Dubai: The latest initiatives by Dubai Government to a set up a comprehensive platform of Islamic economy products and services will strengthen its position as a global centre for Islamic economy, analysts say.
The move will see new comprehensive regulatory regime being set up to standardise and regulate Islamic products, services and practices that will strengthen a ‘parallel economy’ – free from conventional and interest-based financial practices.
“UAE is a regional business and trade centre. The country already has world class ‘hard’ infrastructure. The initiative intends to add to the ‘soft’ infrastructure to encourage and attract Sharia compliant activity in, for example, financial services and the food industry,” Dr. Giyas Gokkent, Chief Economist of National Bank of Abu Dhabi, told Gulf News.
“Officials have indicated that this is also part of an effort to increase inward foreign direct investment which would boost economic growth.”
With Islamic economic principles playing a growing significance in today’s global business environment, with Islamic economy size reaching $2.3 trillion and a growing community of 1.6 billion Muslims, the new initiatives are expected to further promote investments in Dubai, especially from economies spanning the Middle East, Africa, South Asia and Southeast Asia, Dubai Government said in a statement.
“This appears to be an initiative to attract foreign investment and establish the country as a centre for Sharia compliant finance and so on,” Gokkent says. “Sharia compliant activity in various sectors already exists and is subject to regulation.
Bahrain is also pursuing a strategy to become a hub for Sharia-compliant finance.
“The GCC accounts for a large proportion of Islamic finance activity given the size of its economy (13th largest in the World in aggregate). For example, about half of the global Sharia compliant mutual fund activity is in the GCC,” Dr Gokkent says.
Azhar Nazim, Partner, Global Islamic Banking Centre of Excellence at Ernst & Young, told Gulf News, that the move needed to be backed by a solid roadmap and set of actions. “Following the announcement, implementation will be key and it needs to be backed by roadmaps and actions,” he said.
Global Islamic banking assets are expected to reach $1.8 trillion by 2013, according to Ernst & Young’s World Islamic Banking Competitiveness Report 2013, up from the $1.3 trillion of assets held in 2011. This forecast is significantly higher than some of the earlier industry estimates. Globally, the Islamic banking industry continues to record robust growth, with the top 20 Islamic banks registering a growth of 16% in the last three years and Saudi Arabia emerging as the largest market for Islamic assets, it says.
According to the report, in 2011, the Islamic banking industry in Saudi Arabia, with an estimated $207 billion of Islamic assets, was ranked first. Malaysia, ranked second with total assets of $106 billion in 2011 and UAE ranked third with total assets of $75 billion.
Nazim said, he sees significant opportunities for the UAE to gain from Islamic banking as the UAE’s Islamic Banking sector represents only 17 per cent of the total banking sector. He said, if implemented properly, the country has a lot to gain from the global Islamic economic growth.
“The initiative is very timely and it is a broad-based approach,” he told Gulf News. “With this, Dubai could take a leadership role in the linkages of Islamic Economy with the real economy and the various sectors – finance, commodities, home finance, banking and insurance, etc.
“Also, it is important to have regulatory clarity – both for the financial system and the real economy,” he stressed.
Demand for Islamic tradeable securities – or sukuk, is expected to jump from $300 billion in 2011 to $950 billion by 2017, he said.
“The top 20 Islamic banks hold 57 per cent of the total global Islamic banking assets and are concentrated in the seven core markets for Islamic banking which include: Saudi Arabia, Kuwait, UAE, Bahrain, Qatar, Malaysia and Turkey,” he added.
The move comes four years after the global financial crisis that has affected the world economy – from which the major economies are still trying to recover.
Islamic banking and finance – which gained momentum following the global financial crisis, offers better returns, as they are based on real assets.
Regulations will be key, analysts say.
“Discussions with management and boards of leading Islamic banks suggest that major transformation is happening around Regulations, Risk and Retail Banking or the 3 R’s,” Ashar Nazim says.
“These 3 R’s of transformation are geared towards efficient capital planning, risk modelling, mitigating Sharia risk and building customer centric organizations. There are also meaningful developments on the regulatory front although a lot more needs to be done to create the right enabling environment for Islamic banks to implement the reform agenda,” said Ashar.
Although most people think about Islamic Banking when talked about Islamic Economy – which is much wide and covers all aspects of the economic life of a person to a society – has not been brought under a simple set of regulations. There are also issues relating to standardization and regulatory uniformity. Banks’s Sharia compliance varies globally – due to the lack of a single regulatory regime to govern Islamic banking or other aspects of finances.
Islamic economics in practice, or economic policies supported by self-identified Islamic groups, has varied throughout its long history, although these are prescribed to be sourced from the teachings of the holy Quran and the sermons issued by Prophet Mohammad (PBUH) about 1,400 years ago. Islamic economy is linked the lifestyle, governance prescribed by the Islamic theology.
Islamic theory and practice formed a “coherent” economic system with “a blueprint for a new order in society, in which all participants would be treated more fairly”. Michael Bonner, for example, has written that an “economy of poverty” prevailed in Islam until the 13th and 14th centuries. Under this system God’s guidance made sure the flow of money and goods was “purified” by being channelled from those who had much of it to those who had little by encouraging zakat (charity) and discouraging riba (usury/interest) on loans.
Trading in assets have been at the core of the Islamic economic principles.
Social responsibility in commerce was stressed in Islamic sociology. The development of Islamic banks and Islamic economics was a side effect of this sociology: usury was rather severely restrained, no interest rate was allowed, and investors were not permitted to escape the consequences of any failed venture — all financing was equity financing (Musharaka). In not letting borrowers bear all the risk/cost of a failure, an extreme disparity of outcomes between “partners” is thus avoided. Ultimately this serves a social harmony purpose.
The move to develop Islamic Economy is an age-old one. Although it actually started with the development of the first Islamic bank in the 1960s, it gained momentum in the 1990s.
However, in order to address the overall Islamic economy, various sectors have developed Sharia-compliant principles, such as: Islamic Banking, Islamic Insurance, Islamic Finance, Islamic Bonds – Sukuk, Islamic Equity – stock indices, Islamic Derivatives, Islamic Tourism, Halal Food, Halal commodities, etc.