The UAE's market outlook

  • share this article

Going into the second half of the year, Shibeer Ahmed, Head of Middle East Banking & Finance, Global Head of Islamic Finance and Partner at Winston & Strawn, provides an overview of the Shari’ah-compliant industry

editor's pickSunday 16, September 2018

The Islamic finance sector has recorded positive growth in recent years. The Global Islamic Finance Report 2018 highlighted that, the industry was worth over $2.4 trillion by the end of 2017, a six per cent growth compared to the previous year. While the rate of growth is slightly lower than in 2016 (seven per cent), there are strong indicators of the long-term potential growth of Shari’ah compliant financing as illustrated by the Saudi Arabia which raised $9 billion through its first international Sukuk issuance in 2017—the largest to date. Globally, it is projected that the issuance of Sukuk will be valued between $70 and $80 billion by the end of this year, compared to the three-year high of $97.9 billion in 2017. Islamic banking, however, continues to be the largest driver of growth of the Islamic finance sector and is forecasted to grow at an average rate of 9.5 per cent per year to $3.8 trillion by 2022, with Malaysia, Saudi Arabia and the UAE in particular catalysing this growth.

Market trends

While there have been cautionary reports of a likely slowdown in Islamic finance during 2018, with Standard & Poor’s highlighting the need for standardised Shari’ah interpretation and legal documentation, the momentum of growth of Islamic banking has been positive. This has been illustrated by the various noteworthy transactions in recent years, including: the AED 1.51 billion Tabreed (National Central Cooling Company) financing (July 2017); the $3 billion Airport Financing Company (Investment Corporation of Dubai, Dubai Department of Finance, Dubai Aviation City Corporation) conventional and Islamic financing (May 2017); the AED 750 million World of Wonders (Mapa, Gunal – MNG Group) multi-tranche USD/AED conventional and Islamic financing (December 2016); and the AED 310 million Islamic facility Paragon Malls (owned by Tamouh Investments) for the construction of the final phase of Paragon Bay Mall in Abu Dhabi. According to reports, while overall lending growth slowed down from 2013 to 2017, Islamic banks recorded growth of 6.9 per cent compared to 3.7 per cent within the conventional banking sector. Islamic banks in the GCC region continue to record stronger performance, with several drivers for growth such as preparations for Expo 2020 in Dubai and Saudi Vision 2030—both supported by increased government spending.

 Positive indicators of growth

The potential for growth offered by Islamic banking has also found resonance in non-traditional hubs with, for example, the UK enjoying a growing network of Islamic banks. Islamic finance has played a particularly important role in commercial real estate development in the UK, such as the Islamic bank financings for the development of The Shard, the Olympic Village and the London Gateway. This is likely to grow further following Brexit as the UK takes a greater interest in Islamic finance as part of its goal to broaden its economic ties with non-EU countries. Further, Africa is emerging as the next frontier market for Islamic finance, with the Islamic Financial Services Board valuing Sub Saharan Africa’s Islamic financial services industry at $30 billion in 2017.

Several African nations, such as South Africa, Nigeria and Togo, have issued Sukuk—totalling over $1.3 billion in 2016. Increasingly banks in Africa are offering Shari’ah-compliant products, which will further boost the Islamic finance industry. Although still in the early stages of development, there has also been increasing focus globally on fintech in Islamic finance, driven by growth in demand, regulatory support as well as greater awareness amongst Islamic finance market participants. In particular, as part of the growth of fintech across the GCC and generally across the MENA region, Dubai has delivered the fintech Hive accelerator, which brings together technology leaders and entrepreneurs to address the region’s fintech needs, and the Innovation Testing Licence, which allows fintech firms to test innovative products and services. Further, advances in technology are also bringing greater efficiencies.

Last year, Emirates Islamic Bank became the first Islamic bank to leverage blockchain technology for fraud prevention. By reducing the costs involved in transactions and processes, blockchain technology is helping automate contractual processes while reducing administrative complexities. While there are a myriad of reasons for a positive outlook, challenges remain for the sector to be able to compete with the conventional banking market. The introduction of value-added tax (VAT) is expected to affect the profitability of Islamic banks this year but compared to traditional banks, they have displayed strong assetquality indicators, which places Islamic banks in good stead. In particular, the capital-base and limited product flexibility continue to stymie the growth of the Islamic bank finance market. To ensure the sustained development of the sector, enhanced regulation and standardisation is expected to be implemented by governments, regulators and other stakeholders. There is a need for regulatory reform in many countries to broaden the market for Islamic bank finance through, among other things, the removal of double taxation and tax relief on asset-based transactions underpinning the Islamic financing structures.


The UAE took a crucial stride towards much needed standardisation in the Islamic finance space by the establishment of the Higher Shari’ah Authority (approved by the UAE Cabinet in May 2016). The Higher Shari’ah Authority is a national regulator overseen by the UAE Central Bank (CBUAE) which is entrusted with overseeing the Islamic financial sector, approve financial products and set rules and principles for banking transactions in accordance with Islamic jurisprudence on finance. The national regulator will not replace the Shari’ah boards of individual banks but will approve new products that have already received approval from individual Shari’ah boards. A particularly noteworthy, and potentially trend-setting, step was taken by the Higher Shari’ah Authority in a recent resolution requiring the Shari’ah boards of financial institutions in the UAE to apply the Shari’ah Standards issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) as of September 2018.

In a nutshell

The Islamic finance industry, including the Islamic bank finance sector is now a well-established source of liquidity and the future of the industry appears promising. Islamic finance continues to grow and compete with conventional modes of financing in its traditional hubs, as well as gaining ground in non-traditional markets. Consistent with the GCC region gaining traction in growth, led by its focus on economic diversification and infrastructure development, Islamic finance is expected to gain further ground in the coming years and Islamic bank finance will continue to be increasingly tapped into as a viable source alongside conventional bank finance.

TAGS : CBUAE, Sukuk, AAOIFI, Saudi Vision 2030, Shari'ah, GCC, VAT

print this article