The United Arab Emirates Banking Sector - Research Paper Example

? Islamic Banking Introduction The recent global financial recession of 2008 is widely considered as one of the most impactful financial depressions witnessed by the global economy which has drastically influenced the global market. During the financial depression of the world economy, the profitability of UAE banking sector was observed to continuously decline fundamentally because of the massive reductions in the funding programs. The banking sector also had to undergo significant pressure on investment and security portfolios, tumbling real estate market and non-availability of adequate funds to allocate loans as per the market requirements. Since the year 2005 to 2007, the banking sectors in the United Arab Emirates (UAE) have been observed to accumulate a significant growth which further declined substantially in 2008 (Mehta, 2012). In the present day context, the role played by the UAE banking sector can be observed as quite significant for the country’s elevating economic growth rate, both in the micro and macro environments. The banking sector of UAE offers a range of financial products and services targeting both the domestic group of customers and the international clients. Additionally, the recent banking scenario of the country has been witnessed to experience an increasing competition owing to enhanced product innovation requirements and availability of various substitute products/services (Arab News, 2012). Concerning the recent alterations of the industry scenario owing to the impact of the recent global financial turmoil, continuous influence of globalization and altering customer preferences, it can be assumed that the strategies considered by the banks in UAE have changed dramatically towards gaining better flexibility, competency and sustainability. With this concern, the discussion of this report will be focused on comparing two major banking corporations operating in UAE, i.e. Abu Dhabi Islamic Bank (ADIB) and Commercial Bank International (CBI). Hereby, the discussion will emphasize on five most common banking services, i.e. savings account, travel loans, car loans, education loans as well as home or construction loans to comprehensively explain the differences in both the banks’ strategies. Comparison between Abu Dhabi Islamic Bank (ADIB) and Commercial Bank International (CBI) Savings Account The banking corporations have been highly focused on delivering a range of financial products and services to an extended number of consumers in order to provide financial benefits. With this concern, the services rendered by today’s banking industry through savings account has been one of the common and most successful services to gain customer satisfaction by dealing with the client’s deposit amounts. The service is also identified to facilitate the customers in obtaining a security assurance of the deposited balance providing the partial benefits of a fixed account along with the benefits of a current account to withdraw any specific amount at frequent intervals through an easier transaction process (Ayub, 2008). GhinaSaving Account (ADIB) In the context of ADIB, the banking institution focuses on offering effective and beneficial services for the clients. Ghina’s savings account service offers secure and safe access to the account by the authorized person in terms of making any transactions. To open Ghina saving account, the customer must deposit minimum of AED 20,000 and directly the customer will receive a welcome entry coupon (electronic coupon). The electronic coupon will enter the client to two monthly draws of AED 10,000 prizes to 20 winners which held on the 2nd and 4th Thursday of every month. After collecting four coupons the customer will be able to enter the grand draw of AED 2 million and AED 500,000 every four months. The client can receive extra electronic coupon for every deposit of AED 20,000 and maintain it for a calendar month. If the account balance is less than 20,000 the customer will lose all his coupons. The profit on Ghina saving account is not fixed. However, for the last 6 months the profits were fallen between 0.5% - 1% depend on the performance of the bank every month. On September 2012 the profit in Ghina's saving account was1.6% which shows the bank performance is improving. The profit is calculated on a monthly basis, however it will be transferred to the customer's account on a quarterly basis (i.e. January, April, June and October) (Abu Dhabi Islamic Bank, 2012). Islamic principle It is worth mentioning that the savings account service of ADIB is based on the Islamic banking principles and guidelines which called Mudaraba where the customers provide the money for the bank as deposit and the bank invest it in this case the profit is not guaranteed. Example: Saving account balance: AED 100,000 Profit Rate in September 1.60% Transaction Calculation Results Chance to win: (for every 20,000 you get 1 coupon) (100,000/ 20,000) 5 times Profit on September 2012 100,000 * 1.60% AED1,600 The profit value of AED 1,600 will be accumulated along with the profit generated in July, August and September and will be released in my account in 1st of October. Mabrook Savings Account (CBI) In the similar context, Commercial Bank International (CBI) also operates on the basis of certain guidelines when offering various benefits to its customers holding saving account in the banks. Contextually, Mabrook's savings account provides financial benefits of acquiring a substantial rate of interest on the deposited balance of the clients. The interest rate of Mabrook's saving account is 0.5% and it's calculated on a monthly basis, which is further transferred to the customer accounts on a semi-annually basisie. January and July. The banking institution further offers its saving account facilities at a minimum of AED 500 for the customerswhich further assists it to gain AED 10,000 every week, AED 50,000 every month, AED 100,000 every quarter and 1.5 million in a year. If minimum of AED 500 is not maintained in the account, the customer will be charged fee of AED 25 monthly. Example: Saving account balance: