The Key Features of Islamic Banking Business in Dubai - Research Paper Example

Introduction Islamic banking owes its origin to Islamic revivalism. Among the two distinct trends of revivalism, modernism emphasised on the religious aspects substantiated by the Shari’a and debated the premise that interest can amount to Riba only if it is perceived as unfair, while neo-revivalism staunchly upheld its notion that interest in any form tantamount to Riba and hence should be abolished. During 1970s neo-revivalists, augmented by “the oil-wealth of the conservative Gulf countries” (Saeed, 1996, P. 15), were successful in establishing their interpretation that interest is equivalent to Riba. Consequently, Islamic banks were established across the globe with the primary aim of abolishing interest from the banking as well as financial systems. The Dubai chapter of Islamic banking has vital significance to the Islamic financial system. Though neo-revivalism had given rise to semi-Islamic banks in Egypt and Malaysia back in the 1960s, Dubai came up with the first Islamic bank per se in the form of the Dubai Islamic Bank (DIB), whose operations started simultaneously with that of the Islamic Development Bank (IDB) in 1975 (Shoult, 2006, P. 213). This report will aim at outlining The Key Features Of Islamic Banking Business In Dubai. Through extensive literature review and research, this report will make an attempt to describe the Banking Market In Dubai and to subsequently identify the Islamic banking system as a significant component of the former. It will also endeavour to reflect on the future prospects of this Shari’a oriented banking system. The Banking Sector in Dubai The banking sector as observed in Dubai is a prominent subset of that of the UAE and reflects most of the trends shown by the latter. UAE’s banking sector has benefitted immensely from the stupendous economic development and the factors that have contributed to its prosperity are low rates of interest coupled with high price bands of its most precious natural resource – oil. An important feature of UAE’s banking sector is that the government holds huge stakes in it which signifies its enhanced control over the oil based macro economy of the Gulf nations (Global Investment House, 2007, P. 7). Dubai’s banking sector is a major stronghold of UAE’s financial sector. Moreover it is “the most developed and least monopolized in the region” (Anonymous-a, n.d., P. 2). These aspects pertaining to its banking sector makes Dubai a lucrative financial destination and also makes it a significantly strong economy. Keeping with the changing needs of the customers, Dubai banks are trying to incorporate technological advancements in their operations and are focussing on providing better services to them. Generally these banks have IT departments to look after software development as well as their application. Specialised activities such as Core Banking System (CBS) are carried out via professional assistance from reputed vendors. In spite of the retarding effects of the global recession, Dubai banks are spending quite heavily to augment their technological quotient and among the recent trends the most significant are the development of mobile banking and process automation. The banks are also aiming at expanding their networks by adding new branches (Singh, 2007, P. 24-25). On a whole, the scenario in this sector is quite promising both in terms of growth as well as incremental development. Number of Banks According to 2006 figures, UAE had 46 commercial banks which comprised 21 national banks and 25 foreign banks (Anonymous-a, n.d., P. 2-3). Most of these organisations were either headquartered in Dubai or had branch offices their. These banks had played a substantial role in the amazing and fast development of Dubai by providing financial support to the most vital economic sectors. Data from the Central Bank of the UAE reveal that UAE had a total of 52 banks as at March 31, 2009. Of these banks, 30 were headquartered in Dubai. This piece of information is quite significant in assessing the importance of Dubai as the obvious financial centre of the UAE. The 2009 data was analysed to understand the composition of the banking sector of Dubai and it was observed that out of the 24 local banks in UAE, 10 were headquartered in Dubai (Central Bank of the UAE-website-a, 2009). In case of the foreign banks, 20 out of 28 had their headquarters in Dubai (Central Bank of the UAE-website-b, 2009). Size of the Banking Sector It has been observed that among the Gulf Cooperation Council (GCC) countries, only Saudi Arabia and the UAE have been able to withstand the perils of the global recession. Research data from September 2009 showed that banks in Saudi Arabia had the biggest deposit base and contributed about 38% ($283 Billion) of that of the GCC. The UAE was found to contribute 30% ($221 Billion) and stood at the second position. That the banking sector of the UAE is quite sizeable and dominant was proven by the fact that Kuwait, though ranked third, trailed far behind the UAE and contributed 17% of the total deposit base of the GCC. Along with Qatar, Dubai has seen the highest growth (65% CAGR) in the loan portfolio of the banking sector. Consequently loans went up from $14 Billion to $102 Billion over a period of four years (2004-2008). Dubai can still extend $10 Billion as additional loan without violating the loan-to deposit ratio determined by the Central Bank of the UAE (Kapur, 2010). National Banks vs. Foreign Banks It had previously been observed that the number of foreign banks in Dubai is higher that than of the domestic (local/ national) banks. Looking at this difference it may be perceived that the foreign banks might be giving their local counterparts a hard run for money. However, compared to the foreign banks, the domestic banks have been observed to perform quite well and they also enjoy maximum market share both in terms of both assets and credit (Global Investment House, 2007, P. 9). Figure 1: National Banks vs. Foreign Banks (Source: Global Investment House, 2007) The Islamic Banks in Dubai Dubai has a total of eight Islamic banks, viz. Abu Dhabi Islamic Bank, Al Hilal Islamic Bank, Ajman Islamic Bank, Dubai Bank, Dubai Islamic Bank, Emirates Islamic Bank, Noor Islamic Bank and Sharjah Islamic Bank. Among these, Dubai Bank, Dubai Islamic Bank, Emirates Islamic Bank and Noor Islamic Bank are headquartered in Dubai itself (Dubai FAQ, 2010). In the way of complying with the tenets of Shari’a, these banks abide by Islamic principles and incorporate the same in their operations “and consequently those activities forbidden to Muslims, i.e. gambling, liquor, hoarding and usury based lending are strictly avoided” (Abu Dhabi Islamic Bank-website-a, 2009). The Islamic banks are nationalised, i.e. owned by the government and they enjoy the maximum market share as well as customer base. Types of Business The Islamic banks are engaged in different types of businesses related to banking activities. In general they are found to be involved in personal banking, corporate banking, private banking, investment banking and institutional banking (Abu Dhabi Islamic Bank-website-b, 2009). These banks are quite different in their business approach as compared to the traditional banks. They attempt to blend the ideals of the Shari’a with the principles of modern business. In order to gain competitive advantage they do not limit their business to Emiratis, but also attract foreigners as their customers. The business philosophy of the Islamic banks can be condensed as, “Our solution is simple – to offer modern, relevant banking products and services that meet these demands while comfortably fitting with the Islamic way of life. Our range of Shari’a compliant products and services are delivered with dynamism and excellence in service and quality, with a focus on customer needs, both retail and corporate, to build long-lasting relationships” (Dubai Bank, 2010). Competition & Relative Market Share Competition is quite high in the banking sector of the UAE. Dubai being the financial epicentre, feels the maximum heat in this respect. Banks realise that they have to constantly upgrade their competitive advantages in order to survive “in a market place with too many competitors, big promises and complex products for the customers” (National Bank of Abu Dhabi, n.d.). Firstly, the Islamic banks face a lot of rivalry from the foreign banks who try to implement their winning strategies for attracting the Emiratis. Secondly, the Islamic banks, though similar to each other by being Shari’a compliant, compete among themselves in terms of product features and services. Finally, the non-Islamic banks, termed as windows are also offering Islamic products (Booz & Co., 2008, P. 7). Figure 2: Relative Market Share of Islamic Banks in terms of Equity and Profitability (Source: Al-Hamiz, n.d.). Islamic banking is among the emergent economic sectors of the world and it comprises in an excess of 400 institutions whose total assets exceed $1 Trillion (Dubai Islamic Bank, 2010). The fact that certain traditional banks like the Middle East Bank had been converted to Islamic banks is a significant indicator of the rising demand for this genre of banking system and hence suggests the relative market share of these banks in the context of the Gulf countries and especially Dubai (Emirates Islamic Bank, 2009). It has been observed that an increase in the number of Islamic banks has resulted in an enhanced public awareness about their products as well as services. As competition is steadily increasing in Dubai, players like Dubai Bank have started taking initiatives of expansion with a primary focus on Africa and Asia. Acute competition has put the Islamic banks under pressure to innovate as well as improve their product portfolios (Booz & Co., 2008, P. 6). Performance of the Islamic Banks In the UAE and, not to mention, in Dubai, Islamic banks have been steadily surpassing the conventional banks in every aspect of banking, from profitability to earnings per share (EPS). These banks were successful in escaping the wrath of the global recession owing to their operational differences from the conventional banks. As these banks maintain separate criteria for loans and other banking tools, they could circumvent the threats posed by the sub-prime crisis. A new report has revealed that during the worst phase of recession Islamic banks had proliferated across the world and demand for their products and services had also increased. When the financial world was choking under recessionary blues, UAE gave birth to three new Islamic banks, viz. Al Hilal Islamic Bank, Ajman Islamic Bank and Noor