Total Islamic banking assets, including takaful, in the UAE could reach $87 billion (Dh319bn) by 2010, increasing the country’s global market share to around 11.5 per cent. This would place the country among the world’s top global Islamic financial centres, said global investment bank Goldman Sachs.
Banks in the Gulf Co-operation Council (GCC), with increasing participation from the UAE, are gaining significant market share in the global context.
The GCC’s market share in Islamic finance will grow as continuing wealth accumulation and ambitious development plans provide both demand and supply.
Driven by global liquidity, market innovation and supportive regulation, the global Islamic finance market has evolved from a niche market worth perhaps $150bn in the mid-1990s to an estimated $500bn now. The range of instruments and the number of market participants have both blossomed.
The Goldman report estimated the global Islamic finance market could grow at 17 per cent per annum, reaching $1.3trn by 2012.
The report stated the UAE is competing hard to become a global centre for Islamic finance as the Gulf is likely to continue to gain market share from Malaysia, which is widely regarded as hub of Islamic finance in Asia.
“Currently just four cities – Kuala Lumpur, Dubai, Bahrain and London – are competing to become the global centre for Islamic finance. And it seems likely that London will emerge as the gateway for Islamic finance in Europe and Kuala Lumpur for Asia,” it said.
The report said the UAE banks are better placed to compete internationally in industry segments such as sukuk (Islamic bond) issuances, where the banks have made big achievements.
The report said fast Islamic finance growth in the UAE may come partially at the expense of conventional banking growth, as customers may choose to replace existing financing solutions with Islamic alternatives.
The report has forecast that robust structural growth should support demand in both segments.
Nonetheless, “cannibalisation” should become more evident in conventional banks as most are launching new Islamic finance platforms, which will likely appeal to existing customers as much as attracting new ones.
This initiative could just prevent them from losing clients, which may ultimately be attracted by the increasing offer of Shariah-compliant products in the market.
Conventional banks such as ENBD, FGB, Mashreq and United National Bank are better placed to benefit from this trend as they already have well-established and fast-growing franchises in this segment, the report said.
Overall, Goldman doesn’t expect conventional banks’ balance sheet structure to resemble that of Dubai Islamic Bank or Abu Dhabi Islamic Bank in the near future. The Goldman report believes the significant gap between the two should close substantially in five years, providing UAE banks with a meaningful source of growth.
International projection has also become an important source of growth for the UAE Islamic banks. For instance, Dubai Islamic Bank has experienced significant growth in Pakistan through its local subsidiary. Other strategies such as Abu Dhabi Commercial Bank’s partnering with a top-market Islamic finance player in Malaysia may help UAE banks gain expertise and open new opportunities in larger Islamic financial markets.
Goldman said the booming real estate sector and closeness to the government and corporates would be core drivers of growth for Dubai Islamic Bank. Goldman expects the real estate sector’s contribution to the DIB’s income will grow from currently ten per cent to 15 per cent in the next three years.
Goldman said high concentration in real estate activities, low capitalisation level and strong competitive pressures could result in declining margins. The report warned that based on UAE banking standards, DIB’s capitalisation ratio has reached low levels.
The Goldman report has forecast that Abu Dhabi Islamic Bank (ADIB) is likely to face three main challenges. Firstly strong competition coming not only from established Islamic finance players in the UAE, but also from new entrants among which are mainly conventional banks launching Shariah-compliant platforms or converting altogether; secondly lack of sizeable targets to grow inorganically, given that there are not many Islamic finance banks perceived to be willing sellers; and lastly the bank will face cost pressure as it expands operations, particularly abroad.
ADIB has presence in Egypt through an acquisition of a bank and it’s exploring targets in other parts of North Africa.
ADIB’s profitability is expected to reach its peers in three years as it will observe strict cost discipline and maintain the cost-to-income ratio flat.