Demand-driven growth is expected to continue

It has been a strong year for Abu Dhabi’s Islamic financial services (IFS) sector, which is successfully overcoming the systemic challenges that had arisen during the 2008-09 global economic crisis. Robust financial results from the emirate’s two sharia-compliant banks, a continuation of innovative sukuk (sharia-compliant bonds), issuance and the growth of Islamic funds, has allowed Abu Dhabi to further cement its position in the global IFS industry.

Market Structure

Some 21.4% of the UAE’s banking system assets were held sharia-compliant in 2013, up from 17% in 2012 and crossing the $100bn mark for the first time, according to EY’s “World Islamic Competitiveness Report 2014-15”. Moreover, the UAE’s IFS sector represented 14.6% of the global total in the same year, pointing to the sector’s growing capital base in recent years.

As the UAE’s banks operate on a border-free basis within the country, the two sharia-compliant lenders that are based in the emirate – Abu Dhabi Islamic Bank (ADIB) and Al Hilal Bank – compete on equal terms with five other Islamic banks, three of which are located in Dubai (Dubai Islamic Bank, Emirates Islamic Bank and Noor Islamic Bank), while Sharjah Islamic Bank and Ajman Islamic Bank operate from their respective emirates. Beyond the major Islamic banks, sharia-compliant finance companies such as Osool Finance and Amlak Finance also represent a further layer of competition within the sector.

The result has been the development of an increasingly vibrant and competitive sector in which lenders’ branch networks, although usually concentrated in their home emirates, span the entire federation. As of September 2014 Dubai Islamic Bank operated a network of 91 branches across the emirates of Dubai, Abu Dhabi, Sharjah, Ras Al Khaimah (RAK), Ajman, Umm Al Quwain and Fujairah – 12 of which were in Abu Dhabi and were competing for retail presence with the branches of the two home financers. ADIB, meanwhile, has been able to reciprocate by establishing 19 of its 88 branches in the neighbouring emirate of Dubai. In addition to this, the more recent arrival to the market, Al Hilal Bank, has opened seven branches in Dubai and operates a total network of 24 branches across the UAE.

Some sharia-compliant assets in the UAE are held by conventional banks operating so-called Islamic windows. The National Bank of Abu Dhabi (NBAD), for example, operates an Islamic banking division as well as a sharia-compliant finance firm, Abu Dhabi National Islamic Finance (ADNIF). Abu Dhabi’s Islamic banks also face direct competition in the UAE Islamic banking arena from conventional multinationals that provide sharia-compliant financing, such as Standard Chartered, Barclays and Deutsche Bank. Overall there are 23 national banks licensed to operate in the UAE, with a combined network of 1011 branches, as well as 28 licensed foreign banks, eight of which maintain their UAE head office in Abu Dhabi.

Abu Dhabi Players

With total assets of Dh111bn ($30.2bn) as of the end of 2014, ADIB is the largest sharia-compliant bank headquartered in the emirate, as well as the second largest in the UAE as a whole. As of September 2014, its asset base represented around 4.7% of the UAE total, making it a lender of systemic importance. It is also one of the older players in the industry, having been incorporated in 1997 to serve as the first Islamic bank in the emirate. The bank is listed on the Abu Dhabi Securities Exchange (ADX), and as of October 2014 some 46,233 UAE nationals had invested in the institution. Today, the bank is linked to the ruling family through a 40% stake held by the private holding company Emirates International Investment Company (EIIC) and a number of smaller stakes maintained by royal family members and associates. EIIC remains actively involved with the bank’s management, while quasi-sovereign backing comes from stakes held by the UAE General Pension and Social Security Authority (1.19%) and Abu Dhabi Investment Council (7.61%). In 2010 ADIB introduced a new brand identity, which came on the back of a major management reshuffle in 2008. Behind the cosmetic changes lay a new expansion strategy, which includes the aim of becoming the market leader in the UAE by developing its primary customer service segments, such as private banking, personal banking, business banking and wholesale banking, as well as the supporting activities of transaction banking, treasury, cards, investment banking and wealth management.


