Shortage of Shariah-compliant realty financing in UAE

There is a shortage of Shariah-compliant real estate financing in the market as Amlak and Tamweel are not lending because of the liquidity crisis, say real estate experts. "Islamic funds for developers and end-user property purchasers have become scarce with the two Islamic institutions not providing funding," said Sohail Zubairi, CEO of Dar Al Sharia Legal & Financial Consultancy, a subsidiary of Dubai Islamic Bank. "This is forcing those in need of funding to approach Islamic banks for whom real estate financing has never been a core activity in the same way it was for Amlak and Tamweel." Markus Giebel, CEO of Deyaar Development, said: "The end-user market is hurting now and the demand from new buyers is limited. The liquidity issue is a global concern and not a Dubai phenomenon." "Developers today need to put all their efforts into safeguarding the interests of their customers even if it means changing their payment plans." Zubairi said the disappearance of liquidity from the country's financial system had affected Islamic financial institutions (IFIs) as well as conventional ones. "Islamic financing is based on the availability of liquidity and is invested as equity rather than as a loan with interest," he added. He called for government authorities to develop a capital adequacy ratio for Islamic banks in consultation with their managements and Shariah boards. This would enable Islamic banks to free up considerable amounts of liquidity in their systems, which would be helpful in the current situation. "The IFIs are governed in the same manner as the conventional banks, despite their business model being radically different," he added. "With an Islamic bank the depositors invest equity, which is in contrast to conventional banks where depositors lend the money to the banks." And he said Shariah-compliant developers were no different from conventional ones when it came to the impact of the slowdown on the real estate sector. "Liquidity is a challenge for Islamic financiers in the same manner as it is for conventional lenders since both types of financial institutions operate in the same market environment." Robert McKinnon, Managing Director of Al Mal Capital, said the main driver for developers was the demand in the real estate sector. "I don't see an advantage for Shariah-compliant developers or much of a difference in the market risk for either kind of developer," he added. Abdul Aziz Al Awar, CEO of Mada'in Properties, said: "A Shariah-compliant developer is no different from a conventional developer and the current economic conditions has affected everyone in the real estate sector. "Financing has been tight across the board. However a Shariah-compliant company may be in a better situation to obtain funding when Islamic banks start offering finance again." Giebel said: "With regards to financing, bigger developers with the backing of established groups and a healthy balance sheet always have access to different sources of financing. "Deyaar, as a leading Shariah-compliant developer, is backed by its founding company and majority shareholder, Dubai Islamic Bank. We have secured Shariah-compliant funding to execute all of our existing projects. It is our belief that in these times Shariah-compliant funding has an advantage as the principals guarantee fairness and stability." Zubari said: "In Dubai, Islamic banks have become very selective and seek higher down-payments, in some cases up to 50 per cent compared with the pre-crisis level of five per cent." And Al Awar said: "As the public begins to understand the benefits of Shariah financing there will be more demand for financial institutions and other organisations to introduce and promote Islamic funds. We believe once the public is made more aware of this form of financing demand will grow. This sector of the finance industry has a great future." Zubairi said the refinancing of off-plan and completed properties has been partly responsible for the current deterioration in the financing-to-value ratios offered by IFIs. "Refinancing has an element of greed in it, which has severely undermined the portfolios of IFIs. I hope the IFIs do not go near refinancing of properties once the situation gets back to normal," he said. The developers agreed that Shariah-compliant financial products offered benefits to the real estate sector. Giebel said: "Islamic products offer some real benefits to both customers and developers looking for security and Shariah-compliant investment practices. Customers generally select products based on their needs and whether the service and product features are beneficial to them." "The Middle East, and especially Dubai, has been emerging as a strong centre for Shariah-compliant products and services that have been very successful. There is definitely a lot of potential for the market to absorb more innovative products that are aligned to globally accepted Islamic principles." Zubairi said that according to Shariah principles,