Abu Dhabi’s sharia-compliant finance sector, traditionally led by its Islamic banking industry, has expanded to include an increasing array of activities in areas such as insurance offerings and asset management. An environment of low oil prices has put pressure on margins in 2016 but, with nearly a quarter of assets in the UAE held by sharia-compliant institutions, the industry is firmly entrenched and well positioned to take advantage of growth opportunities as they arise.
Recent decades have witnessed a rapid expansion of Islamic banking activity worldwide, and the UAE has played a leading role in this development. According to the “World Islamic Banking Competitiveness Report 2016” by EY, the UAE is one of nine core markets that account for around 93% of global sharia-compliant banking assets. The UAE is a prominent market in this group, with its 15.4% claim on global assets being the third largest behind only Saudi Arabia (33%) and Malaysia (15.5%).
Within the emirate’s banking sector, sharia-compliant institutions now account for around 23% of the sector’s total assets, according to the Central Bank of the UAE (CBUAE). The figure has grown consistently year-on-year as the relatively new segment expands beyond its status as a niche domestic industry to one with a global outlook.
Domestic growth has taken place in a competitive environment: the federal nature of the UAE means that Abu Dhabi’s Islamic banks compete on a border-free basis within the country. The two sharia-compliant lenders based in the capital currently compete for business on equal terms with six other Islamic banks, three of which are located in Dubai (Dubai Islamic Bank, Emirates Islamic Bank and Noor Islamic Bank), while Sharjah Islamic Bank, Ajman Islamic Bank and National Bank of Fujairah – the most recent market entrant – also offer sharia-compliant financing from their respective emirates.
The UAE’s Islamic banks have been quick to expand outside of their home territories. Dubai Islamic Bank’s network of more than 90 branches across the UAE includes 10 in Abu Dhabi as of January 2017. Abu Dhabi Islamic Bank (ADIB), meanwhile, has a presence across the entire country, having established 29 branches in Dubai and branches in Sharjah, Ras Al Khaimah, Ajman, Umm Al Quwain and Fujairah. Al Hilal Bank, which began operating in Abu Dhabi in 2008, has opened seven branches in Dubai and operates a network of 24 locations.
Another area of competition stems from sharia windows operated by the majority of conventional banks licensed in the UAE. In the third quarter of 2016 the number of locally incorporated banks stood at 23. These banks operate alongside six GCC lenders and a further 22 foreign institutions.
Foreign multinationals such as Deutsche Bank and Standard Chartered have successfully entered the domestic sharia-compliant arena, and their Islamic windows compete with those of local giants such as First Abu Dhabi Bank, which operates an Islamic banking division as well as a sharia-compliant finance firm, Abu Dhabi National Islamic Finance. The bank was formed in April 2017 as a result of a merger between the National Bank of Abu Dhabi (NBAD) and First Gulf Bank.
More Islamic financing options come in the form of sharia-compliant finance companies such as Amlak Finance and Osool Finance. The pursuit of market share by local and foreign Islamic banks, Islamic windows and Islamic finance companies makes for one of the most dynamic and competitive markets in the region.
Abu Dhabi’s Islamic institutions play an important role in this vibrant market, with two of the UAE’s wholly Islamic banks headquartered in the capital. The larger of the two, with total assets of approximately Dh122.3bn ($33.3bn) at the end of 2016, is ADIB: one of Abu Dhabi’s largest banks and the second-largest sharia-compliant institution in the wider UAE. Established in 1997 as the first Islamic bank in the emirate of Abu Dhabi, ADIB listed on the Abu Dhabi Securities Exchange (ADX) in 2000 and today is 41% owned by the Emirates International Investment Company. Despite this controlling interest, the bank’s investor base is considerably wider, with more than 46,000 UAE nationals who have bought shares in the institution and together account for a 39.25% stake.
In 2008 the bank acquired a new management team that has subsequently followed a three-tiered expansion strategy: to establish ADIB as the market leader in the UAE by developing its primary customer service sectors of private banking, personal banking, business banking and wholesale banking, as well as growing the supporting activities of transaction banking, treasury, credit cards, investment banking and wealth management; to create an integrated financial services group and capitalise on the synergies to be found within the bank’s diversified offerings; and to pursue growth opportunities outside its home market. The final objective has seen the institution acquire a large wholesale and retail operation in Egypt, as well as establish a corporate foothold in Iraq, the UK, Saudi Arabia, Sudan and Qatar.