AED 100,000 Profit Rate in September 0.50% Transaction Calculation Results Chance to win (only 1 chance to enter the withdraw ) - 1 time Profit on September 2012 100,000 * 1.60% AED 500 The profit value of AED 500 will be accumulated along with the profit generated from July to December and will be released in my account in 1st of January. Decision In the context of savings account, both the financial organizations provide substantial benefits for its customers. As per the above information related to providing beneficiary plans for the customers through savings account, it can be identified that ADIB and CBI have been significantly dissimilar with their offered profit rates on this particular service. For instance, the Ghina savings account service of ADIB provides higher rate of return for its customers in comparison to the savings accounts service offered by CBI. Moreover, the additional offering of electronic coupons for the clients during their deposit transactions in savings account has also been identified as a considerable advantage for the organization compares to the savings account services delivered by CBI. Therefore, according to the above discussion of savings account rendered by two major banking institutions, it can be identified that ADIB has been providing better savings account services for the people of UAE offering higher rate of profits to its customers. Moreover, the Islamic framework ‘Mudaraba’ can also be considered as one of the major advantages for ADIB owing to its integrity in complying with the enforced banking regulations that can further be beneficial in terms of acquiring wider range of its customers within the UAE (ADIB, 2012). Travel Loan Travel loan facilities are often regarded as one of the innovative services rendered by modern banking institutions to its prospective clients. The travel loan facilities of banking organizations have been recognized to provide an additional benefit for the customers to motivate them in taking part in the tourism activities. The travel loan services of banking organizations have been focused on providing financial support for the customers offering monetary assurance to avail the necessary amenities during their travel. With this concern, banking organizations can be observed to have developed certain regulations as well as terms and conditions for the customers to avail this facility. In the context of UAE, the banking industry has been identified to be highly focused on providing a range of financial plans to the customers with the sole motive to encourage tourism within the national as well as international environment. Stating precisely, this program intends to secure the financial interests of the customers when planning for long tours, either inbound or outbound and thus can be regarded as Al Qard ul Hasan (AME Info FZ LLC., 2012). While providing travelling loan facilities to the UAE banking customers, ADIB has been playing a crucial role offering effective finance options for the clients to plan holidays for any personal or religious purpose. The banking institution finances up to AED 250,000 for the eligible clients as a travel loan facility. The travel finance service of ADIB also offers an extending repayment option which allows the loan to be paid back within 48 months from the date of issue. The eligibility criteria mentioned by the bank in this regard specifies that the age of the traveler should be above 21 years, duration of the tour should be for 6 months or below, a quotation from the travel agencies is mandatorily required and the minimum salary of the client must be AED 5,000 (ADIB, 2012). However, CBI seeks to offer other financial services as substitutes to the travel loans facilitated by its competitors in the market. It can be mentioned in this regard that by offering substitutes to the travel loan facilities, the bank intends to gain better competency allowing greater flexibility to its clients in utilizing the financial support as per their requirements without any restriction on the basis of its purpose (CBI, 2012). Car Finance Financing or acquiring loan for car has been recognized as one of the increasingly preferred financial services among the modern day banking customers. Therefore, banking institutions have often been identified to provide financial support to their clients when purchasing a car (Dubai Media Incorporated, 2012). According to the present scenario of the modern financial institutions, organizations have been considering various financial strategies including, down payments, monthly installments as well as other payment options when offering car loan facilities. As car loan facilities have been offered in the UAE banking industry since a substantial period of time following the rise in the demand of automobile products, a rapid growth of competition can be witnessed among the various financial institutions recently. Different banking organizations stipulate various types of car finance facilitates according to the flexibility of the customers owing to the prices charged by the marketers and the loan repaying capabilities of the clients (Dubai Media Incorporated, 2012; Hashmi, 2007). ADIB emphasizes on an effective strategy when offering car loan facilities at a lower interest rates in comparison to its competitors along with other flexible amenities which further tend to enhance the market position of the bank. Furthermore, the bank intends to deliver car loan facilities in a time-efficient and consumer friendly process involving minimum regulatory obligations. Moreover, the financial institution also facilitates car loans by paying 80% of total cost of the vehicle and extending the repayment options upto 60 months for its borrowers. In addition, ADIB also offers ADIB VISA Cashback Card for each customer acquiring car loan facilities from the organization which further assists the borrowers to substantiate a percentage of the car loan availed encouraging their degree of satisfaction as well as loyalty (ADIB, 2012). On the other hand, the car loan facilities rendered by CBI also involves similar categories that are offered by ADIB. The banking institution hereby offers quick