The Middle Eastern and few Southeast Asian economies are seeing developments in Islamic finance. Islamic banks have been considered as one of the greatest innovations in the global banking industry. There are over 350 Islamic banks and financial institutions operating globally in 60 economies. Furthermore, the majority of them can be found in Islamic economies. The assets of global Islamic finance are expected to be worth $4 trillion by the end of 2020. The Emirates has experienced notable growth in Islamic finance in the last two decades.
How are Islamic banks in the Emirates performing?
According to Emirates Islamic, Islamic banking products demand fell from 60 percent to 58 percent, while conventional banking products recorded a 64 percent slump from 65 percent in 2020 compared to 2019, marking a small reduction in the overall penetration of both conventional and Islamic banking. The slump in overall penetration is due to the global economic downturn because of the outbreak of the Covid-19 pandemic. The penetration of Islamic banking products has surged to 58 percent from 47 percent since 2015 and is expected to grow more in the long run. However, conventional banking products have seen a 64 percent slump from 70 percent over the years.
Wasim Saifi, Deputy CEO-Consumer Banking and Wealth Management at Emirates Islamic, told the media, “No industry has been untouched by Covid-19, as consumers have changed the way they live, preferring reduced face to face contact, more time spent in the home, and financially conservative behaviour in a climate of economic uncertainty. However, while the global economic downturn has impacted consumer’s banking habits, Islamic banking continues to be perceived as more supportive of the community and trustworthy as well as having better value to customers as compared to conventional banking.”
The survey indicated that 70 percent of the Muslim respondents contributed to the overall penetration of Islamic finance products in 2019, while 69 percent contributed in 2020. Furthermore, 28 percent of the non-Muslim population applied for credit cards in 2020 compared to 24 percent a year ago. That said, 32 percent of non-Muslims opened Islamic savings accounts in 2020, compared to 28 percent a year ago.
The perception for Islamic banks surpassed conventional banking perception with 38 percent in line with 2019, but has improved by 12 percentage points from 26 percent in 2015. It is reported that the driving force behind the surge in perception toward Islamic banks is low fees, better finance and profit rates including trustworthy services and catering to all communities.
The shift towards digital services has spurred 2020 and it will be a good test for Islamic banks including Emirates Islamic, which is expected to lead from the front to innovate and bolster its ecosystem in order to create a strong relationship with customers.
Fostering growth and development
The Emirates is fostering the growth of Islamic finance by rolling out fresh initiatives. Earlier, the country’s Ministry of Finance floated plans to establish a unified global legal and legislative framework for the segment.
The Dubai International Finance Centre (DIFC) has been pouring fresh capital to ramp up the growth of the Islamic finance industry. Furthermore, the Dubai Islamic Economy Development Centre (DIEDC) and various Islamic banks have been partners with the FinTech Hive accelerator. The green sukuk market is driven by DIEDC which established partnerships with the Dubai financial market, DIFC and climate bonds. The partnership bolsters the promotion of green sukuk issuance.
There has been a boom among the investors who are willing to carry out investment in the Islamic finance segment. The Dubai Islamic Bank and the Emirates Islamic have successfully generated sukuk and oversubscriptions, which have attracted many foreign investors. Mr Wasim Saifi said that banks are continuing to see a surge in uptake on Islamic finance products, particularly on the retail segment due to lockdown relaxations and the re-opening of economies.
Farad Al Mullah, Deputy Head of Consumer Banking and Wealth Management at Emirates Islamic, told the media, “As an Islamic financial institution, it is now up to us to champion this new way of life, by embracing digital solutions and creating customer-centric ecosystems.”
Emirates Islamic launches digital banking platform despite sluggish performance
The new digital platform, businessonline is a comprehensive digital global cash management ecosystem equipped with features such as trade, treasury, virtual accounting, collections and liquidity management functionality, which will assist businesses in the Emirates’ manage all their banking needs on a single secure, intuitive platform.
The new digital banking platform supports the Emirates’ vision to transform itself into a global hub for Islamic banking. It can be described as one of the leading next-gen banking innovations among the Islamic banks. The platform has been effective towards the urgent demand among regional businesses for anytime, anywhere visibility amid the Covid-19 pandemic and has bolstered digital transformation across all sectors.
Abu Dhabi Islamic Bank shows rebound amid the pandemic
The retail banking business of the Abu Dhabi Islamic Bank (ADIB) has seen a favourable rebound amid the pandemic. The digital transformation of the bank has been the driving force in its recovery from the crippling effects of the coronavirus crisis. The bank’s ADIB’s global head of retail banking, Philip King said that the bank’s digital operations success will not be at the expense of its physical branches. The bank will ensure that digitalisation will remain a choice for the customers and the branches will be more digitised and automated to produce a seamless customer experience.
The bank sold 50 percent of its cover cards were carried out remotely as customers signed up through an app on their phone. The company would have had 50 percent card sales less if the online services were not available. ADIB, with a total asset of $34 billion, remains the fourth largest Islamic bank in the world. The banks’ net profit surged AED1.12 billion and net revenue by AED3.93 billion for the first nine months of the year.
