Islamic Banking and Finance - Essay Example

Islamic Banking and Finance Table of Contents Industry overview 3 Products offered 4 National Bank of Abu Dhabi 4 Abu Dhabi Commercial Bank 4 Emirates NBD 5 Key Products offered 6 Financial Performance 7 Conclusion 8 Industry overview Since mid-2000, the United Arab Emirates has established itself as a major financial hub and banking centre in the Middle East. Dubai, in particular, possesses the most developed banking sector in the region. The company has been able to gain such a stature owing to a very robust communications and financial infrastructure, a large centre for re-exports and a stable political environment. The number of locally incorporated commercial banks, which has been operating in UAE since 2011, stands at 23. These banks are spread around 768 branches, which is way greater than the coverage area of 28 foreign banks that have 110 registered representative offices. After the financial crisis that froze the global economy, UAE has recovered strongly and has been able to stabilize its position as a banking hub in the Middle East. Over the last few years, banks in the UAE have increased their impaired loans ratio, distribution network and liquid assets ratio (AHK, 2013). The UAE Islamic financial services sector represents 30% of the overall Islamic banking industry based throughout the world. This has been possible largely because of rising requirement of customers within the UAE for Islamic financial services. Islamic banks in the UAE have played a crucial role in financing multiple infrastructure projects in the region, expansion of the human capital market by training talented individuals from the region and also, financed development of housing properties for the citizens of UAE. The growth witnessed in the Islamic banking industry has been driven by the growing requirement for Islamic products and services by an augmenting count of customers. The underlying reason for this growth is the emphasis that the industry lays on ethical principles, their commitment to transparency and implementation of the principle of mutual benefits in transactions and operations. There are certain similarities between Islamic banking system and conventional banking; however, huge differences lie in between financial mechanisms and transactions done in these banking systems (Global Islamic Finance Magazine, 2014). The following sections will explain the products and services offered by three of the leading banks based in the UAE (National Bank of Abu Dhabi, Abu Dhabi Commercial Bank and Emirates NBD). Following that, financial performance of each of the banks will be compared and lastly, comments would be made regarding the difference in between Islamic banking system that these banks follow and the conventional banking system. Products offered National Bank of Abu Dhabi The National Bank of Abu Dhabi’s Islamic Financial System is guided by Shari’a principle and rules. The bank offers a broad range of superior quality products and services that meets the requirements of their clients through various Islamic investment and financing modes such as Ijarah, Murabaha and Istisnaa (NBAD, 2014a). The bank offers savings and current items as well as investment deposits through its Islamic banking division. The accounts have been structured in such a way that they will enhance the daily banking experience of their clients and help them grow their money in a Shari’a compliant method (NBAD, 2014b). The current account facility provided by the bank offers a variety of services and benefits to the users in order to improve their banking experience that includes unrestricted number of transactions every single day (NBAD, 2014c). The savings account facility provided by the bank is a deposit account which is based on the principles of Mudaraba stated within the Shari’a law. This account offers the client with a flexible savings plan whereby the client has an easy access to the money. The client can also earn profits from their investment (NBAD, 2014d). The bank also offers their client with investment deposit which is also another deposit account which is based on the principles of Mudaraba stated within the Shari’a law. This provides the clients with a broad range of investment plans that enables them to invest on funds that fall within different schemes. The scheme ranges from 1 month to 12 months (NBAD, 2014e). The National Bank of Abu Dhabi also offers debit and credit cards which complies with the Shari’a rules and principles (NBAD, 2014f). The credit cards offered by the bank are inclusive of exceptional services and exciting benefits and offers such as exclusive loyalty program (ADNIF Stars) and Free for life (NBAD, 2014g). The debit card offered by the bank is a two in one card that offers swift card purchases as well as instant access to cash both in the UAE as well as in foreign countries (NBAD, 2014h). Abu Dhabi Commercial Bank The bank conducts all its operations as well as offer products and services which comply with the Shari’a principles. Alongside offering conventional banking products and services, the bank also offers its clients with Murabaha Auto Finance and Wakala Investment deposits which has been discussed in the following paragraphs. Accounts: Savings Account, Current Account, Term Investment Deposit, ADCB Islamic Aspire - Relationship Pricing, Special Savings Account, Millionaire Destiny Savings Account. Financing plans: Murabaha Auto Finance, Ijarah Home Finance, Salam Personal Finance, Salary Advance Facility, Banking on Education (ADCB, 2014a). Takaful and Savings products and services Funds and Investments: Third party Islamic investment and funds. Credit card offerings The term investment deposit is based on the principles of Mudaraba where the investment of the client is put into a common Mudaraba pool and henceforth the investments are made according to rules specified under Shari’a law in order to extract good returns. Wakala Investment deposits are a product where an agreement known as the Master Wakala is signed between the investor (Muwakil) and the bank (Wakil). The investors over here appoints the bank as an agent in order to make Shari’a compliant investments on their behalf at an agreed rate of profit that is to be paid at the time of maturity along with the principal (ADCB, 2014b). Emirates NBD Sharia compliant products The principles of Sharia in the Islamic banking system are highly relevant in the continuously shifting world. The private banking segment of the Emirates NBD has done revolutionary work in designing Sharia compliant investments in UAE. The private banking experts of Emirates NBD deliver guidance to clients in order to ensure that every investments made by the latter comply with the enduring principles of Sharia law. The Sharia compliant investment products offered by Emirates NBD private