approvals, easy and flexible repayment options as well as competitive interest rates for the clients to encourage them in availing car loans. According to the car loan guidelines of the bank, CBI covers 80% of the total amount of the vehicle, where the client needs to pay only the remaining 20%. Home Loan According to the present day context, the increasing housing market of the country is also a beneficial factor in terms of accomplishing a major economic development. The present housing loan portfolio of the country consists of a feasible structure of repayment options with an interest rate of 6.5% per annum. Moreover, the housing finance also considers various additional benefits for the clients in terms of acquiring quick approvals from the financial institutions as per the UAE banking policies (Al Shamsi, Aly & El-Bassiouni, 2002). According to the fundamental guidelines of acquiring home loan in the UAE, the rule significantly involves certain common aspects for each individual. For instance, the home loan guidelines of UAE specifies that any individual including self-employed, entrepreneurs, salaried class as well as other professionals who are residing in the country since last 5 years are eligible to apply housing loan from any of the financial institutions (Hashmi, 2007). The home loan benefits that are provided by ADIB can be regarded as effective and profitable for any individual, as it emphasizes on offering flexible agreement tenure for the interests of the borrowers belonging to various socio-economic classes. The organization provides its home loan facilities through owner to owner transaction, financing construction process, purchasing developer as well as governmental programs. The banking organization finances up to 85% of the total property value and facilitates 5% per annum of interest rates for five years with additional 6 months of grace period for the clients. The home loan facility of ADIB also facilitates its clients by financing upto AED 20 million for the UAE citizens and AED 10 million for the expatriates of the country without any early settlement charges (ADIB, 2012). On the other hand, CBI also provides effective and profitable home loan facilities including mortgages and land registration processes for the country’s salaried staffs. The major aspects of home loan process that are provided by the institution illustrates that the organization finances up to 80% of the total property valuation with a initial interest rate of 3.95%, facilitating upto 20 years of repayment options for its clients. The organization also facilitates its clients to avail property valuation services without any cost following the repayment of the entire loan amount (CBI, 2012). Education Loan The education loan can be considered as one of the effective and supportive financial services for the students who are unable to bear the higher educational costs due to their unstable economic condition. The education loan can be differentiated according to its interest rates and benefits comparing to other modes of finance services. The borrower avails the facility of repayment loan amount after completing the course in a lower amount of monthly interest rate compared to other loan facilities (Nisr Publishing LLC., 2011). Owing to the increasing amount of educational programs, students in today’s context need to bear huge costs in order to achieve any professional or technical course within the country or abroad. With this concern, UAE banking institutions have been providing an effective and beneficial support to the UAE residents in terms of acquiring higher education benefits with a feasible and affordable structure of loan repayment (Business Media Group, 2012). Noor Education loan (ADIB) ADIB has been facilitating a range of educational loan services to students across the various areas within the UAE. According to the agreement, ADIB facilitates up to AED 250,000 as financial support to the borrowers with a minimum of 1% of processing fees in terms of availing education loan facilities. Moreover, it also provides the benefits of repayment options upto 48 months to the borrowers in order to pay back the installment amounts. The bank also provides ADIB VISA Cash-back Card to each borrower so as to encourage educational loan facilities. The profit rate they offer is 4.99% p.a. Furthermore, the organization practices a simple and effective eligibility standard for each borrower in relation to its educational loan program. With this concern, the minimum salary of the borrower should be AED 5,000 and minimum age of the student should be 21 years. Moreover, the borrower(s) should also mandatorily submit an offer letter from the educational institutions and a legal quotation from the institute or the university addressing to ADIB in terms of applying for education loans. Islamic principle The bank is using Ijarah agreement with ADIB leasing the usufruct of the education to the customer. Which mean when the period is finished you have to do another contract. Example Education expenses = 140,000 Profit rate = 4.99% Profit of the bank for 2 years= (140,000*4.99%)*2= AED 13,972 Amount the borrower should pay monthly = (140,000 + 13,972) / 24 months = AED 6,415.50 Education loan (CBI) Dissimilar to ADIB, CBI does not offer loan facilities particularly emphasizing on the educational needs of the customers or their family members’. However, the bank offers personal loan with an interest rate of 6.75% per annum to its customers which substantiates their requirement in terms of education as well. The personal loan program of CBI involves effective and beneficial plans for the customers in order to avail loan facilities for various purposes includes higher education, travelling, and business purposes among others. The personal loan facilities of CBI also provide the advantages of feasible and easy structure for the borrowers in utilizing the availed amount for different purposes with a lower yearly interest rate. The major aspects of CBI’s personal loan involve quick approval systems and easy monthly installment facilities for the borrowers. Example Loan Amount up-to = AED 250,000 Loan Approval time = 