50 years of Islamic banking: UAE has become a global hub for Islamic finance

18/04/2025 10:31 AST

The UAE has emerged as a global hub for Islamic finance over the past five decades, marking a significant transformation in the financial landscape of the region and beyond. The growing sector benefits from a dynamic economic environment and advanced regulatory policies that support Shariah-compliant financial activities.

There is no second opinion that 50 years of Islamic banking in the UAE reflects a remarkable journey characterised by growth, innovation, and resilience. The sector has not only enriched the emirate's financial landscape but has also contributed significantly to the global Islamic finance industry, exceeding $2.44 trillion in assets worldwide by growing at an accelerated pace of 11.4 per cent.

Since the launch of Dubai Islamic Bank - the UAE's and the world's first Islamic bank - in 1975, the sector has grown significantly over the past five decades, becoming a fundamental pillar of the national economy. This landmark institution served as a pioneer, proving that Shariah-compliant banking could be both profitable and sustainable without interest-based transactions by promoting ethical investment.

The Dubai Islamic Bank establishment paved the way for promoting Islamic finance in the country. The 1980s and 1990s witnessed a remarkable expansion in the Islamic finance sector with several other banks and financial institutions emerging. These included Abu Dhabi Islamic Bank and Sharjah Islamic Bank in catering to the growing demand for Shariah-compliant financial products.

The government played a significant role in developing this promising sector, promoting policies that fostered an environment conducive to Islamic financial institutions. The establishment of regulatory bodies, such as the Central Bank of the UAE and Higher Shariah Authority, and initiatives to standardise Islamic financial products and services contributed significantly to the sector's growth in the past 50 years.

Another notable milestone in the UAE's Islamic finance industry was the establishment of the Dubai International Financial Centre in 2004, which provided a sophisticated regulatory framework and an international platform for Islamic finance. The centre has not only attracted various Islamic financial institutions but has played a major role in positioning the UAE as a global leader in Islamic finance.

Promising Outlook
Today, the UAE is considered one of the leading markets for Islamic finance as it has a well-established Islamic financial industry, comprising Islamic banks, Islamic banking windows, Islamic finance companies, and Islamic insurance (takaful) companies. For three consecutive years, it was ranked among the top three Islamic economies worldwide in the 2022 State of the Global Islamic Economy Report. It was ranked fourth globally in Islamic financial markets by assets, according to the 2023 Islamic Finance Development Indicator.

A recent study, conducted by the Central Bank of the UAE, found that 79 per cent of Islamic banks in the UAE have sustainability strategies, with 74 per cent having them approved at the board level. Also, all Islamic banks reported having established sustainability strategies, whereas some conventional banks with Islamic windows are still developing theirs.

"Islamic banks accounted for approximately 22 per cent of the total banking credit in the UAE, with investments reaching Dh152.3 billion by the end of third quarter of 2024," according to the latest data issued by the Central Bank of the UAE for September 2024.

Fitch Ratings projects that Islamic banks in the UAE will grow faster than their conventional counterparts over the medium term due to favourable operating conditions in 2024 and 2025. The agency, which recently upgraded the UAE bank operating environment score to 'bbb+' from 'bbb' considers the emirate as a key hub for Islamic finance due to the beneficial economic environment, continued non-oil sector expansion, strong liquidity and improved asset quality.

Furthermore, the rating agency noted that Islamic financing now accounted for 29 per cent of total sector financing at the end of first half of 2024 as it rose 5.7 per cent during the January-June 2004 period compared to 5.3 per cent of conventional banks.

S&P Global Ratings also expects strong growth in the UAE's Islamic finance sector to continue over the coming period, supported by the strong performance of the non-oil economy.

Leading Sukuks, Takaful
Other than the banking sector, the UAE is also supporting the takaful sector and sukuk issuances due to strong presence of Islamic financial institutions and an enabling industry ecosystem. The emirate established its first takaful insurance company - Islamic Arab Insurance Company (Salama), in 1979 to ensure availability of Shariah-compliant insurance products in the country.

The UAE has actively promoted sukuk issuance, becoming one of the largest markets for Islamic bonds globally. The government's emphasis on sustainable development has led to the growth of green sukuk, aligning financial practices with environmental and social governance (ESG) criteria.

The rise of Islamic investment funds and sukuk, which allowed businesses and governments to raise capital while adhering to Shariah-compliant principles, indicates that the emirate is committed to developing economic policies and legislation to enhance Islamic finance and the broader Islamic economy.

The UAE, which holds 6.6 per cent of the global sukuk market, ranking fourth globally in all currencies, is a leading global destination for sukuk issuances. Nasdaq Dubai, the world's largest exchange for sukuk, reported the total value of sukuk listed in Dubai reaches $98.9 billion in December last.

"Sukuk and bond issuances in the UAE recorded 13.1 per cent year-on-year increase, reaching $294.4 billion by the third quarter of 2024, with sukuk accounting for approximately 20 per cent of total issuances," according to Fitch Ratings.

The UAE has witnessed significant growth in the sukuk market as the Federal Government introduced dirham-denominated Islamic Treasury Sukuk, encouraging broader sector participation. The issuance of Green Sukuk since 2019 has driven growth in sustainable financing. The UAE ranks first in the region and second globally in outstanding sustainability sukuk.

Looking ahead, the future of Islamic finance in the UAE appears promising. The increasing global awareness of ethical finance and sustainable investing aligns closely with the principles of Islamic finance. As the world increasingly turns to responsible finance models, the UAE is well-positioned to lead the way.

- muzaffarrizvi@khaleejtimes.com

UAE Islamic Finance Key Milestones
1975: The UAE and world's first Islamic commercial bank established: Dubai Islamic Bank
1979: The UAE's first takaful insurance company, Islamic Arab Insurance Company (Salama), established
1985: The UAE Islamic banking law and Higher Shariah Authority introduced under Federal Law 1985
1998: Establishment of the UAE's second Islamic Bank: Abu Dhabi Islamic Bank
2002: Sharjah Islamic Bank became the first bank to be converted into a full-fledged Islamic bank.
2010: Islamic Certificate of Deposit was issued by the Central Bank of the UAE
2011: Islamic banking assets reached 9.1% of the total banking assets
2014: Govt of Sharjah debut sukuk
2017: The Higher Shariah Authority was formed and it commenced operations in 2018
2018: Islamic bank assets reached 25% of the total banking assets
2019: DFM launched DFM Shariah Index, the first of its kind in the UAE
2020: Consolidation between two Islamic banks: DIB and Noor Bank
2022: Debut sustainable sukuk by Islamic bank in the UAE: DIB
2023: First Abu Dhabi Bank issued first local currency green sukuk
2024: Islamic financing accounting for 29% of total sector financing at the end of first half of 2024

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