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UAE: Slow and steady it goes

Friday, 16 December 2016

The year 2016 was a year of slow and steady progress for Islamic finance in the UAE. Although total banking assets under Islamic banks increased, the pace of growth reduced in an otherwise challenging operating environment. Growth in the Takaful sector also remained subdued. On a positive note, policy support for a standardized Shariah board at the Central Bank of the UAE, the launch of the Sukuk index and plans to launch a Shariah compliant trade bank all support Dubai’s aspiration of becoming the global capital for Islamic finance. On the flip side, there was a lack of momentum in Sukuk issuance.

Review of 2016
The drop in oil prices has seen a significant slowdown in the UAE’s economy and has reduced growth opportunity for Islamic banks, much in sync with their conventional counterparts. Also, the current trend in the real estate sector has stifled growth although investment related to Dubai Expo 2020 is creating opportunities. Based on data from the central bank, Islamic banking assets reached AED493 billion (US$134.19 billion) as at the third quarter of 2016 compared with AED446 billion (US$121.39 billion) in the previous year, reflecting a growth of 10.4% over the year versus 2% for conventional banking assets. The asset quality of Islamic banks has largely remained strong; however, given their higher exposure to real estate, there is a heightened concern for the future outlook on non-performing loans. That said, the creation of sufficient capital buffers in the previous years should alleviate any material decline in credit quality of the Islamic banks.

Working toward its ambition to become the global capital of the Islamic economy, the Dubai government announced plans to launch the world’s first Shariah compliant trade finance-focused bank in the UAE soon. The bank is to be called the Emirates Trade Bank and will support endeavors to double the UAE’s estimated US$1.4 trillion trade flows in 2014 by 2020.

The Islamic insurance industry had seen good growth over the last few years in the UAE as organizations such as the Dubai Health Authority introduced comprehensive medical insurance schemes and the population continued to grow. However, premium growth slowed in 2016 as a sharp drop in hydrocarbon prices hit economic growth across all sectors and reduced the pace of employment and immigrant population growth. Despite tariff increases, only half of the listed Takaful companies in the UAE reported profits in the year 2015. The losses in the remaining Takaful companies, mainly from the motor insurance segment, were in fact so large that the overall Takaful market in the UAE recorded a total loss of over US$40 million in 2015. Looking at the interim results so far, it appears that the year 2016 will also be a loss-making year for the Takaful sector.

In terms of debt capital markets, despite a budget deficit of over 3% of GDP in the UAE, Sukuk issuance did not materialize as anticipated. In fact, as a percentage of the total figure, Sukuk issuance fell in 2016 compared with 2015 as sovereign and government-related entities needing to raise money in a hurry chose the path of conventional bonds, particularly as they endeavored to tap the abundant cheap liquidity from Japanese and European investors. The Abu Dhabi government also did a US$5 billion deal in the conventional bond form. During the year, Sukuk investors received multiple offerings from the likes of Sharjah, Bahrain and Oman sovereigns as well as corporates. Banks were also active with Tier 1 issuances from Boubyan, Barwa and others.

A welcome development for investors in the secondary market for Sukuk was the launch of the NASDAQ Dubai Idea Rating Global Sukuk Index during the year. The index measures the performance of the global investable Sukuk universe with issuances in multiple currencies.

Preview of 2017
Looking ahead, Islamic finance is expected to have a stronger growth trajectory next year driven by improving oil prices, asset-financing needs of the upcoming infrastructure projects and potential funding needs arising from merger and acquisition activities in the banking sector.

Opportunities for growth in Islamic finance are also likely to gather momentum from the natural connection between the principles of Shariah finance and some of the 17 sustainable development goals of the United Nations that aim to reduce income inequalities, invest in clean water and sanitation, improve infrastructure and quality education.

While Sukuk issuance in 2017 is likely to be higher than in 2016, much will depend on monetary and fiscal policy developments and volatility in the developed markets particularly in the US. Construction activity in the UAE is likely to be high as it makes progress on one of the GCC’s largest projects – the Al Maktoum International Airport, budgeted at over US$30 billion in total. The Dubai government has already mandated banks to arrange circa US$3 billion in financing over the coming quarters –in both the conventional as well as the Islamic finance format (aka Sukuk).

The UAE market will also likely benefit from the financing needs to fund another large project – the Al Gharbia Chemical industrial city in Abu Dhabi. In addition, the likes of Etihad Airways are also likely to tap the market soon.

The year 2016 marked another year of slow and steady growth for the Islamic finance industry in the UAE, although low oil prices created some headwinds. Looking ahead, government efforts to position Dubai as the global capital for Islamic finance is likely to bear fruit and the industry can look forward to another solid year ahead.

Anita Yadav is the senior director of global markets and treasury at Emirates NBD Bank. She can be contacted at