Recent years have seen the bank spearheading innovation in the segment, as evidenced by its issuance of the world’s first sharia-compliant hybrid perpetual Tier-1 sukuk (Islamic bond) in 2012. ADIB also consolidated its position in the domestic market through its 2014 acquisition of the UAE retail banking operation of Barclays Bank. This combination of organic growth and acquisitions has established the bank as a systemically important player, both in the emirate’s and the country’s banking sector, accounting for 5.1% of the total UAE aggregate assets at May 2016.
After more than a decade as the sole sharia-compliant bank in Abu Dhabi, ADIB was joined in the local market by Al Hilal Bank in 2008. The new entrant was established with authorised capital of Dh4bn ($1.1bn) by the Abu Dhabi Investment Council (ADIC), an investment arm of the Abu Dhabi government. As the bank has yet to list on the ADX, the ADIC continues to hold the controlling share.
The bank became profitable after its second year of operation and held $5bn in assets by 2010. Al Hilal’s assets grew to approximately $10bn by 2013 and during that year it raised its capital base further with a debut sukuk offering – a dollar-denominated sale which brought in $500m.
In addition to traditional banking services, Al Hilal has broadened the scope of its activities into the Islamic insurance arena – founding Al Hilal Takaful in 2008 – as well as ventured into the competitive vehicle financing market with Al Hilal Auto, which opened for business in 2009. However, the board of directors subsequently decided to discontinue operations of Al Hilal Auto on March 30, 2016.
Furthermore, the bank’s strategy calls for the expansion of its geographical presence. In 2010 Al Hilal Islamic Bank Kazakhstan officially opened for business, establishing Al Hilal as the first Islamic bank in the hydrocarbons-rich and predominantly Muslim country. In 2015 the bank appointed a new CEO, Khaled AlKhoori, to oversee a restructuring of the bank’s leadership – a task he completed by the start of 2017 when it was announced that he would step down. AlKhoori was subsequently replaced by Alex Coelho as CEO in April 2017.
Abu Dhabi’s two Islamic banks helped to drive the growth of a national sharia-compliant banking sector that expanded at a compound annual growth rate (CAGR) of 13% between 2010 and 2014, according to EY. Moreover, both institutions succeeded in expanding their balance sheets in recent years despite regional political tensions that began in 2011 and the decline in oil prices that followed in the second half of 2014.
Between 2013 and the close of 2016, ADIB’s total assets grew at an average CAGR of 5.8%, while gross customer financing and customer deposits rose by a CAGR of 7.7% and 9.4%, respectively. The period was also a successful one for the bank, with net profit rising by an average CAGR of 10.4%. After an entire year of depressed oil prices, ADIB entered 2016 facing a challenging economic scenario.
However, by the end of the year ADIB had succeeded in registering 5% revenue growth, while net customer financing dropped by only 0.2% despite continued low oil prices. It also increased its net profit for the year by 1%.
After posting its first profit in 2010, newcomer Al Hilal also showed steady gains across key performance indicators, with total assets rising from approximately Dh25.8bn ($7bn) in 2010 to Dh41.1bn ($11.2bn) by mid-2016. Between 2010 and 2015 its deposit base expanded from Dh18bn ($4.9bn) to Dh32.2 ($8.8bn), which allowed it to increase its net financing from Dh15.3bn ($4.2bn) to Dh30.4bn ($8.3bn) over the same period.
Looking to recent aggregate performance of Abu Dhabi’s Islamic banking sector, deposit growth remained positive for the first half of 2016, rising by 4.55% y-o-y, while customer financing exhibited an expansion of 2.81% over the same period. However, aggregate profitability for the first half of the year declined by 11.7% as a result of a marked slowdown in net profits reported by Al Hilal.
Given the competitive nature of the market within the UAE, both of Abu Dhabi’s Islamic banks have implemented strategies aimed at securing their customer base. The UAE’s tech-savvy population means that digital platforms play an important role in this effort.
Al Hilal, for example, has invested heavily in its client-facing infrastructure in Masdar City, a planned establishment being constructed 17 km from the capital and which is already a centre for clean technology. Its second branch in the city utilises wall-mounted touch screens that allow for social media interaction in order to establish the facility as an attraction for younger customers.
ADIB has also given its branch network a digital overhaul. In March 2017 the bank launched ADIB Express, a concept that combines digital banking with personalised service. The first branch of this type was established in Dubai and features interactive screens, UAE ID scanners and media walls. Using this new technology customers can receive approval of personal finance; open new bank accounts in under 20 minutes through a paperless process; and obtain cheque books and debit cards that are printed on-site and ready for use as soon as the customer leaves the branch. In a statement to the press made at the time of the new service’s launch, Philip King, ADIB’s head of retail banking, outlined the rationale behind the bank’s strategic decision: “There is a definitive shift taking place in the way that consumers in the UAE are banking and we are investing heavily in digital infrastructure to reflect this. Many customers tell us that they value the human touch provided in our branches, but also desire the efficiency of digital transactions. ADIB Express represents the solution and provides customers with this optimal balance.”
