The UAE is one of the world’s core markets for Islamic financial services (IFS), and in recent years has made significant contributions to both global industry asset growth and innovation. Within the wider federation, the IFS institutions which have made Abu Dhabi their home have played an important role in the nation’s emergence as a centre for sharia-compliant banking, insurance and asset management. After a robust performance in 2015, the sector has entered 2016 ready to weather the economic challenges presented by a subdued oil price and well positioned to pursue growth where opportunities arise in the coming years.
With total assets estimated at $127bn in 2014, the UAE has one of the largest sharia-compliant banking sectors in the world – the third-largest after Saudi Arabia and Malaysia. The federal nature of the UAE means that Abu Dhabi’s Islamic banks compete on a border-free basis within the country. The two sharia-compliant lenders based in Abu Dhabi, Abu Dhabi Islamic Bank (ADIB) and Al Hilal, compete on equal terms with six other Islamic banks, three of which are located in Dubai (Dubai Islamic Bank, Emirates Islamic Bank and Noor Islamic Bank), with Sharjah Islamic Bank, Ajman Islamic Bank and National Bank of Fujairah (the most recent market entrant) also offering sharia-compliant financing from their respective emirates. Expanding beyond the capital has been the first stage of development for the UAE’s Islamic financers: for example, ADIB has established 34 of its 139 branches in the neighbouring emirate of Dubai. The more recent arrival to the market, Al Hilal Bank, has opened seven branches in Dubai and operates a branch network of 26 units.
Meanwhile, as of 2015 Dubai Islamic Bank operated a branch network of 91 units across the emirates of Dubai, Abu Dhabi, Sharjah, Ras Al Khaimah, Ajman, Umm Al Quwain and Fujairah – 12 of which were in Abu Dhabi and therefore competing for retail presence with the branches of the two home financers. Beyond the dedicated Islamic banks, the majority of the UAE’s 23 licensed lenders and many of the 26 foreign banks in the country operate sharia windows. Domestic giant National Bank of Abu Dhabi, for example, operates an Islamic banking division as well as a sharia-compliant finance firm, Abu Dhabi National Islamic Finance (ADNIF), while foreign multinationals such as Deutsche Bank and Standard Chartered offer sharia-compliant products to customers across the country.
Yet more competition comes from a number of sharia-compliant finance companies, such as Amlak Finance and Osool Finance. The result is a crowded but vibrant sharia-compliant financing sector in Abu Dhabi, which has claimed a significant share of UAE banking activity: according to EY’s “World Islamic Banking Competitiveness Report 2014-15”, the Islamic assets of the UAE’s dedicated Islamic banks and the sharia-compliant windows of their conventional counterparts accounts for 21.4% of the banking system assets.
Abu Dhabi Players
Two of the UAE’s Islamic banks are headquartered in Abu Dhabi. The largest of which, with total assets of Dh118.4bn ($32.2bn) as of December 31, 2015, is ADIB, one of Abu Dhabi’s “Big Five” banks and the second-largest sharia-compliant financer in the UAE. Its size makes it a systemically important player in the nation’s banking sector, accounting for 5.1% of its aggregate assets in the third quarter of 2015. 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. The bank was listed on the Abu Dhabi Securities Exchange (ADX) in 2000, and as of 2015 it was mainly owned by more than 46,000 UAE nationals and companies that have taken a stake in it. The bank’s main shareholder is National Holding, via the Emirates International Investment Company (EIIC), a private holding company. Government backing comes from stakes held by the UAE General Pension and Social Security Authority (1.19%) and Abu Dhabi Investment Council (7.61%).
The introduction of a new management team in 2008 and a fresh brand identity in 2010 led to a new strategy, based around three pillars: first, to establish ADIB as the market leader in the UAE by developing its primary customer service sectors – private banking, personal banking, business banking and wholesale banking – as well as the supporting activities of transaction banking, treasury, cards, investment banking and wealth management; second, to create an integrated financial services group and capitalise on the synergies to be found within its diversified offerings – the acquisition in 2012 of a 51% stake in sharia-compliant consumer financing outfit, Saudi Finance Company, can be seen in the light of this objective; and lastly, to pursue growth opportunities outside its home market. The latter objective has seen it acquire a large wholesale and retail operation in Egypt, as well as establish a corporate foothold in Iraq, the UK, Sudan and Qatar.
