Complex Made Simple

Growth of Islamic finance in numbers globally, in Saudi, and the UAE

Islamic finance (IF) is a way of doing financial transactions and banking while respecting Islamic law or sharia. IF is today is a $2.5 trillion industry located in more than 80 countries, and thriving in Saudi and the UAE

GCC Islamic banks now compete directly with Western banks to attract Muslim clients Shuaa recently launched a $200 million credit fund for GCC corporates and developers Saudi had total IF assets of $339 bn as of March 2020, leaving Malaysia a distant second with $145 bn

Islamic finance (IF) is a way of doing financial transactions and banking while respecting Islamic law or sharia. IF is today is a $2.5 trillion industry located in more than 80 countries. Islamic banks account for $1.75 trn or 70% of total assets. According to a 2019 State of Global Islamic Economy report, total sharia-compliant assets are expected to grow to $3.5 trn by 2024, just over 1% of global financial assets.

Miniscule, however, with an 11.4 % growth in 2019, it was expanding quicker than conventional finance. 

The total assets of Islamic institutions grew by 6.6% last year.

The Gulf Cooperation Council (GCC) Islamic banks now compete directly with Western banks to attract Muslim clients.

The most famous rule in Islamic finance is the ban on usury. In economic terms, this means lenders and borrowers are forbidden from charging or paying interest or riba. Sharia-compliant banks don’t issue interest-based loans.

How money is made in Islamic banks?

Instead of lending money to their clients at a profit, they buy the underlying product, be it a house, the car, the refrigerator, and then lease it or re-sell it on installment to the client for a fixed price typically higher than the initial market value. The banks make a profit on the transaction as a reward for the risk they took with the customer. Islamic banks use customers’ deposits to acquire assets such as property or businesses and profit when the loan is successfully repaid. 

All Islamic finance investments, acquisitions, and transactions must reflect Islamic values, so no dealing with anything illicit, like alcohol, pork breeding, arms manufacturing, or gambling. 

Sukuk (Islamic bonds) issuance hit an all-time high of $162 billion in 2019, up 25% from 2018 backed by strong appetite from Malaysia, Indonesia, GCC countries, and Turkey.

Due to COVID-19 and according to Standard & Poor’s (S&P) report on Islamic Finance, the volume of issuance should drop around $100 billion.

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Shuaa IF funds

Shuaa recently launched a $200 million credit fund for GCC corporates and developers, the fourth investment vehicle rolled out by the company in 2020, raising more than $140 mn in the past 3 months. 

The fund targeting special situations across Gulf countries has already attracted a total of $68 mn in commitments from investors, Shuaa said in a statement to the Dubai Financial Market (DFM).

The closed-ended fund with a 4-year tenor will target investments in senior, mezzanine, and uni-tranche Sharia-compliant financing for corporates and developers operating in the GCC in key sectors including healthcare, real estate, hospitality, construction, and shipping.

Opportunities in the current market environment include requirements for short-term recapitalizations, growth capital, bridge loans, and acquisition financing.

Shuaa manages $13 bn in assets and plans to expand its investment banking and asset management businesses to boost assets under management (AUM) to $20bn.

Moody’s assessment 

Investor appetite for Sharia-compliant investments held up in the GCC, rating agency Moody’s revealed.

Net inflows into some large Islamic funds in the GCC countries have remained positive despite weaker markets and lower oil prices, in contrast to the net outflows experienced by many western peers, Moody’s noted.

“Islamic fund managers in the GCC region benefit from bespoke mandates with a range of affluent clients, including high net worth individuals, family offices, sovereign wealth funds, and other government institutions,” said Vanessa Robert, a vice-president, and senior credit officer at Moody’s. “These investors generally have high-risk tolerance and long investment horizons.”

While in the MENA region, Islamic banking assets represent 14% of total banking assets, in the GCC this market share is over 25%.

Moody’s flagged that growth in Islamic AUM would slow to 2% this year and 4% next year.

Saudi Arabia leads IF

Moody’s said investor appetite of Islamic investments is rising rapidly in Saudi Arabia, both among corporate and retail investors. Malaysia and Saudi account for almost two-thirds of Islamic AUM between them.

Moody’s said Islamic financing in Saudi will reach around 80% of loans within 12-18 months, from 78% in 2019. It had total IF assets of $339 bn as of March 2020, leaving Malaysia a distant second with $145 bn.

Legal advisors, Abdulaziz Alajlan & Partners in association with Baker & McKenzie announced on November 17 they were advising the Saudi Ministry of Finance in relation to a 167.92 billion Saudi Riyal ($45.3 bn) Shariah-compliant financing to Saudi Electricity Company.

This significant transaction is considered the world’s largest-ever Islamic finance transaction.

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IF in the UAE

In January 2020 Islamic banks accounted for about 18% of total banking sector assets in the UAE, according to the country’s Central Bank.

In the local capital markets, sovereign and corporate Sukuk issuances comprise the bulk of the Islamic offerings, while in the insurance sector, takaful companies operate as either standalone entities or as part of larger, conventional banks.

Abu Dhabi’s local IF market features an onshore component and an offshore component, operating within the jurisdiction of the financial free one Abu Dhabi Global Market (ADGM).  

In 2019 around 60% of UAE residents used at least one Islamic banking product, according to the Islamic Banking Index from Emirates Islamic Bank.

Over the last year, DIFC recorded an increase in Islamic assets being managed in the Centre, along with a 15% growth in the value of Islamic contracts during the first quarter of 2020 when compared to the same period a year earlier, according to the latest S&P 2020/21 report. .

Abu Dhabi Islamic Bank (ADIB) is the largest IF institution in the country with total assets of about $34.3bn at the close of 2019. 

In May 2019 Al Hilal Bank was part of one of the region’s most significant restructurings: the merger between Abu Dhabi Commercial Bank (ADCB) and Union National Bank, which saw the two lenders acquire Al Hilal Bank to form a new banking heavyweight with $110.3bn in assets as of December 2019. The new group carries the ADCB identity, but Al Hilal Bank remains a separate Islamic provider within the group.