As well as upgrading the digital capacity of their branch networks, both ADIB and Al Hilal continue to develop their online banking channels, moving beyond traditional functions such as account balance queries, account statements, credit card services and investment account inquiries to include utility bill payment capabilities.
While Abu Dhabi’s rapidly growing Islamic banks account for the majority of sharia-compliant assets in the emirate, a broader Islamic financial services (IFS) industry is developing around them to bring even more Islamic products and services to the market. The incorporation of the Islamic Arab Insurance Company – Salama – in 1979 established the UAE as the second country in the GCC to adopt the takaful (Islamic insurance) concept, and today Salama is the world’s largest takaful and re-takaful provider, with paid-up capital of Dh1.2bn ($326.7m) and operations in more than 60 countries.
The industry has grown rapidly since the 1980s and, according to EY, the UAE was the second-largest sharia-compliant insurance market in the GCC by 2014, accounting for 15% of the region’s total takaful contributions. The most recent annual report from the UAE Insurance Authority shows that the domestic market was home to 11 takaful operators and two re-takaful institutions in 2015.
A number of pure takaful providers have chosen Abu Dhabi as their operational homebase. The Abu Dhabi National Takaful Company was the first to enter the market in the capital, commencing operations in 2003 and listing on the stock exchange in 2005. The company’s operations cover the entire UAE with offices in Abu Dhabi, Dubai and Al Ain. With total assets of Dh855.6m ($232.9m) as of September 2016, it is the largest of the locally-based firms.
In 2009 the Abu Dhabi National Takaful Company was joined by the Methaq Takaful Insurance Company which, with total assets of Dh387.2m ($105.4m) in September 2016, is the emirate’s second-largest takaful operator. Since the opening of its Abu Dhabi headquarters, the company has established additional branches in Dubai, Ras Al Khaimah and Al Ain.
Abu Dhabi’s third-largest stand-alone takaful provider, Watania, began its underwriting operations in 2011 and listed on the Abu Dhabi Stock Exchange in the same year with paid-up capital of Dh150m ($40.8m). The founding of the company was a coordinated effort of several major initial shareholders: Abu Dhabi National Insurance Company, Abu Dhabi National Islamic Finance, Abu Dhabi National Energy Company and Aldar Properties. Since then, a 60% stake has been secured by MB Investment UAE and Madina Takaful Oman. Watania currently operates a head office and service centre in Abu Dhabi as well as a branch in Dubai, and total assets stood at Dh321m ($87.4m) in September 2016.
The cross-selling opportunities provided by pairing financial and insurance products have brought Abu Dhabi’s two Islamic banks to the takaful arena over recent years. Their approach, however, has differed considerably: ADIB has accessed the takaful space through a 40% stake in the Abu Dhabi National Takaful Company, while Al Hilal has operated its wholly-owned Al Hilal Takaful since the bank’s inception in 2008. In terms of business lines, UAE Insurance Authority data shows that general takaful is the largest segment in the market, accounting for Dh2.4bn ($653.4m) of the Dh3.4bn ($925.7m) total premiums collected in 2015, with the remainder claimed by family takaful products.
Competition for business in these segments is strong, and this combined with a slowdown in new project launches in 2016 means that remaining profitable has become a challenge. Of the Abu Dhabi-based standalone takaful providers, Abu Dhabi National Takaful Company and Watania, respectively, posted a net profit of Dh48.4m ($13.2m) and Dh385,000 ($105,000) for 2016. Methaq Takaful showed a yearly net loss of Dh1.3m ($362,000) after the first nine months of 2016.
The expansion of the global Islamic banking industry has also resulted in a strong worldwide market for sharia-compliant bonds, known as sukuk. According to Malaysia International Islamic Financial Centre, the value of global sukuk issuance was $74.8bn in 2016, up 13.2% over the previous year.
The UAE has been at the forefront of this growth, both in terms of innovation and issuance. The global market hit its peak in 2012, the same year that ADIB offered a $1bn Tier-1 perpetual sukuk, which was a market first for a Middle East Bank. When in July 2014 Al Hilal Bank issued $500m worth of Tier-1 sukuk certificates using the same innovative model, Abu Dhabi’s Islamic banks were confirmed as being at the forefront of global sukuk development.
