UAE Leads Global Islamic Finance After 50 Years

Ever wondered how one nation transformed itself into the nerve center of ethical finance? Buckle up, because for the past fifty years, the UAE has been quietly building a financial powerhouse rooted in Islamic principles. From the groundbreaking launch of Dubai Islamic Bank in ’75 to its current status as a global hub for Global Islamic Finance, this isn’t just about money; it’s a fascinating story of strategic growth, smart regulations, and a deep understanding of what people truly want in their financial dealings – ethics and sustainability. Let’s explore how the UAE became a key player in Islamic Finance, attracting worldwide investment and pioneering innovative, Shariah-compliant solutions.

The journey of Global Islamic Finance in the UAE is a compelling narrative of transformation, resilience, and an unwavering dedication to Shariah-compliant practices. From a single pioneering institution to a multi-trillion-dollar industry, the UAE’s ascent in this sector reflects a confluence of factors: a dynamic economic environment fueled by diversification efforts, proactive and forward-thinking government policies, and the establishment of world-class infrastructure, including the Dubai International Financial Centre (DIFC). Today, the UAE stands tall as a leading force in Islamic Finance, a testament to five decades of unwavering commitment and strategic development.

Related: UAE To Introduce Higher Sharia Board To Strengthen Islamic Finance Industry

The Genesis: Dubai Islamic Bank and the Dawn of a New Era

The year 1975 marks a watershed moment in the history of finance, not just for the UAE but for the world. The establishment of Dubai Islamic Bank (DIB) wasn’t merely the launch of another financial institution; it was the birth of a new paradigm. As the world’s first Islamic commercial bank, DIB bravely ventured into uncharted territory, demonstrating that banking could indeed thrive by adhering to Shariah principles, most notably the prohibition of interest (riba) and the promotion of ethical investment. This pioneering spirit laid the foundation for what would become a monumental shift in the global financial order.

DIB’s early success served as a powerful proof of concept, illustrating that Shariah-compliant financial models could be both profitable and sustainable. By focusing on partnership-based financing structures like Mudarabah (profit-sharing) and Musharakah (joint venture), and emphasizing tangible asset-backed investments, DIB offered a compelling alternative to conventional banking practices. This resonated deeply within the UAE and across the wider Muslim world, igniting a demand for financial services that aligned with deeply held religious and ethical values.

The Eighties and Nineties: Expansion and Diversification

The initial success of DIB acted as a catalyst, paving the way for a wave of new Islamic financial institutions in the UAE during the 1980s and 1990s. Abu Dhabi Islamic Bank (ADIB) and Sharjah Islamic Bank emerged as key players, further diversifying the Global Islamic Finance landscape within the country and catering to the growing appetite for Shariah-compliant products and services. This period witnessed not just an increase in the number of institutions but also a broadening of the product offerings, extending beyond basic banking services to include trade finance, investment products, and early forms of Islamic insurance (Takaful).

This expansion was crucial in embedding Global Islamic Finance within the fabric of the UAE’s economy. These new institutions brought with them innovative approaches and a deeper understanding of the specific needs of individuals and businesses seeking ethical financial solutions. The competition fostered a spirit of innovation, pushing the boundaries of what Islamic finance could achieve.

Government Support and Regulatory Framework: Nurturing Growth

The remarkable growth of Global Islamic Finance in the UAE would not have been possible without the proactive and consistent support of the government. Recognizing the immense potential of this sector, the UAE authorities played a pivotal role in creating an enabling environment for Islamic financial institutions to flourish. This involved the establishment of robust regulatory bodies, most notably the Central Bank of the UAE and the Higher Shariah Authority, which were instrumental in providing guidance, setting standards, and ensuring compliance with Shariah principles.

The introduction of the UAE Islamic banking law in 1985 was a landmark achievement, providing a clear legal framework for the operation of Islamic financial institutions. This legislation, along with the subsequent establishment and operationalization of the Higher Shariah Authority in 2018, demonstrated the government’s commitment to fostering a credible and transparent Global Islamic Finance sector. These regulatory initiatives helped to standardize Islamic financial products and services, build trust among consumers and investors, and attract international players to the UAE market.