Until the establishment of Al Hilal Bank in 2008, ADIB was the sole sharia-compliant bank headquartered in the federal capital. The new entrant was founded with authorised capital of Dh4bn ($1.1bn) by the Abu Dhabi Investment Council (ADIC), an investment arm of the Abu Dhabi government, which – as the bank has yet to list on the stock exchange – continues to have the controlling share. With assets of Dh43.1bn ($11.7bn) as of June 2015, Al Hilal is less than half the size of ADIB, but in its relatively short existence the newcomer has established a diverse array of sharia-compliant offerings across the personal, wholesale, investment and treasury segments.
According to Al Hilal’s most recent annual report, the bank has grown to reach 10th place among UAE banks in terms of financings. It has also broadened the scope of its activities into the Islamic insurance arena, founding Al Hilal Takaful in 2008, as well as venturing into the competitive vehicle financing market through Al Hilal Auto, which opened for business in 2009. In addition, the bank’s strategy calls for the expansion of its geographical presence: 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.
Abu Dhabi’s two Islamic banks have been at the forefront of a rapid expansion of sharia-compliant financing in the UAE, a trend that has persisted despite the challenges of regional unrest, the aftershocks of the global economic crisis and subdued oil prices. Total Islamic banking assets and deposits in the UAE both grew at a compound annual growth rate (CAGR) of 11% between 2009 and 2013, according to EY, while assets and deposits in the conventional segment expanded at a more modest 5% and 6% CAGR, respectively. Abu Dhabi’s Islamic banks have made a significant contribution to this consistent growth. Between 2012 and the close of 2015, ADIB’s total assets grew at a CAGR of 11.2%, while gross customer financing and customer deposits rose by a CAGR of 14.5% and 15.7%, respectively. The period was also a profitable one for the bank, with net profit rising by a CAGR of 17% between 2012 and 2015. In 2015, net customer financing grew by 7.4%, while deposit growth expanded by 12%, a strong performance that underpinned a net profit growth for the period of 10.5%, to reach Dh1.9bn ($517.2m).
Despite being in an early growth phase, Al Hilal has also shown steady gains across key performance indicators since it published its first results in 2010. At the close of the first half of 2015, its total assets had reached Dh43.1bn ($11.7bn), up from Dh38.7bn ($10.5bn) a year earlier. Like ADIB, Al Hilal has over recent years successfully grown its deposit base, and as a result has positioned itself well to responsibly increase its customer financings: from the first half of 2014 to the first half of 2015, its total customer deposits increased by 10% from Dh28.8bn ($7.83bn) to Dh31.7bn ($8.6bn), while total financings expanded by 15% from Dh28.7bn ($7.81bn) to Dh32.9bn ($8.9bn). While income for the period rose year-on-year, net profit for the first half of 2015 was almost static due to increased personnel costs and administrative expenses in the expanding bank.
Looking to the aggregate performance of Abu Dhabi’s Islamic banking sector, while profitability remained strong, at 7%, the pace of financings (13%) outstripped the rate of deposit growth for the period (11%), a reversal of the normal trend which is also displayed by conventional lenders and has raised concerns regarding future liquidity in the banking system (see Banking chapter).
Abu Dhabi’s Islamic banks account for the majority of sharia-compliant assets in the emirate, but the wider IFS sector is also showing strong growth in segments other than financing. The takaful operators based in the capital are playing a salient role in the expansion of the wider UAE sharia-compliant insurance sector, which has seen the nation become the second-largest provider of takaful contributions in the GCC.
According to EY Global Takaful Insights 2014, aggregate UAE takaful contributions accounted for 15% of the GCC total in 2014, and the nation was one of three key markets where takaful growth momentum had been maintained despite volatility in global financial markets. For Islamic banks, takaful operations have proved a useful means to broaden their revenue bases, and both ADIB and Al Hilal have entered the sharia-compliant insurance market in recent years. ADIB offers takaful products through the Abu Dhabi National Takaful Company, of which it owns 40%, while Al Hilal has operated its wholly-owned Al Hilal Takaful since the bank’s inception in 2008.
