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Islamic banks make big headway in retail banking

DUBAI — The fast growing Islamic banking business in the country is making major headway into the retail banking sector in the UAE with substantial growth in their retail assets and a growing contribution to their profits.

The first half results of leading Islamic banks show that they have done much better than their conventional counterparts. Despite most local banks reporting lower profit figures for the first half of the year, most Islamic banks have managed to keep up or do better than last year.

In the first quarter of this year, Dubai Islamic Bank recorded a 127 per cent increase in its profit (including depositors' share of profit) to Dh695 million. For the first six months of the year, the net profit including depositors' share of profit touched Dh1,446 million.

Abu Dhabi Islamic Bank (ADIB) made a net profit Dh291.70 million for the first half of 2006, up by 06 per cent compared to Dh141.50 million in 2005 first half.

Despite the market melt-down, ADIB was unaffected because of its selective expansion in retail segment. Sharjah Islamic Bank's first half profits were marginally down in the first half 2006, reaching Dh91.3 million, compared to Dh98.4 for the same period last year.

A small decline in net profits notwithstanding, the bank has reported substantial increase in retail earnings and assets.

Capitalising on the strong growth trends, UAE-based Islamic banks are fast expanding their branch network and other delivery channels across the country. DIB plans to open 23 new branches in the UAE during the next 18 months.

DIB is on a major expansion drive and its branch network in the UAE will reach 53 by the end of 2007. Currently, DIB has 30 branches in the UAE that will reach 42 by the end of this year.

‘DIB is in an expansion mode. All our products and services are witnessing exponential growth. Our branch expansion programme will also comprise doubling the number of our ladies branches 'Johara' from the current four branches to eight by 2007,’ said Saad Abdul Razak, CEO, Dubai Islamic Bank.

DIB has reported big increase in the number of customers migrating to its electronic channels such as Internet, telephone and mobile banking services. The bank claims that more than 50 per cent of its customers use banking services through electronic channels.

To increase the share of electronic banking customers, DIB has recently signed a contract to buy 97 of the latest self-service terminals. To attract more retail business DIB has made significant enhancements their product and service portfolio. These include products such as Al Islami Personal Finance, Al Islami Credit Card and Al Islami Auto Finance, in addition to a growing range of investment funds.

Emirates Islamic Bank (EIB) currently has 13 branches across the country and plans to open half a dozen more branches in the near future. Not to be left behind, Sharjah Islamic Bank is planning to open six new branches across the UAE, including new locations in Al Ain, Fujairah, Dubai and Sharjah. ‘Islamic banking products have a strong retail appeal, and greater customer loyalty than conventional banking products. For the banks themselves the availability of Islamic investment funds in the marketplace is a major added attraction,’ said an industry analyst.

In order to access the Islamic funds, a bank needs first to be operating in an Islamic way. Thus the pressure on banks to convert to Islamic banking is a double edged. There is the push of retail demand and the pull of a huge liquid pool of Islamic funds looking for a home.

Sharjah Islamic Bank (SIB), the first Islamic Bank created from converting a conventional Bank into an Islamic Bank has shown big increase in their profit and asset growth. After its conversion into an Islamic institution about two years ago, the bank has been focusing its attention on the high growth retail Islamic banking products. Setting up a retail banking group is one of several expansion projects that followed a major overhaul of all its operations.

SIB currently has several innovative Islamic finance products including a Haj and Umrah scheme called 'Labbayk', and 'Shahadati' — specially-designed to meet educational needs.

Many conventional banks are considering strategies such as opening Islamic windows or starting fully dedicated Is Islamic finance companies.

Mashreqbank is one of the few local banks such as RAKBank, First Gulf Bank and Union National bank which are in the process of setting up Islamic finance arms. With the entry of new Islamic finance companies topics such as securitisation of Shariah compliant asset-backed mortgages, and the pricing of home financing with floating rates are being actively considered as alternatives conventional financing options.

Mashreqbank's new Islamic finance company, Badr Al Islami, plans to offer a range of Islamic financial services such as retail, corporate and investment banking products and services with an initial capital of Dh500 million.

‘We are committed to playing an active role in the growth of Islamic financial services within the UAE and beyond, at both retail and wholesale levels, and look forward to welcoming Muslim and non-Muslim customers,’ said Abdul Aziz Al Ghurair, CEO of Mashreqbank. The new Islamic companies are expected to make deep inroads into areas such as auto financing and mortgage lending. The entry of this new breed of Islmic finance companies are expected to give a tough competition to both conventional banks, finance companies and the existing Islamic banks.