48 Hours (2 Working Days) Processing Fees = 1% of Loan Amount (Min AED 500 to Max. AED 2500) Additional Benefits = Free for Life Credit Cards and special rate of interest facilities for the credit card holders Decision With reference to the above discussion concerning the education loan facilities of ADIB and CBI, it can be stated that ADIB has been considerably focused towards providing educational loan facilities for the clients particularly for education purposes. However, CBI facilitates its personal loan service that can be beneficial for the customers to utilize the loan amount for various purposes including education, travelling or any business related programs. Moreover, 6.5% rate of interest of total loan amount on a yearly basis is also a competitive advantage for CBI in attracting a larger number of borrowers within UAE. Therefore, it can be affirmed that the personal loan facility of CBI is comparatively more beneficial for the customers in order to utilize the loan amount as per their need rather than being restricted to educational purposes only as in the case of ADIB. The competitive interest rates as well as easy and quick accessibility of personal loan facilities are a few other major financial tools for CBI that can be beneficial in achieving competitive advantages in terms of customer loyalty (CBI, 2012). Justification of the Discussion According to the above discussion based on the various financial products and services rendered by ADIB and CBI, it can be observed that both the financial institutions have been playing a major role towards the country’s striving economic growth. However, the products and services of these two banking institutions have been observed as moderately different with respect to their banking products and services. For instance, in the context of savings account, CBI tends to facilitate a comparatively lesser amount than ADIB to maintain a minimum account balance. However, ADIB facilitates its customers by offering the accumulated interest amount on a quarterly basis, whereas CBI offers the same facility after every six months on a half-yearly basis. Therefore, it can be stated that the strategy followed by ADIB can be more beneficial for the customers owing to the frequency of recovering the interest amount. Furthermore, as ADIB also offers free service for the savings account holders to the margin of AED 1000, customers are likely to prefer ADIB over CBI in selecting the savings account facilities. According to the observation, it can be recognized that, ADIB has been able to obtain considerable competitive advantages over CBI providing additional unconventional services including travel finance and education loan facilities which are not present in the service range of CBI, perhaps owing to its conventional banking policies. Moreover, the guidelines and the nature of business that are practiced by ADIB in the UAE financial market can be regarded to offer greater competitive advantages to the company in UAE focusing on both the customers’ requirements and the business objectives of the financial institution. As the organization strictly intends to follow the spirit and belief of the legal guidelines specified by Islamic ‘Sharia’, the organization had been focusing on continuous product/service innovations which in turn facilitated it to acquire a larger market share in the country. However, from a generalized perspective, it was observed that the major objectives of the Islamic banking institutions are to maintain the principles and guidelines of Quran and Sunnah within their various financial operations which can be considered as a distinct aspect of the banking industry in the international context (Miniaoui & Gohou, 2011). Conclusion With reference to the recent growth trends of UAE, it has been observed that the country has been achieving a rapid development in its various economic dimensions including, industrialization, communication, transportation and education among others. It is in this context that the financial institutions become increasingly important with a substantial change in their roles from operating as mere bankers of public savings and finances, to supporters of industrial progression facilitating loans and other similar amenities to the customers. According to the reflection of above discussion based on UAE’s two major banking institutions, it can be observed that the both the organizations are performing an important role of the country’s economic development taking active participations in the educational as well as industrial fields of the economy. Since the last two decades, a substantial development in the number of Islamic banks within the UAE has further given rise to the level of competition witnessed by the banking institutions within the country. Owing to this rising competition, the banks had been strategically redesigning their operational processes to differentiate their products in the market and thus gain competitive advantages. For instance, ADIB is recognized as one of the major Islamic banks that principally focus towards maintaining the spirit of ‘Shari’a’ legal guidelines. Therefore, it can be considered that both conventional and Islamic banking institutions are mutually contributing towards the financial development of UAE offering a wide range of financial products and services which have been found as highly valuable for the country’s continuous economic growth. References Abu Dhabi Islamic Bank. (2012). Savings Account. Retrieved from http://www.adib.ae/savings-account ADIB. (2012). Travel Finance. Retrieved from http://www.adib.ae/travel-finance ADIB. (2012). Car Finance. Retrieved from http://www.adib.ae/car-finance-0 ADIB. (2012). Home Loan. Retrieved from http://homefinance.adib.ae/OwnertoOwner.html ADIB. (2012). Education finance. Retrieved from http://adib.ae/education-finance Al Shamsi, F. S., Aly, H. Y. & El-Bassiouni, M. Y. (2002). Measuring and explaining the efficiencies of the United Arab Emirates banking system. Retrieved from http://www.econ.ohio-state.edu/Aly/docs/UAE%20Bank%20Efficiency%20APE-07-0409%20Aly-revised.pdf Arab News. 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