A recent Dubai Chamber of Commerce and Industry study calls for exporting Dubai’s expertise in Islamic financial services to the untapped markets outside the GCC including Turkey, the Levant and South East Asia where the large Muslim population provides a good base for growth, especially in light of the sector’s expected strong growth in the coming years.
The study points out that Dubai banks are potentially well positioned to harness organic growth in these markets where Islamic products can appeal to the predominantly Muslim indigenous population. However, to compete with conventional international institutions, Dubai’s Islamic finance sector must scale and breach the critical mass required to make products feasible. For example, takaful contracts that imitate life-insurance rely on long-term Islamic bonds, which in turn rely on viable secondary markets and wide-scale adoption.
Nonetheless, Dubai and the UAE has developed world-class banking sector and it is expected that the demand for both Islamic retail and wholesale banking products will remain strong as awareness of ethical and Sharia-compliant investment grows along with the region’s young population and rising incomes, says the study.
In terms of the product spectrum, sukukwhich are debt issuing instruments are likely to continue to experience strong growth throughout 2013 on the back of pent up demand for yield. In the medium to longer-term, as markets mature the takaful and conventional banking segments are likely to stage a revival.
Streamlined regulations for the sector can lead to more confidence for borrowers and these will come into being over the long-term. Over time, the need for more cost-effective financing will put pressure on Islamic banks to perform better, it says.
The study predicts, according to industry sources, Islamic finance globally to reach US$2 trillion by 2015, up from an estimated US$1 trillion in 2010 while pointing at Dubai’s viability as an Islamic finance hub due to the emirate’s strategic positioning as a regional financial hub, with an increasing number of infrastructure projects in the region which are now being financed through Sharia-compliant arrangements.
It further points out that together, Islamic assets account for over a fifth of all banking assets in the country. The sector caters toward a growing demand for Sharia-compliant and ethically conscious market in Dubai and the UAE which is expected to grow as both the population and income of residents continue to increase.
Islamic finance products typically comprise of broad offerings such as commercial banking, sukuk (bonds), takaful (insurance) and fund management.