ADIB also aims to create an integrated financial services group and capitalise on the synergies within its diversified offerings. A key point of this strategy is to pursue growth opportunities outside the bank’s traditional markets. The acquisition in 2012 of a 51% stake in Saudi Instalment House, a sharia-compliant consumer financing outfit, can be seen as indicative of this objective. ADIB’s purchase of Barclays’ UAE retail operations in April 2014 also furthers this pursuit. The sale will add around 110,000 customers to the ADIB books. “This transaction is a perfect fit for our strategy as we expand into the expatriate market segment without disrupting our loyal existing customer base,” Tirad Al Mahmoud, ADIB’s chief executive, said of the purchase.

Until as recently as 2008, when the arrival of Al Hilal Bank presented the institution with local competition for the first time, ADIB was the only sharia-compliant bank headquartered in Abu Dhabi. The market entrant, which has yet to float on the stock market and is wholly owned by the Abu Dhabi Investment Council (an investment arm of the Abu Dhabi government) had grown its assets to Dh41.2bn ($11.2bn) by June 30, 2014, and established itself in 10th place among UAE banks in terms of financing.

Like ADIB, it has sought to expand its business by providing a diverse array of sharia-compliant activities. In 2008 it established Al Hilal Takaful, while in 2009 operations commenced at Al Hilal Auto, a vehicle financing entity. The bank’s strategy also incorporates the expansion of its geographical footprint, although it has chosen a different market for its first foreign venture: in 2010 Al Hilal Islamic Bank Kazakhstan officially opened for business, making Al Hilal the first Islamic bank in the country.


Within the wider UAE context, Abu Dhabi’s Islamic banks have played a part in an expansion of sharia finance, which has remained strong even in the wake of the global economic crisis. Total Islamic banking assets in the UAE grew at a compound annual growth rate (CAGR) of 11% between 2009 and 2013, according to EY, while aggregated assets for the entire banking sector expanded by a CAGR of 7.43%. Abu Dhabi’s Islamic banks have made a significant contribution to this growth. Between 2010 and the end of 2014, ADIB’s total assets grew at a CAGR of 14.6%, while net customer financing and customer deposits rose by a CAGR of 13.5% and 15.4%, respectively. This strengthening of the bank’s position was reflected by a steady rise in profitability over the same period, which saw it post a CAGR of 14.9%. In 2014 customer financing grew by 18.2% for the year, while deposit growth stood at 12.3%. The bank attributes its recent success to its expansion into new customer segments, including long-term expatriates and emerging commercial entities. According to ADIB’s unaudited financial statement for the end of 2014, net profits grew by 20.7% to reach Dh1.75bn ($476.4m) and it held assets of Dh111bn ($30.2bn).

Although still a relatively new player in the market, Al Hilal has also shown sustained growth since its first annual report in 2010. At the close of the first half of 2014 its total assets had reached Dh41.19bn ($11.2bn), up from Dh38.7bn ($10.5bn) at the beginning of the year. Profit for the first six months of 2014 also rose year-on-year by 17.6% from Dh217.4m ($59.2m) to Dh255.6m ($69.6m), building on the 42% profit growth the bank posted for 2013. Like ADIB, Al Hilal has over recent years successfully grown its deposit base, and as a result has positioned itself well to increase its customer financing. From the close of 2012 to the close of 2013 its total customer deposits rose by 12.8% from Dh25bn ($6.8bn) to Dh28.2bn ($7.7bn), while total financings expanded by 18.3% from Dh22.9bn ($6.2bn) to Dh27.1bn ($7.4bn).

Sector Stability

One of the principal concerns of financial regulators worldwide since the onset of the global economic crisis in 2008 has been sector sustainability – and this applies just as much to sharia-compliant activity as to conventional operations. Crucially, the growth of Abu Dhabi’s two Islamic banks has not come at the expense of their financial stability. Both institutions have consistently maintained a capital adequacy ratio (CAR) comfortably in excess of the 12% mandated by the Central Bank of the UAE (CBU): as of September 2014 ADIB enjoyed a CAR of 14.3%, while the CAR of Al Hilal stood at 13.2% as of December 31, 2013. On the liquidity side, ADIB has maintained a robust liquidity ratio since 2008, generally tracking above 24% and standing at 20.5% as of the third quarter of 2014. Al Hilal Bank uses a ratio of net liquid assets to total liabilities for its key liquidity risk measure, and as of December 31, 2013 the bank’s advance to stable ratio was a comfortable 89.28%.

