Islamic banks increase share in total assets - Emirates24|7

Islamic banks increase share in total assets

(SATISH KUMAR)   

 
 

UAE banks are becoming less dependent on income from interest as lending levels drop and income from service fees rises, a new report has revealed.

 

The ratio of interest margin to gross income fell to about 29 per cent at end of 2006 from about 59 per cent at the end of 2003, according to a study released yesterday by Dubai Chamber of Commerce and Industry (DCCI), based on the IMF’s recent report on the UAE’s financial system’s stability.

 

The banking system’s exposure to the mortgage market seems to be less significant, DCCI said, adding that real estate loans averaged five per cent of total loans during the period between 2003 and 2006.

 

The ratio of commercial banks’ loans to the private sector to total deposits averaged 69 per cent during the 2003-2006 period.

 

DCCI said the ratio of non-performing loans to total loans fell to about six per cent at the end of 2006 from about 14 per cent at end of 2003. The regulatory capital assets’ ratio stood at about 17 per cent at end of 2006.

 

Return on equity rose from about 14 per cent at end of 2003 to 18 per cent at end of 2006, keeping the UAE banking sector – the second largest in the GCC after Saudi Arabia – profitable.

 

 

Islamic banking

 

The report showed that Islamic banks in the UAE have increased their share of total bank assets from nine per cent at the end of 2003 to about 13 per cent at the end of 2006.

Deposits of Islamic banks also rose in that period, growing from 11 per cent at the end of 2003 to about 14 per cent by 2006-end.

 

“This is in addition to several Islamic financing companies and a number of commercial banks that have opened Islamic windows,” DCCI said in its report.

 

Shariah-compliant deposits in the UAE have reportedly increased at an average rate of 35 per cent per annum, compared to only 19 per cent for the overall sector, between 2001 and 2006.

 

The growth in total bank assets and deposits illustrates the development of the Islamic banking sector alongside the conventional banks, DCCI said.

 

The Islamic finance market in the UAE held assets of Dh120 billion at the end of 2006, accounting for nearly 15 per cent of all the country’s banking assets, according to reported statistics compiled by Ajman Bank. Reuters last year said UAE bank assets that comply with Islamic law are growing faster than conventional assets.

 

 

Foreign banks

 

The share of foreign banks in total banking assets fell from 24.1 per cent at the end of 2003 to 21.9 per cent at the end of 2006, despite the fact that there are 25 foreign banks in the UAE compared with 21 local banks.

 

According to DCCI, the share of foreign banks in total deposits also declined, this time from 26.1 per cent at end of 2003 to 24.5 per cent at the end of 2006.

 

A ban on new foreign entrants, as well as the UAE Government’s desire to avoid mergers, has kept the number of banks in the country stable for a number of years.

 

The structure of bank ownership also reflects the prevalent role of the public sector, the report said.

 

Banks owned by the public sector accounted for about 64 per cent of total bank assets, and about 60 per cent of total bank deposits, at the end of 2006. The UAE banking sector is not highly concentrated, with the five of the largest banks in the UAE accounting for about 44 per cent of the total assets of the banking system.

 

According to the IMF, the UAE banking system would be resilient to significant deterioration of asset quality, and would withstand deterioration of loan quality arising from external factors relatively well.

 

The report said exposures to interest rate and foreign exchange risks appear modest, but added: “Although the vulnerability to exchange rate risk appears well contained, significant assets held abroad and large net foreign exchange positions in US dollars still expose banks to the effects of an appreciation of the domestic currency.”

 

The country’s banking system also appears well positioned to cope with a severe decline in the real estate market, but few banks would see their capital seriously depleted, the IMF predicted.

 
 
 
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