The bank-owned takaful operations face competition from a federal takaful segment which generates an increasingly important contribution to the nationwide IFS sector, and a number of industry participants have chosen Abu Dhabi as the location for their headquarters. Abu Dhabi National Takaful Company was the first to enter the market from the capital, establishing in 2003 and listing on the stock exchange in 2005. The company’s operations cover the entire UAE, with offices in Abu Dhabi, Dubai and Al Ain, and with total assets of Dh632.4m ($172.1m) at the close of 2014.
A second dedicated takaful player set up operations in Abu Dhabi in 2009: with total assets of Dh364.8m ($99.2m) in September 2015, Methaq Takaful Insurance Company is the emirate’s second-largest takaful operator. Since the opening of its Abu Dhabi headquarters, the company has established further branches in Dubai, Ras Al Khaimah and Al Ain. Abu Dhabi’s third-largest takaful provider, Watania, entered the market in 2011, listing on the ADX in the same year with a paid-up capital of Dh150m ($40.8m). The founding of the company was an initiative of several major initial shareholders: Abu Dhabi National Insurance Company (ADNIC), ADNIF, Abu Dhabi National Energy Company (TAQA) and Aldar Properties.
However, in August 2014 there was a significant shift in the company’s ownership structure, in which MB Investment UAE and Madina Takaful Oman acquired a majority 60% stake in the company from existing shareholders. Watania currently operates out of its head office in Abu Dhabi, and at the close of 2013 its total assets stood at Dh415.6m ($113.1m). All three of Abu Dhabi’s takaful providers offer products to individuals, small and medium-sized enterprises, and corporates, providing coverage in areas such as property, construction and engineering, marine, motor and employee benefits, small public/third-party liability, accident, health, travel, motor and home insurance. They compete for business within a wider UAE market of 11 takaful operators, which in 2014 was estimated by EY to have generated $1.31bn worth of contributions (the takaful equivalent to premiums) – the second-highest gross contributions in the GCC behind Saudi Arabia, granting the UAE a 15% share of the regional market.
The increasing number of Islamic banks and insurance companies is the most visible manifestation of Abu Dhabi’s growing IFS sector. However, as the appetite for sharia-compliance grows, a broader and deeper array of financial activity is developing within it. In global terms, the growth of sukuk, a sharia-compliant alternative to conventional bonds, has outpaced even that of Islamic banks: according to TheCityUK, the representative body for the UK’s financial services industry, the international sukuk market overtook Islamic banking as the most rapidly growing IFS sector in the post-2008 period, growing at 20% each year to reach a record value of outstanding sukuk of $310bn at the end of 2014. Alongside Malaysia and Saudi Arabia, the UAE has emerged as a key driver of sukuk growth, having entered the market in 2004 with a $1bn offering from Dubai’s Department of Civil Aviation. In September 2015, data from Dealogic showed that the UAE was the second-largest issuer of sukuk over the preceding 12 months, with $5.9bn of issuance. Historically, institutions in Abu Dhabi have played an important role in the UAE’s development as a centre of sukuk offerings: after a period of subdued issuance at the height of the global economic crisis of 2008 and 2009, Abu Dhabi led a recovery in 2010, spearheaded by a $750m sukuk issued by ADIB – the largest corporate issuance to emerge from the emirate that year. In 2012, Abu Dhabi rose to prominence 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. In July 2014, Al Hilal Bank issued $500m worth of Tier 1 sukuk certificates – once again in the form of a perpetual instrument. The adoption of this relatively novel model places Abu Dhabi’s Islamic banks at the forefront of the development of sukuk globally.
