Since its conversion to a Shariah-compliant institution on January 1, 2007, Dubai Bank has not faltered in its ambition to become the region’s fastest growing Islamic bank. Ahmed El Shall, Dubai Bank’s Chief Financial Officer, gives an insight into the phenomenal growth of the banking sector.
What sort of growth are you predicting for the Islamic finance institutions in the Gulf region?
The Gulf Islamic finance industry has been growing at rates in excess of 40 per cent per annum for the past three years. I expect this will continue because of the high level of liquidity currently floating in the Gulf. My guess is that this will be channelled into the banking system.
In which industries do you predict the region’s Islamic finance industry will experience most growth?
All three main segments: corporate, retail and investment banking should see healthy growth because of the boom in housing and related sectors such as construction, real estate services and the sale of durable goods.
Other boom sectors will be tourism related sectors such as airlines and hotels, as well as infrastructure, particularly oil and gas capacity expansion, and the domestic capital markets.
Thani Investments was one of the region’s first privately owned companies to use sukuk. Do you predict that more family businesses will follow its lead?
We see sukuk picking up for private family businesses only if the banks’ capacity to lend becomes constrained due to regulatory ceilings or otherwise, or if the pricing of bank credit becomes clearly more expensive than going to the debt capital markets. We don’t foresee either of these situations happening in the near term.
In the past significant funds have gone to the United States or Europe. How big is the desire for individual investors to invest their assets locally?
Due to the stellar performance in recent times of Asian markets, including the Gulf markets, we expect more funds to stay close to home in the foreseeable future.
At one point Muslims forewent Shariah-compliant investments because of a lack of availability of products. Is this changing in the Gulf? Who finds Shariah products attractive?
t is no longer the case that Shariah-compliant products are not available. There are many compliant products that compete effectively with their conventional counterparts. Today both Muslims and non-Muslims bank with Islamic banks with the choice being made on the basis of the quality of service, convenient location and pricing.
If there is a different level of Shariah compliance for conventional and Islamic banks, does it matter? Do you think that Islamic financial products offered by a conventional bank are equally acceptable to Muslims as those offered by fully complaint Islamic financial institutions?
In theory there should be no difference in the level of Shariah compliance between conventional banks with Islamic windows and fully-fledged Islamic banks. However, in practice, it is quite difficult for conventional banks with Islamic windows to ensure compliance due to the potential for commingling Islamic and non-Islamic assets and liabilities.
But is “bigger better” in the sense that a commercial bank has a proven track record and higher degree of certainty than a newly established Islamic bank? Does it matter that Islamic banks are smaller and less diversified than conventional banks?
In the case of the competition between the Islamic banks on one side and the conventional banks on the other, bigger is not necessarily better for a number of reasons. First, Islamic banks are a new phenomenon and could not have started big from day one.
Secondly, Islamic banks are niche players and this justifies their smaller size. Interestingly, despite their newness and small size, Islamic banks have managed to raise their market share in the UAE market from less than one per cent in the late 1990s to more than 15 per cent today.
The Islamic private equity system is still at a very early stage of development. Many of today’s private equity transactions rely on leverage – a debt to equity ratio higher than 33 per cent. Would you like to see the Islamic financial system develop Shariah-compliant alternatives that can ape conventional instruments?
Newly launched Shariah-compliant private equity funds are arranging leverage through Shariah-compliant structures that will allow them to lever much higher than the constraining 33 per cent.
There are also ongoing discussions among banks about setting up Shariah-compliant mezzanine financing funds to aid the development of the Islamic private equity business.
As home markets mature and new players enter the space, is there an increasing need for regional and international expansion into new markets that can provide sustainable growth?
There is no doubt that the UAE banking sector is already overcrowded and that the need for expansion across the borders is already recognised by many senior bankers in the country. We have been hearing about cross-border M&A deals by local banks. Many local banks are planning regional acquisitions to expand outside the UAE.
In Europe, Islamic finance is growing at a rapid pace, but tax hurdles remain. What about regulatory conditions in the Gulf?
The regulatory schemes to which Islamic banks are subjected across the Gulf vary from country to country. For example, in the UAE, Islamic banks are treated in exactly the same manner as conventional banks with a couple of exceptions that allow for Islamic banking transactions to be processed in a Shariah-compliant manner.
But in Saudi, despite the presence of two of the world’s largest Islamic banks and many Islamic banking windows, there are no clear promulgations for Islamic banking. Bahrain has an elaborate regulatory scheme for Islamic banking, while Oman simply does not allow Islamic banking. The Qatari model is between those of Bahrain and the UAE.
Nonetheless, across the Gulf, Islamic banking customers are awarded the same protection given to conventional banking customers. However, when it comes to Shariah compliance, the models implemented by the Shariah boards of the various banks differ and could leave the consumer confused and perplexed.
We hope for a convergence of the Shariah principles applied by Gulf banks under the surveillance of a unified Shariah body.
Is it a problem that some Shariah rules create a particular challenge for financial institutions?
There have been some recent developments that cast doubt about the true nature of compliance of some of the sukuks currently on issue.
However, we are quite confident that this matter will be resolved to the satisfaction of all interested parties, as there is a taskforce that is currently working on recommendations to resolve this matter.
Profits of Dh211 million last year – 102 per cent higher than 2006 – reflect Dubai Bank’s ever strengthening retail, corporate and investment banking divisions.
Shareholders of Dubai Bank such as Dubai Holdings and Emaar will be pleased with the results as both have benefited from a tripling of the bank’s share capital from Dh500 million to Dh1.5 billion. The bank recently won Best Islamic Bank in the Middle East and Best Islamic Product Provider from World Finance, London.
Dubai Bank 'fastest growing' Islamic lender