Like other banks in the region, one of the most salient risks faced by ADIB and Al Hilal since 2008 has been an increase in the level of non-performing assets, and since 2011 speculation as to whether or not the provisioning cycle was on the verge of moving to a more favourable stage has been rife. The issue of non-performing assets is directly linked to the wider economic recovery of the UAE, and in particular with the improving circumstances of the real estate sector. With real estate prices in Dubai and Abu Dhabi ticking upwards in 2013 and 2014, the asset quality of Abu Dhabi’s Islamic banks continues to improve. As of the third quarter of 2014 the nonperforming ratio (as a percentage of gross financing) of the ADIB loan book stood at 4.8%, down from 7.3% in the third quarter of 2013, while total provisions to gross customer financing decreased from 5.4% to 4.4% over the same period. The solid position of both banks has been recognised by international ratings agencies: in 2014, ADIB was rated “A+” and “A2” by Fitch and Moody’s, respectively, with a stable outlook from both; Al Hilal, meanwhile, was rated “A+” by Fitch and “A1” by Moody’s, also with a stable outlook – a rating level enjoyed by only two other Islamic banks worldwide.


While Abu Dhabi’s Islamic banks account for the bulk of the emirate’s IFS assets, takaful ( sharia-compliant insurance) has emerged as an important segment in the industry. Abu Dhabi’s takaful operators are playing their part in the growth of the UAE industry, which has seen the nation become the second-largest provider of takaful contributions in the GCC. According to EY’s “Global Takaful Insights 2014”, aggregate UAE takaful contributions accounted for 15% of the GCC total in 2014, and the nation was one of three key markets where takaful growth momentum had been maintained despite volatility in global financial markets. As part of their diversification efforts, both ADIB and Al Hilal have established their own sharia-compliant insurance businesses. ADIB provides takaful through the Abu Dhabi National Takaful Company, of which it owns 40%, while Al Hilal has operated its wholly owned Al Hilal Takaful since the bank’s inception in 2008. The cross-selling opportunities arising from these complementary activities are obvious, but in promoting their sharia-compliant insurance products both banks face competition from a wider UAE takaful segment which forms an increasingly significant component of the nation’s IFS sector. A number of these providers have established themselves in Abu Dhabi, the first to do so being the Abu Dhabi National Takaful Company, which entered the market in 2004 and listed on ADX two years later. The company’s operations cover the entire UAE, with offices in Abu Dhabi, Dubai, Al Ain and Sharjah, and with total assets of Dh543.4m ($147.9m) at the close of 2013, it is the largest of the locally based firms. In February 2009 it was followed into the market by Methaq Takaful Insurance Company, which, with total assets of Dh364m ($99.1m) at the close of 2013, is the emirate’s second-largest takaful institution. Since the opening of its Abu Dhabi headquarters the company has established further branches in Dubai, RAK and Al Ain. The most recent entry to the takaful market is Watania, established in 2011 with a paid-up capital of Dh150m ($40.8m). The new entrant listed on ADX in November 2011, with major shareholders including Abu Dhabi National Insurance Company, ADNIF, Abu Dhabi National Energy Company and Aldar Properties. Watania currently operates out of its head office in Abu Dhabi, and at the close of 2013 its total assets of Dh262.5m ($71.5m) made it the third-largest takaful operator based in the emirate.

All three of Abu Dhabi’s takaful providers offer products across the corporate segment, including property, construction and engineering, marine, motor and employee benefits; the small and medium-sized enterprise segment, such as contents, insurance, employer’s liability, public/third-party liability, business interruption and machinery; and individual segments like accident, health, travel, motor and home. As with their banking counterparts, they compete for business within a wider UAE market of standalone takaful providers, the key players of which are the Islamic Arabic Insurance Company, known as Salama, and Takaful Emarat. Competition is further intensified by 52 conventional insurance operators, although a 2010 regulatory change that prohibited conventional insurers from offering takaful products via Islamic windows has strengthened the hand of relatively small number of purely sharia-compliant insurers in the market.