banking segment are: Money market funds Multi-asset class investments Alternative strategies funds Global equity funds Regional equity funds (Emirates NBD, 2013a) Apart from providing conventional banking products and services, like, Qatar National Bank and National Commercial Bank, Emirates NBD also offers MENA bonds and Sukuks. These are Islamic financial certificates that are very similar to bonds issued in Western countries (Emirates NBD, 2013b; 2013c). The Sukuks are Sharia compliant investment products, where the issuer sells the certificate to a group of investors. The investors then rent it to the issuer again at a pre-specified rental fee. A contractual promise is made by the issuer to buy the bonds back at a par value on a future date. Key Products offered National Bank of Abu Dhabi Abu Dhabi Commercial Bank Emirates NBD Current accounts, Savings Accounts, loans, Mudaraba based Term Investment Deposit, Shari’a compliant debit and credit cards. Savings Account, Current Account, Term Investment Deposit, ADCB Islamic Aspire - Relationship Pricing, Special Savings Account, Millionaire Destiny Savings Account, Murabaha Auto Finance, Ijarah Home Finance, Wakala Investment deposits, Credit Cards. Conventional banking products and services, Money market funds, Multi-asset class investments, Global equity funds, regional equity funds, alternative strategies funds, MENA bonds and Sukuks. Financial Performance Figure 1: Financial performance for the year 2012 (Source: NBAD, 2012; ADCB, 2012a, 2012b; Emirates NBD, 2012) *all figures are denominated in $000 It is quite evident from the graphs given in figure 1 that Emirates NBD is the largest among the three banks, as far as total asset value is concerned. Nonetheless, at the same time, the value of total liabilities of Qatar National Bank is higher than that of National Bank of Abu Dhabi and Abu Dhabi Commercial Bank. This suggests that the bank might be susceptible to a greater degree of market risk as well as interest rate risk due to the amount of debt obligations that they are holding. On the other hand, Abu Dhabi Commercial Bank has comparatively lesser liabilities, which make it less susceptible to interest rate and market risk. National Bank of Abu Dhabi has generated a higher net income and return on equity, compared to the other two banks. However, its return on asset is lesser than that of Abu Dhabi Commercial Bank. Emirates NBD have the lowest return on asset among the three banks which signifies that the bank has not been able to implement efficient investment strategies, given the fact that the amount of total assets at the bank’s disposal is greater than that of the other two banks. Having done an in-depth study of all the three banks, it can be said that National Bank of Abu Dhabi has outperformed the other two banks in terms of its net income and return on equity. On the other hand, Abu Dhabi commercial bank has implemented efficient investment strategies and has generated the highest return on assets compared to the other two banks. Emirates NBD has not been able to implement effective strategies and thus stands at the third position. Conclusion An in-depth study of the three major banks in the UAE highlighted major differences as well as similarities, which exist between the Islamic and conventional banking system. There are many similarities in the way certain basic banking products and services, such as, account openings, credit cards, foreign exchange, offshore banking, financing, asset management and wealth management services, are provided to the clients. However, the major difference is the fundamental principles upon which the banking systems are based on. As mentioned above, the disparities are also evident in their financial transactions and mechanisms. The products and services that are designed in the Islamic financial system comply with the Sharia principles, thereby enforcing the code of mutual benefit and transparency in every banking transaction. For example, in the Islamic banking system, the rate of Murabaha is predetermined (fixed) and client is well-informed about the same from the instance the contract is signed. According to Sharia principles, banks cannot raise the interest rate, even if client is not able to meet the monthly payments. In conventional banking system, money is considered as commodity; thus, it can be sold at a value greater than the actual face value and can also be rented. Nonetheless, it is just the opposite, in case of Islamic banking system. The basis for earning profit in conventional banking system is time value; whereas, that for Islamic banking system is profits made from trade and other service charges. In conventional banking system, interest is charged even though the organization incurs losses, but in Islamic banking system, the loss made by businessmen will also be shared by the bank (Hanif, 2011; Beck, Demirgüç-Kunt and Merrouche, 2010; Maldives Islamic Bank, 2011). The reasons behind rapid development, sustainability and stability of the Islamic financial industry can be attributed to the Sharia principles, which the banking system follows. Reference List ADCB, 2012a. Annual Report and Accounts 2012. [online] Available at: [Accessed 1 March 2014]. ADCB, 2012b. Annual Report and Accounts 2012. [online] Available at: [Accessed 1 March 2014]. ADCB, 2014a. ADCB Islamic banking. [online] Available at: [Accessed 1 March 2014]. ADCB, 2014b. Shari’ah Compliant Products. [online] Available at: [Accessed 1 March 2014]. AHK, 2013. Sectorial Overview: Banking & Finance. [pdf] AHK Available at: [Accessed 25 February 2014]. Beck, T., Demirgüç-Kunt, A. and Merrouche, O., 2010. Islamic vs. Conventional Banking Business Model, Efficiency and Stability. [pdf] World Bank Available at: http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-5446 [Accessed 26 February 2014]. Emirates NBD, 2012. Emirates NBD PJSC: Group consolidated financial statements for the year ended 31 December 2012. [pdf] Emirates NBD Available at: [Accessed 1 March 2014]. Emirates NBD, 2013a. Heritage Changes Preferences -  Sharia Compliant Investments. [online] Available at: [Accessed 26 February 2014]. Emirates NBD, 2013b. Fixed Income Products. [online] Available at: [Accessed 26 February 2014]. Emirates NBD, 2013c. MENA Bonds and Sukuk List. [pdf] Emirates NBD Available at: [Accessed 26 February 2014]. Global Islamic Finance Magazine, 2014. UAE Dominates the Islamic Banking Sector. [online] Available at: [Accessed 25 February 2014]. Hanif, M., 2011. Differences and Similarities in Islamic and Conventional Banking. International Journal of Business and Social Sciences, 2(2), pp. 166-175.   Maldives Islamic Bank, 2011. Difference between Conventional and Islamic banking. [online] Available at: [Accessed 26 February 2014]. NBAD, 2012. Annual Report 2012. 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