A deepening IFS sector has also helped to establish the UAE as a hub for sharia-compliant asset management. By 2012, according to the MENA Asset Management Survey, some 25% of UAE funds were being operated according to sharia principles. By 2014, a total of 12 funds licensed in the country were categorised as Islamic by the Thomson Reuters Global Islamic Asset Management Report of that year, for total assets under management (AuM) of $331m. Both conventional and Islamic banks have responded to the demand for sharia-compliant funds, and in Abu Dhabi it is the National Bank of Abu Dhabi flagship that operates the largest of them: the bank’s Islamic MENA Growth Fund (formerly known as the NBAD UAE Islamic Fund, Al Na’eem) is the biggest in the country, investing across diverse sectors in public equity markets across the region, and posting AuM of Dh118.5m ($32.2m) as of October 2015. The nation’s largest Islamic bank, meanwhile, has established the ADIB Select Savings Investment Plan, which offers a range of investment packages to suit investors’ risk appetite, from conservative to aggressive, based on sharia-compliant mutual funds. The bank also offers customers 11 third-party sharia-compliant funds operated by local and regional institutions, as well as access to a sukuk trading platform for secondary market trading. Al Hilal has launched a number of sharia-compliant funds of its own: the Al Hilal GCC Equity Fund, which in November 2015 had AuM of Dh75.54m ($20.6m), the Global Sukuk Fund (AuM $56m) and the Global Balanced Fund (AuM $27.3m). The bank has also established a number of strategic investment funds which are aimed at longer-term investors interested in sectors such as infrastructure, energy and natural resources.
As the depth and complexity of Abu Dhabi’s IFS sector continues to grow, so too does the need for effective oversight and regulation. The emirate’s sharia-compliant banks, takaful operators and asset managers operate within the same regulatory framework as their conventional equivalents, by which their activities are governed federally by the Central Bank of the UAE (CBU) and the UAE Insurance Authority. Little distinct legislation exists with regard to sharia-compliant operators, the most notable instance being the Federal Law No. 6 of 1985, which pertains to Islamic banks and financial institutions. Takaful regulations were introduced in 2010, outlawing takaful window operations and enabling the Insurance Authority to apply some specific standards in areas such as solvency requirements and underwriting. Questions of sharia-compliance are addressed by banks and takaful operators, each of which operates its own board of sharia experts, who review new products.
This decentralised approach to sharia issues, however, may change in the short to medium term. The CBU has been examining the possibility of creating a centralised sharia board for some time, the result of which would be a more comprehensive regulatory framework for its sharia-compliant licensed entities. While the details of this initiative have yet to be released, the issue was raised in 2015 when the UAE Banks Federation, the nation’s banking industry representative body, discussed a proposal to establish a Higher Sharia Authority that would complement and oversee the work of sharia boards of individual banks. Any such body would be a welcome step towards greater consistency in sharia rulings. “We have asked for it, it will bring consistency and a level playing field,” Philip King, head of retail banking for ADIB, told OBG.
Abu Dhabi’s Islamic banks face similar challenges to those of their conventional counterparts. In the short term, the question of liquidity arises as a potential barrier to asset growth: an OBG analysis of aggregate results shows that Abu Dhabi’s Islamic banks deposits, like those of conventional lenders, have grown at a slower rate than their financings over the first half of 2015, at 12.1% and 14.7%, respectively. However, while this trend points to a tightening of liquidity over 2016, a conservative regulation regime has positioned the sector well to ride out a challenging economic scenario (see Banking chapter). Looking to the longer term, Islamic lenders stand to benefit from domestic economic activity, including the projects attached to Dubai Expo 2020 and the return of Iran to the international market with the easing of the international sanctions regime, as well as potential improvements in the external environment, such the possibility of an oil price recovery in late 2016 or 2017. In a wider context, some industry participants, such as EY, expect to see the global profit pool of Islamic banks triple by 2019, with Islamic banking assets in the core markets of the UAE, Saudi Arabia, Malaysia, Qatar and Turkey to hit $1.8trn by that time. The sound prospects of Islamic banking growth are also driving the expansion of the takaful sector. “The role of the takaful concept has become increasingly attractive to all parties supported by the stronger role Islamic banks are playing. Takaful complements the financial services by offering sharia-compliant products with an added value to policyholders. With this growing segment, more investors are incentivised for return on capital,” Osama Abdeen, CEO of Abu Dhabi National Takaful Company told OBG. While the insurance penetration rate in the UAE is high in the regional context, it remains low compared to global levels, and therefore the potential for further growth is significant (see Insurance chapter).