The emirate’s conventional lenders have also played an active part in the sukuk arena. NBAD ranked among the top 10 of sukuk managers globally in 2016, according to Dealogic, overseeing nine issuances for a combined value of $1.4bn. ADIB, meanwhile, was ranked in the top 20 worldwide for its management of three issuances over the year, worth $393m. Corporates of the UAE are among the most prominent issuers of sukuk in the global market, and in 2016 Abu Dhabi’s flagship airline, Etihad Airways, was the fifth-largest issuer in the world, with a Euro market public issue of $1.5m.
Lastly, the return of the sovereign to the bond markets in 2016 after a seven year absence has raised the prospect of a sovereign sukuk issuance in the future. Looking to the wider UAE, the federal government is expected to finalise its long-anticipated public debt law in 2017 – a development that would permit it to issue its first sovereign bonds and sukuk to finance government development projects.
The UAE’s deepening IFS sector includes a thriving sharia-compliant asset management industry. According to Abu Dhabi-based brokerage house SICO UAE, asset managers in the MENA region managed approximately $75bn in mutual funds across a variety of assets as of May 2016.
The UAE, with nearly $1.2bn of assets under management (AuM), is the third-largest domicile for funds in the GCC. While data regarding sharia-compliant funds are scarce, in 2012 the Qatar Financial Centre determined that around 25% of UAE funds were operated according to sharia-compliant principles. The “Global Islamic Asset Management Report 2014” by Lipper and Thomson Reuters reported that by 2014 a total of 12 funds located in the UAE were categorised as Islamic, with AuM totalling $331m.
Of the local banks, NBAD is the most active in terms of sharia-compliant fund management: the bank’s Islamic MENA Growth Fund is the most prominent in the country, investing across diverse sectors in public equity markets around the region, and posting AuM of Dh35m ($9.5m) as of December 2016. Furthermore, the bank’s Sukuk Income Fund offers access to the popular sukuk market.
ADIB, meanwhile, provides a range of structured products for sophisticated investors, yet has opted to instead take an advisory role with regard to the mass market fund offerings. The bank provides its client base with access to 16 third-party sharia-compliant funds operated by local and regional institutions, as well as access to sukuk trading platforms for secondary market trading.
Al Hilal has launched a number of sharia-compliant funds of its own: the Al Hilal GCC Equity Fund, the Global Sukuk Fund and the Global Balanced Fund. The bank has also established a range of strategic investment funds that are aimed at longer-term investors interested in sectors such as infrastructure, energy and natural resources.
The question of how Abu Dhabi’s IFS sector is regulated has emerged as one of the central industry debates over the past year. Since the inception of the IFS industry, the emirate’s sharia-compliant banks, takaful operators and asset managers operate within the same regulatory framework as their conventional equivalents, by which their activities are governed federally by the CBUAE and the UAE Insurance Authority. To date, authorities have been content with deferring to the proprietary sharia boards of IFS institutions on matters of sharia-compliance – a decentralised approach that is practised across the Gulf.
However, in May 2016 the UAE Cabinet approved the establishment of a centralised sharia authority that will monitor and set the standards of the nation’s Islamic finance industry, as well as issue rulings on the sharia-compliance of products and services. The announcement has been welcomed by those who believe that regulatory harmonisation is essential for the sustainable development of the increasingly complex IFS sector (see analysis).
Like their conventional counterparts, Abu Dhabi’s sharia-compliant institutions faced a challenging set of circumstances in 2016, and are likely to be confronted with a similar scenario in 2017 in terms of external forces. The US Energy Information Administration forecasts a modest recovery in oil prices in 2017 to an average of $52 per barrel, compared to $43 in 2016. The World Bank anticipates a more positive trend, with an average of $55 per barrel. Further yet, Goldman Sachs expects an average of $55.60 per barrel for West Texas Intermediate and $57.40 for Brent sweet light crude oil.
The ability of the government of Abu Dhabi to maintain its capital spending programme despite projected oil prices that fall below its fiscal break-even points is one factor contributing to the continued expansion of the IFS sector. Therefore, Abu Dhabi’s ability to draw on its considerable foreign reserves to meet its spending commitments is significant. Other potential growth drivers include projects attached to Dubai Expo 2020 and the opening of Iran to increased trade and investment activity resulting from the easing of international sanctions, as well as potential improvements in the external environment, such as the possibility of a recovery in the global oil price in 2018.
One of the more interesting possibilities for the coming year is that of Gulf sovereigns – including Abu Dhabi – following through on their renewed appetite for conventional bond issuances with a programme of sovereign sukuk. Similarly, as regional financing needs increase against the backdrop of low oil prices, a larger number of GCC corporates may find the sukuk market a useful route to funding.
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