UAE Islamic finance continues to outpace conventional banking: Fitch

The UAE’s Islamic finance sector has continued to outpace the country’s conventional banking sector's growth in 2015.

The six largest Fitch-rated Islamic banks’ share of total bank gross loans was around 21 per cent, up 3 per cent in the first half of 2015, and they had around 20 per cent of total assets at end-H1, 2015.

Fitch ratings said in a report that it expects demand for UAE Islamic banks’ lending to continue to grow, supported by wider acceptance and an expanding customer base.

The Islamic banks' impaired loans /gross loans ratio was 5.3 per cent at end-H1, 2015, down from 11.5 per cent at end-2012. Significant improvement continues and partly reflects increasing gross loans, but asset quality remains weaker than the conventional banks’ average of 4-6 per cent.

This is partly due to the larger proportion of retail loans at the Islamic banks (including personal residential mortgages), which made up more than 40 per cent of their loans at end-2014. This has resulted in vulnerability and potentially large losses compared with conventional banks when the cycle turns.

Positively for their ratings, Islamic banks have managed to reduce exposure to the real-estate sector, which was historically higher than for conventional banks.

UAE Islamic banks will benefit from the central bank's decision this year to include sharia-compliant securities in the range of instruments it accepts as collateral for accessing liquidity.

Islamic banks often hold these securities but in the past have had to hold liquidity either in cash or monthly offerings of central bank sukuk, with maturities of three to six months. This puts them at a disadvantage to conventional banks, which have a wide range of interest-earning liquidity management options.

Key UAE sukuk issues in 2015 were Dubai Islamic Bank's $750m and Noor Bank's $500m.

There is no Sharia Council in the UAE, the central bank has proposed a Higher Sharia Authority to provide unified supervision and issue guidelines to financial institutions in Islamic finance-related matters.

This means that Islamic banks have their own Sharia boards, which can give different Fatwa on product or bank activities. The effect of the new authority would likely vary by bank, depending on whether the new rules increase or limit a specific bank's product offering.

Fitch expects total UAE bank loan growth of 10-15 per cent in 2015, closer to 10 per cent as a sector average, slightly down on 2014 (around 13 per cent for Fitch-rated banks).

Growth is particularly high among Islamic banks. Fitch expects loan growth to moderate slightly further in 2016, but remain in high single digits. Net income improved sharply across most banks in 2013-H1, 2015, particularly due to reducing impairment charges. The ratings agency expects these to remain low in 2016, but without further improvement.

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