UAE Prosperity: Islamic Finance: Keeping the Momentum Going
British Embassy Abu Dhabi
The World Islamic Economic Forum (WIEF) in London set out the UK’s commitment and offering of Islamic Finance (IF). It is also firmly on the agenda in the UAE, where the next WIEF will be held. The opportunities for UK – UAE cooperation have the potential to become an important strand of our prosperity agenda. The upcoming Global Islamic Economic Summit (GIES) in Dubai provides a key opportunity to take this forward.
In his keynote speech at the WIEF on 29 October, the Prime Minister said he wanted London to be a global centre for Islamic Finance alongside Kuala Lumpur and Dubai. Dubai will host next year’s WIEF, and hold their own Global Islamic Economy Summit (GIES) at the end of November; a forum for practitioners in Islamic Finance sector and broader Halal industries, for example food, tourism and regulation.
Snapshot of the UAE Islamic Finance Industry
With an estimated share of 8% of global Islamic banking assets and 20% of GCC Islamic banking assets in 2012, the UAE considers itself to be one of the leading centres of Islamic Finance. Services in the UAE were launched with the establishment of Dubai Islamic Bank in 1975, one of the first two modern institutions to offer Sharia-compliant products. It remained the only Islamic bank in the UAE until Abu Dhabi Islamic Bank was founded in 1997. A total of eight Islamic banks are currently operating in the UAE, accounting for 25% of the nation’s total bank branches.
The UAE’s sukuk (Islamic bonds) market, as measured by volume of annual sukuk issuances, has grown significantly in the past decade, thanks in part to the development of innovative Sukuk structures (e.g. Dubai’s Civil Aviation Authority sukuk, the world’s first international quasi-sovereign sukuk); big Dubai businesses like Emirates Airline and the hospitality group Jumeirah raise funds through sukuk. If Dubai is successful in bidding for the Expo 2020, there could be a strong increase in sukuk issuance.
However, the financial crisis caused a number of defaults in 2009 and a subsequent slowdown of the UAE’s sukuk market. Many UAE banks decided to go to foreign markets like Malaysia to issue sukuk. Recovery started in 2011: First Gulf Bank’s sukuk issuance was six times oversubscribed. The market has since continued its upward trajectory and in 2012, the UAE became the second biggest GCC market for sukuk with USD 5.3 billion raised in between January and July 2012.
A Sharia-based insurance industry (“Takaful”) forms an integral part of the UAE’s IF services sector. Due to the increasing awareness of Sharia-based finance and a low insurance penetration rate of approximately 2%, the UAE’s Takaful market has enormous potential.
Islamic Finance moves to the top of the agenda
In early 2013, Sheikh Mohammed bin Rashid Al Maktoum’s (MbR), Prime Minister of the UAE and Ruler of Dubai, announced the ambitious goal to make Dubai the leading global Islamic Economy, designed to spur investments into Dubai and promote further economic diversification. In July 2013, the Dubai Centre for Excellence in Islamic Banking and Finance opened to meet the shortfall of Islamic Finance experts. A centre for issuing, listing, and trading sukuk is to be established to make Dubai the main marketplace and to encourage companies and countries to issue Sukuk instead of conventional bonds. Consideration is currently being given by the federal government to the introduction of a new higher Sharia Council which would oversee the work of the Sharia boards of the eight Islamic banks now operating in the UAE.
Opportunities for the UK
Experts consider the lack of unified standards and regulation to be a major obstacle to the sustained growth of the IF industry. Given the City of London’s position as one of the global centres of Islamic Finance and its maturing integration with our legal system, the UK can serve as an experienced partner to the UAE in the harmonisation of standards and the development of an effective regulatory environment for Islamic Finance. In fact, many professionals who structure and issue Islamic products are British or work for British institutions.
Key UAE interlocutors are concerned with the lack of education and awareness around Islamic Finance. As a global leader in Islamic Finance education, training and research, the UK can offer valuable support in bridging this gap in the UAE through the establishment of a comprehensive IF education infrastructure.
Baroness Warsi’s visit in September to the UAE, her engagement with the Emirati delegation at the WIEF, and her attendance at the GIES at the end of November have confirmed to the Emiratis that, as with traditional finance, the UK should be their partner of choice. The announcement of a UK sovereign sukuk was most important, but the Emirati delegates were also impressed by sharia compliant student and small business loans. There has also been a very positive reception in the UAE media.
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