The DIFC: A Global Gateway for Islamic Finance

The establishment of the Dubai International Financial Centre (DIFC) in 2004 marked another significant leap forward in the UAE’s journey to becoming a global leader in Global Islamic Finance. The DIFC provided a sophisticated and internationally recognized regulatory framework, coupled with a world-class infrastructure, attracting a diverse range of Islamic financial institutions, including banks, asset managers, and Takaful operators.

The DIFC’s strategic location, its independent legal system, and its commitment to international best practices made it an attractive hub for both regional and international players in the Global Islamic Finance industry. It fostered a vibrant ecosystem where innovation could thrive, and cross-border transactions could be facilitated with ease. The DIFC’s success in attracting global talent and capital further solidified the UAE’s position as a leading destination for Global Islamic Finance.

The Current Landscape: A Thriving Ecosystem

Today, the UAE boasts a well-established and diverse Global Islamic Finance industry, encompassing a wide array of institutions, including dedicated Islamic banks, Islamic banking windows within conventional banks, specialized Islamic finance companies, and a robust Takaful (Islamic insurance) sector. This comprehensive ecosystem caters to a broad spectrum of financial needs, from retail banking and corporate finance to investment management and risk mitigation, all by Shariah principles.

The numbers speak volumes about the UAE’s dominance in Global Islamic Finance. For three consecutive years leading up to 2022, the UAE was consistently ranked among the top three Islamic economies globally in the State of the Global Islamic Economy Report. By 2023, the country held the fourth position worldwide in Islamic financial markets by assets, according to the Islamic Finance Development Indicator. These rankings underscore the significant strides the UAE has made in establishing itself as a leading center for Global Islamic Finance.

Sustainability and Ethical Finance: A Natural Alignment

A significant trend shaping the future of Global Islamic Finance in the UAE is the increasing focus on sustainability and ethical investing. Islamic finance, with its inherent emphasis on social responsibility, fairness, and the prohibition of investments in harmful industries, aligns naturally with the principles of Environmental, Social, and Governance (ESG) investing.

Recent studies underscore this synergy. A Central Bank of the UAE study revealed that a remarkable 79 percent of Islamic banks in the UAE have already implemented sustainability strategies, with 74 percent having these strategies approved at the board level. Furthermore, all Islamic banks surveyed reported having established sustainability strategies, indicating a strong commitment to integrating ethical considerations into their operations. This proactive approach positions the UAE as a leader in the growing intersection of Global Islamic Finance and sustainable development.

Sukuk and Takaful: Pillars of the Islamic Financial System in the UAE

Beyond banking, the UAE has fostered a thriving market for Sukuk (Islamic bonds) and Takaful (Islamic insurance). The establishment of the first Takaful insurance company, Islamic Arab Insurance Company (Salama), in 1979, ensured the availability of Shariah-compliant insurance products, catering to the specific needs of the population.

The UAE has also actively promoted Sukuk issuance, becoming one of the largest markets globally for these Islamic bonds. The government’s emphasis on diversifying funding sources and attracting international capital has contributed significantly to the growth of the Sukuk market. Nasdaq Dubai has emerged as the world’s largest exchange for Sukuk listings, with the total value of Sukuk listed in Dubai reaching USD 98.9 billion as of December last year.

The growth in Sukuk and bond issuances in the UAE has been significant, reaching $USD 294.4 billion by the third quarter of 2024, with Sukuk accounting for approximately 20 percent of the total. The introduction of dirham-denominated Islamic Treasury Sukuk by the Federal Government has further broadened sector participation and deepened the domestic Global Islamic Finance market.

A Promising Future for Global Islamic Finance in the UAE

The future of Global Islamic Finance in the UAE appears exceptionally bright. Several factors point towards continued growth and increasing global influence. The rising global awareness of ethical finance and sustainable investing aligns perfectly with the core principles of Islamic finance, creating a natural tailwind for the industry. As the world increasingly seeks responsible and value-driven financial models, the UAE, with its well-established infrastructure, robust regulatory framework, and deep understanding of Shariah-compliant finance, is ideally positioned to lead the way.

