Dubai Is Leading The Revolution In Islamic Banking, says Dr. Adnan Chilwan

Since its inception, modern Islamic commercial banking has been intrinsically linked with the UAE. The formation of Dubai Islamic Bank over 40 years ago is widely regarded as the birth of the sector as it was the first financial institution to incorporate the principles of Islam into all of its practices. In the short span of time since then, the industry has rapidly established a firm foothold in the world of banking and finance and has steadily progressed from being a select ‘niche’ to a fast-growing ‘norm’.

The last financial crisis revealed the true value of this relatively nascent industry highlighting it as a transparent and fair system of banking for people, corporations, and governments alike. Islamic finance is now increasingly being recognised for its innovative and modern practices as well. Reflective of the industry’s success, global Islamic banking assets are expected to reach $1 trillion by the end of 2015, growing at a CAGR of 16 percent a year, according to EY. Indicative of the potential yet to be realised, the global industry profit pool is expected to exceed $30bn by 2020, as Sharia-compliant financing increases its share in emerging markets.

Looking to 2016 and beyond, innovation will continue to be critical for the ongoing development of the industry. For instance, efficiency can still be improved as Sharia-compliant institutions still lag behind their conventional counterparts, and are increasingly looking to embrace technological innovation in order to minimise operational costs as well as project a modern face of banking that would appeal to a younger generation of customers, which will be critical for ongoing growth.

Another area of development is the Islamic asset management sector, as the range of services available remains quite limited and there is a general lack of quality products in this space. To this end, Islamic investment instruments and securities related to savings and pension plans are also an area where significant progress can be made in order to appeal to a broader range of customers. Indicative of the untapped potential here, the total value of pension funds’ assets globally exceed $27 trillion, while those that are Sharia-compliant make up just 0.001 percent in spite of Muslims making up almost 25 percent of the world’s population.

Unity across Sharia standards is another area that has constantly been discussed as one where the industry needs to make significant progress. This is a core point of focus for the Dubai Islamic Economic Development Centre and where much work has been done, supported by the government’s ambitious drive to make the Emirate the capital of the Islamic economy. Valued at over approximately AED30 trillion and touching the lives of 1.65 billion Muslims across the world, the Islamic economy is an intricate network of industries and sectors that are rooted in the principles of Islam. Under the vision of His Highness Sheikh Mohammed bin Rashid Al Maktoum, Dubai has emerged as the leading contender to become its capital.

The Islamic financial services industry here is being asserted as the foundation of the Emirate’s drive, and the progress made just over the past few years shows how it is going to lead the development of the sector globally as well.  The tremendous growth and success has led to Dubai recently becoming the global hub for sukuk issuances with listings here exceeding those in Malaysia and the UK. The market in the UAE and the broader GCC for these instruments exceeded $20bn, growing at 25 percent in 2014 according to S&P, far outpacing the 5 percent global sukuk market growth.

In addition to the private and public sector working together, industry regulators are also promoting the growth of the industry. UAE Islamic banks are anticipated to benefit from the central bank’s decision to include sharia-compliant securities in the range of instruments it accepts as collateral for accessing liquidity. Lack of access to these facilities used to put them at a disadvantage compared to conventional banks, but now the playing field has been levelled.

Given the UAE Islamic finance sector’s success so far, it is anticipated to outpace the conventional banking industry in 2015 on the back of wider acceptance of Sharia-complaint services and an expanding customer base.

Due to the innovation it is driving, while the sector accounts for 17 percent of assets and 19 percent of consumer deposits in the country at the moment, this is poised to rise to 50 percent of the UAE market by 2020. Given its expertise and its experience, DIB will be the cornerstone in driving this growth and in positioning Dubai as the leader in the global Islamic banking sector.