In the larger scheme of things in the UAE
The Emirates has swiftly responded to mitigate the pandemic impacts on Islamic banks. Furthermore, The Central Bank of the UAE (CBUAE) has been active towards safeguarding the Islamic banks against any kind of downturn. The CBUAEA floated a stimulus package worth $27.2 billion in the beginning of the pandemic in the Emirates in March. The stimulus included Zero-Cost Funding (ZCF) Support Facility worth DH 50 billion for the banks. The liquidity support paved the path for banks to utilise their capital conservation buffer effectively.
The CBUAE has taken another tremendous step towards the banks as it has paved the path for them to draw down their liquidity by $25.9 billion. The move will drop down the liquidity coverage ratio to 70 percent and also bring down the level of eligible liquid asset ratio to 7 percent. In addition, the CBUAE has made positive changes towards the requirement for funding real estate and SMEs other than the techniques focused on the expansion of the capital and liquidity. The central bank’s criteria for real estate allowed for higher loan-to-value by 5 percent for fresh buyers and the exposure cap for the banks were relaxed to 30 percent from 20 percent, however, they must possess more capital. Furthermore, the central bank has cut down the risk-weighting on SME financing to 15 percent from 25 percent in order to boost SME financing.
The financing including the implementation of measures to mitigate the impacts of the pandemic involved around $69.7 billion worth of capital, which is about 17 percent of the country’s GDP last year. The CBUAE has been trying their level best to bring stability in the country as well as the Islamic banks. The central banks have provided financial assistance through the TESS to some businesses and consumers. The CBUAE has also issued guidance on how the banks should treat their financing impairments, in addition to the capital and liquidity relief offered to banks in the region. The guidance was issued with assistance from Abu Dhabi Global Market (ADGM) and the Dubai Financial Services Authority (DFSA).
The response towards the pandemic crisis within the Emirates for them for the time being is sustainable. However, Islamic banks may find it complex to adhere to certain elements than normal banks due to a different mix of financing assets.
How are Islamic banks coping with the pandemic?
The central bank policies are currently focused on relieving those who are impacted by the pandemic and are defensive. The actions taken by the CBUAE is good enough, however it may not be sufficient for the banks. The banks have the opportunity to cater and support its customers to go through the current tough times provided with the support by the central bank. Islamic banks can be benefitted from the framework to support their customers as the economy rebounds following the pandemic downturn due to the ethical principles that drive the industry.
The top most Shariah council of the Emirates’ emphasised Islamic banks to support the critically affected economic segments and customers. The efforts towards rebuilding the damaged economic sectors is vital because the damage caused by the pandemic is unpredictable. The economic transformation for recovery from the pandemic needs fresh investment in addition to the financial support towards immediate response. The existing financial tool can be postponed for a shorter period of time but needs to be supplemented with fresh financing as well.
CBUAE extends Tess Scheme to bolster economic recovery
The central bank has planned in November to extend its Tess until June next year to support economic recovery from the pandemic until a strong stability in the region is witnessed. Abdelhamid M. Saeed Alahmadi, governor of the Central Bank of the UAE, told the media, “The Central Bank remains committed to supporting the financial system of the UAE by taking the required measures to accelerate economic recovery from Covid-19 repercussions. The extension of applicability period of the Tess will provide relief for retail, small and medium sized enterprises, and corporate banking customers. We believe that this initiative will shield the economy from the impact of the pandemic and place us in an ideal position to recover, once the pandemic is over.”
The Islamic finance segment was poised for notable performance in 2020, prior to the pandemic outbreak, however, the outlook changed due to the pandemic and slump in oil prices. Standard & Poor’s report has stated that the Islamic finance industry will still record low to mid-single-digit growth in 2020-2021 despite the current challenging conditions. The industry recorded a 11.4 percent growth last year due to a robust sukuk market’s performance. The report also indicates that the volume of issuance will surge to the $ 100 billion mark in 2020-end, which is higher than the previous year’s $162 billion.
The Emirates’ strategy and response towards the pandemic crisis have been effective with the objective to contain the spread of the virus and boost economic activities as far as possible. The government has developed a robust infrastructure empowering authority to test and track the infection level and boost the current situation. The government has set up a new set up of fresh testing and healthcare facilities to cater the domestic as well as foreign nationals. In addition, the government has also floated regulations supporting the banking sector and other sectors. The central bank has eased the burden of the Islamic banks including the conventional banks towards customers’ repayment worries that stress both capital and liquidity. Furthermore, the central bank has been effective in stabilising interbank rates, which is often considered as an indicator of financial strain.
Islamic banks could face challenges within the Islamic bank’s marketplace. The challenges could be competitive pressure due to accelerating trends in digitization, that they need to address concurrently. Islamic banks will better understand the risk and opportunity through the development of ESG practices in the banking segment. Islamic banks can unlock more resources by turning more resilient and will support businesses that can flourish in the post-pandemic world but are tottering in the current environment.
An ESG effort is expected to be more effective towards balancing the risk management then traditional methods for Shariah-compliant financial institutions. The fintech segment is expected to play a vital role in development of the Islamic finance industry against the backdrop of the pandemic outbreak which has jeopardised several economies.. The fintech segment will enhance the industry’s access to the financial services and transform Islamic social finance as well. The pandemic has disrupted global economies, especially the oil and banking industries.