it resulted in an order book in excess of $15bn (meaning it was 15 times oversubscribed, the most of any sukuk offering in the world to date).


As the activities of the UAE’s Islamic finance institutions increase in both scale and complexity, the question of oversight regarding the nation’s sharia-compliant operators has become more prominent. Currently, Abu Dhabi’s Islamic banks and takaful providers operate within the same federal regulatory framework as their conventional counterparts, with their activities overseen by the Central Bank of the UAE and the UAE Insurance Authority.

Little distinct legislation exists with regard to sharia-compliant operators, the most notable instance being Federal Law No 6 of 1985 that pertains to Islamic banks and financial institutions. The Banking Supervision Department is responsible for regulating and supervising those institutions offering Islamic financial services, and its regulations and supervision are reviewed for quality from time to time.


The rapid expansion of the sharia-compliant sector is indisputable. According to Ernst & Young, the share of Islamic finance in the GCC stands at 25% of the total market, while the share of the insurance market claimed by takaful operators is a more modest 15%, which again suggests that the industry has the capacity to expand. Within the wider UAE, the assets of Islamic banks grew by a CAGR of 14.8% between 2007 and 2011, according to the company, outstripping the 8.5% CAGR of the country’s banking assets as a whole.

With global Islamic banking assets forecast to surpass the $2trn milestone by the end of 2014, Abu Dhabi’s sharia-compliant financers are well positioned to capitalise on the expansion. The potential for takaful growth in Abu Dhabi and the wider UAE also remains strong, underwritten by its citizens’ high levels of disposable income and the low penetration of insurance (see Insurance chapter). Reviewing both future domestic and global opportunities, the outlook for Abu Dhabi’s sharia-compliant institutions remains a positive one.

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The Report: Abu Dhabi 2014

Islamic Financial Services chapter from The Report: Abu Dhabi 2014

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