Sectoral Development

The domestic appetite for sharia-compliant finance means that Abu Dhabi’s IFS sector continues to deepen. Within the UAE, for example, it has been playing an important part in establishing the country as a regional centre for sharia-compliant funds. By 2012, according to NBAD’s “MENA Asset Management Survey”, some 25% of UAE funds were being operated according to sharia-compliant principles, while by 2014 a total of 12 funds licensed in the country were categorised as Islamic by Lipper and Thomson Reuters’ “Global Islamic Asset Management Report 2014”, for a total assets under management (AUM) of $331m. For example, ADIB’s wealth management offerings at present are concentrated on the ADIB Select Savings Investment Plan, which offers conservative, balanced and aggressive investment packages based on sharia-compliant mutual funds, but the bank also channels customers to 17 third-party sharia-compliant funds operated by local and regional institutions. Al Hilal has launched a number of sharia-compliant funds of its own including the Al Hilal GCC Equity Fund, which in September 2014 had AUM of Dh75.54m ($20.6m); the Global Sukuk Fund ($54.32m); and the Global Balanced Fund ($32.99m). The bank has also established a number of strategic investment funds, which are aimed at longer-term investors interested in sectors such as infrastructure, energy and natural resources. Conventional banks have also moved into the sharia-compliant fund market. NBAD’s Islamic fund, Al Naeem, is the biggest in the country, investing predominantly in the UAE and posting AUM of Dh163.3m ($44.5m) at the time of its most recent financial statement at the close of 2013.

Investment Channels

Similarly, demand for more investment channels has driven the growth of the UAE sukuk market. After a drop in issuance levels during 2008 and 2009 as the global economic crisis reduced investor appetite across the region, Abu Dhabi led a recovery in 2010, of which the centrepiece was a $750m sukuk issued by ADIB – the largest corporate issuance to emerge from the emirate that year. In 2012 Abu Dhabi rose to prominence in the global sukuk market once again with the issuance of ADIB’s $1bn tier-one perpetual sukuk, which represented both the first sharia-compliant tier-one issue executed in the international markets and the first tier-one instrument issued by a Middle East bank in the capital markets.

The CBU’s decision in November 2013 to tighten lending caps on banks, while at the same time permitting exemptions in specific rated bonds and sukuks, was further expected to support a shift by government-related entities towards the debt and sukuk markets in the UAE over the medium term. In July 2014 Al Hilal Bank announced the issuance of $500m worth of tier-one sukuk certificates – once again in the form of a perpetual instrument. The adoption of this relatively novel model has therefore placed Abu Dhabi’s Islamic banks at the forefront of sukuk development globally (see analysis).

Questioons Of Regulation

As the IFS sector grows in scale and complexity, the question of regulation becomes ever more prominent. To date, the emirate’s sharia-compliant banks, takaful operators and asset managers have operated within the same regulatory framework as their conventional equivalents, by which their activities are governed federally by the CBU (which regulates the sector according to the provisions of Union Law No. 10 of 1980 and UAE Federal Law No. 18 of 1993) and the UAE Insurance Authority (which applies Federal Law No. 9). Little distinct legislation exists with regard to sharia-compliant operators, the most notable instance being Federal Law No. 6 of 1985, which pertains to Islamic banks and financial institutions.

However, the CBU is currently in the process of creating a more comprehensive regulatory framework for its sharia-compliant licensed entities. While the details of this initiative have yet to be fully released, OBG understands from discussions with the CBU that its goal is to develop common principles for Islamic institutions across the UAE, and that it is referencing its new framework against the regulatory regimes of regional neighbours, market leaders such as Malaysia and industry bodies such as the Accounting and Auditing Organisation for Islamic Financial Institutions.


The growth of the UAE’s non-hydrocarbons sector, low interest rates and the firming up of real estate prices have resulted in a positive outlook for the nation’s banking sector, and Abu Dhabi’s sharia-compliant institutions are well placed to capitalise on this anticipated expansion. The outlook for growth of takaful also remains strong.

According to EY, gross takaful contributions rose at a CAGR of 25% between 2008 and 2012. Thanks to a low insurance penetration rate, double-digit growth is expected to continue into the short to medium term. In its report “Islamic Finance Outlook 2015”, Standard & Poor’s identified the UAE as a future driver of sukuk issuance in the broader region, thanks to its relatively strong investment levels and GDP growth. In 2013, for example, issuance by Islamic banks in the UAE represented 57.7% of regional issuance. Further to this, the report observed that the IFS sector has found leverage “less problematic” than conventional institutions, given the asset-building principle and prohibition on speculation built into Islamic banks. With Abu Dhabi’s clearly defined development plan (see Economy chapter), the emirate is set to continue playing a key role in the UAE economy. As the emirate’s IFS sector continues on a path of steady growth, the primary challenge over the coming years will be to increase the efficiency of participating institutions.

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