Islamic financing growth outpaces conventional banking in the UAE: Fitch

Published December 7th, 2016 - 06:16 GMT
The UAE, specifically Dubai is aiming to become a global hub for the Islamic economy by 2020. (File photo)
The UAE, specifically Dubai is aiming to become a global hub for the Islamic economy by 2020. (File photo)

Islamic financing growth in the UAE has slowed in 2016, but remained above that of conventional banks on the back of enhanced recognition of Islamic finance and wider adoption of Shariah products, especially in retail, Fitch Ratings said.

The share of total bank gross financing held by the six largest Islamic banks and the Islamic windows of conventional banks was around 26 per cent at end of first half 2016 as against 25 per cent for the same 2015 period and lending was up four per cent year on year.

"We expect growth of Islamic bank financing to be in high single digits in 2016, still higher than that of conventional banks," the ratings agency said.

"Lower GDP (gross domestic product) growth, combined with less ample and more expensive funding, will continue to put pressure on Islamic banks' financing and revenue growth, as for the conventional banks. However, GDP growth will remain positive and most banks have been successful in re-pricing their financing books," Fitch said.

The Islamic banks' average impaired financing/gross financing ratio was six per cent at the end of first half 2016, down from 11.5 per cent at end-2012, Fitch said in a report.

"Impaired financing ratios have materially improved from post-crisis levels, assisted by rapid growth of Islamic financing. However, this remains worse than the conventional banks' 4.9 per cent at end of first half 2016. This is partly due to Islamic banks' large proportion of retail financing, including residential mortgages of more than 40 per cent at end-2015, which increases their vulnerability to a cyclical downturn relative to conventional banks, the rating agency said.

The UAE, specifically Dubai is aiming to become a global hub for the Islamic economy by 2020. According to a report by Thomson Reuters and Dubai authorities, the UAE already has the second most developed Islamic economy ecosystem following Malaysia.

The country ranked high on indicators such as halal travel, halal media and recreation, modest fashion and Islamic finance.

In July this year Dubai became the world's largest centre for Islamic bonds overtaking rival financial centres. Sukuk listing rose to $36.7 billion ahead of Malaysia ($26.6 billion) for the first time.

Fitch report noted that since the first half 2015, liquidity conditions have tightened in the UAE, mainly reflected in a higher cost of funding, but also some government deposit withdrawals from Abu Dhabi banks, which have partly receded in 2016. Deposit growth was fairly weak in first half 2016, which has slightly pushed up the sector's average financing-to-deposit ratio, although it remains well within an acceptable range.

The report said the UAE Central Bank set up a central Shariah board in early 2016 to provide unified supervision and guidance to financial institutions on Islamic finance. Islamic banks also have their own Shariah boards, which can give different fatwas on product or bank activities. The new authority is positive for the Islamic finance industry, as it will introduce more transparency and harmonisation. It is not yet clear whether the new rules will increase or limit a specific bank's product offering, said the report.

Given the dependence of core Islamic finance markets on oil, S&P expects the economic growth in some of these markets to remain muted.

The rating agency expects low oil prices to persist and believes oil prices will increase only moderately for at least the next two years, averaging $45 (Dh165) per barrel in 2017 and $50 in 2018 reinforcing slower growth for Islamic finance.

Despite the current slow growth S&P expects a growth of around 5 per cent in 2017 and the total assets of the industry to cross $3 trillion in the next decade.

By Isaac John 
 

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