S&P Global Ratings also echoes this optimistic view, expecting strong growth in the UAE’s Global Islamic Finance sector to persist, underpinned by the robust performance of the non-oil economy. This confluence of factors – strong economic fundamentals, a supportive regulatory environment, a growing global appetite for ethical finance, and the UAE’s established leadership position – paints a promising picture for the future of Global Islamic Finance in the Emirates.

In conclusion, the UAE’s journey over the past five decades has firmly established it as a cornerstone of Global Islamic Finance. From the pioneering spirit of Dubai Islamic Bank to the sophisticated ecosystem that exists today, the UAE has consistently demonstrated its commitment to fostering a thriving and innovative Shariah-compliant financial sector. As the world increasingly embraces ethical and sustainable finance, the UAE’s leadership in Global Islamic Finance is set to become even more pronounced, shaping the future of finance on a global scale.

UAE Islamic Finance: Key Milestones Revisited

• 1975: Dubai Islamic Bank, the UAE, nd the world’s first Islamic commercial bank, is established, marking the dawn of modern Global Islamic Finance.
• 1979: The UAE’s first Takaful (Islamic insurance) company, Islamic Arab Insurance Company (Salama), is established, broadening the scope of Shariah-compliant financial services.
• 1985: The UAE Islamic banking law and the introduction of the Higher Shariah Authority under Federal Law 1985 provide a foundational regulatory framework for the burgeoning Global Islamic Finance sector.
• 1998: The establishment of Abu Dhabi Islamic Bank (ADIB), the UAE’s second Islamic bank, further strengthens the Global Islamic Finance landscape.
• 2002: Sharjah Islamic Bank becomes the first bank in the UAE to fully convert into a Shariah-compliant Islamic bank, demonstrating the growing appeal of Global Islamic Finance.
• 2010: The Central Bank of the UAE issues Islamic Certificates of Deposit, enhancing liquidity management within the Global Islamic Finance system.
• 2011: Islamic banking assets reach 9.1% of the total banking assets in the UAE, indicating the increasing integration of Global Islamic Finance within the national economy.
• 2014: The Government of Sharjah issues its debut Sukuk, highlighting the growing importance of Islamic capital markets within the UAE’s Global Islamic Finance strategy.
• 2017: The Higher Shariah Authority is formally established and commences operations in 2018, further strengthening the regulatory oversight of Global Islamic Finance.
• 2018: Islamic bank assets reach 25% of the total banking assets in the UAE, underscoring the significant growth and market penetration of Global Islamic Finance.
• 2019: The Dubai Financial Market (DFM) launches the DFM Shariah Index, the first of its kind in the UAE, promoting Shariah-compliant investment opportunities within Global Islamic Finance.
• 2020: The consolidation between two prominent Islamic banks, Dubai Islamic Bank (DIB) and Noor Bank, creates a larger and more robust entity within the Global Islamic Finance sector.
• 2022: Dubai Islamic Bank (DIB) issues the debut sustainable Sukuk by an Islamic bank in the UAE, showcasing the growing alignment of Global Islamic Finance with ESG principles.
• 2023: First Abu Dhabi Bank (FAB) issues the first local currency green Sukuk, further driving the growth of sustainable finance within the UAE’s Global Islamic Finance market.
• 2024: Islamic financing accounts for 29% of total sector financing at the end of the first half of 2024, demonstrating the continued expansion and increasing market share of Global Islamic Finance in the UAE.

The UAE: A Global Connector and Future Vision for Islamic Finance

Moreover, the UAE’s strategic geographic location, its strong international relationships, and its reputation for stability and security make it an ideal gateway for connecting Islamic financial markets across Asia, Africa, and Europe. As Global Islamic Finance continues its trajectory of growth and expansion, the UAE’s role as a facilitator of cross-border transactions and a center for knowledge sharing will become increasingly important.

The legacy of the past 50 years is not just about the numbers – the trillions of dollars in assets, the numerous institutions established, or the impressive growth rates achieved. It’s about the vision that began with a single bank and blossomed into a nationwide commitment to ethical finance. It’s about the resilience demonstrated during global economic shifts and the unwavering dedication to Shariah-compliant principles. It’s about the creation of a sophisticated ecosystem that serves as a beacon for the future of Global Islamic Finance.