Islamic Bank. According to Mohamed Albeltagi, “Islamic banks in the UAE were among the best in the world in terms of growth, performance and compliance with Shari’a regulations” (Mohamad, 2009). The Islamic banks had been successful in delivering a stellar performance as none of them went into bankruptcy. Thus, they have a set a new benchmark altogether and has set a fantastic example in front of their occidental counterparts. The Islamic banks owe their stupendous performance during the worst of the financial crises to their traditional principles, stable banking tools and an uncanny knack for details. An analysis by Dr. Obaid Saif H Al Zaabi indicates that the Islamic banks, particularly those in the UAE, are financially sound as well as healthy. The Dubai Islamic Bank, among others, was found to be potentially healthy (Zaabi, 2008). In a recent quality benchmarking survey it was found that the Islamic banks have outperformed the non-Islamic banks. The service channels that were taken into consideration for this survey was branch, website and call centre. It was observed that the Islamic banks have topped the list for all the three. Survey findings have also revealed that the Islamic banks have bettered their performance in areas wherein they used to lag behind their non-Islamic counterparts (Anonymous-b, 2010). Future Prospects of the Islamic Banking System Islamic banking proves to a feasible alternative to usual banking. The highly successful operations of this genre of banking has made it proliferate into the western markets and has also drawn attention from regulators as well as finance ministries. It is noteworthy that London has five fully operational Islamic banks and France had also embraced it into her financial machinery in 2009. The Islamic Bank of Britain has a customer base of more than 40000 (Wilson, Prof., 2009). These pieces of information definitely point at the immense potential that Islamic banking system has in terms of growth, expansion and profitability. The future prospects of these banks can be suggested to be favourable owing to the fact that none of them were hit by the global recession, and their exemplary buoyancy predicts their success in the times to come. The future prospects of Islamic banks are quite bright, more because of the global economic scenario that is currently prevailing. As can be easily observed there is a regular hike in oil prices. Owing to this, majority of the Islamic banks which are centred on the oil-rich Gulf nations are at the peak of their financial strength. Their recent performances, as has already been told, indicate a highly prosperous future provided they take certain precautionary measures in the areas of corporate governance and accounting methods. Moreover, they should take efficient measures to ensure that the fundamental principles of the Shari’a are uniformly interpreted (Maiya & Banerjee, 2009). Conclusion Throughout its course this report had aimed at analysing the Islamic banking system in context of the banking sector in Dubai. It was observed that Dubai stands out as the financial epicentre of the UAE and houses the headquarters of most of the national as well as foreign banks that are operational in the UAE. A vital component of the banking systems in the GCC countries, and hence in Dubai, are the Islamic banks. These are banking institutions which differ from the conventional banks by virtue of abolishing interest from their course of operations. These banks comply with the financial principles advocated by the Shari’a and thus, operate strictly by following religious tenets. It has been observed through research that the Islamic banks have been facing substantial competition from conventional banks as well as Shari'a compliant banking and non-banking institutions. There has also been a steady rise in their numbers, both in Dubai as well as in the rest of the world. Economic superpowers such as the UK and France have also recognised the potentiality of the Islamic banking system and have integrated it in their financial systems. The most outstanding observation about these banks is that they could not only successfully withstand the effects of the recent global recession, but they had also grown immensely during the economic crisis. Most of the Islamic banks were found to have outperformed conventional banks in terms of service quality, market share and profitability. It is noteworthy that these banks are striving to augment their competitive advantages in every possible way in order to climb the ladder of industrial leadership and are enhancing their technological aspects in order to improve customer satisfaction. On a whole, the future of Islamic banking can be perceived to be bright and healthy owing to the current dynamics of global economy that are quite favourable for these banks. It can be safely presumed that these banks will go a long way. References 1. Abu Dhabi Islamic Bank. 2009. Home. [Online]. Available at: http://www.adib.ae/index.html [Accessed on February 25, 2010]. 2. Abu Dhabi Islamic Bank-website-b. 2009. Principles. About Islamic Banking. [Online]. Available at: http://www.adib.ae/english/about-adib/about-islamic-banking/ [Accessed on February 25, 2010]. 3. Al-Hamiz, S. No Date. Supervisory approach for conventional and Islamic banks. UAE. [Pdf]. 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