UAE: Dubai focuses on Islamic finance as part of its economic diversification strategy

The Oxford Business Group

Sheikh_Hamdan_bin_Rashid_Al_MaktoumPlans to establish Dubai’s credentials as a centre for Islamic finance took a step forward in July with the opening of a new academic institution to train professionals for employment in the sector.

A joint initiative backed by the government and the Hamdan Bin Mohammed e-University, the Dubai Centre for Islamic Banking and Finance is expected to support the emirate’s push to become a leader in Islamic finance. Included in its curriculum will be master’s degrees, foundation certificates and short-term training programmes in Islamic banking and finance.

According to Dubai’s crown prince, Sheikh Hamdan Bin Mohammed bin Rashid Al Maktoum, the centre represents a “major step forward in the economic development agenda of Dubai”.

Part of that agenda was set out in January 2013, when the emirate’s ruler Sheikh Mohammed bin Rashid Al Maktoum announced that Dubai would work to develop itself as a centre for Islamic business, actively promoting sharia-compliant banking and insurance, as well as other areas including the arbitration of Islamic contracts and setting quality standards for halal food.

The boost to the economy could extend beyond financial services, according to Hamad Buamim, the director-general of the Dubai Chamber of Commerce and Industry. By gaining recognition as a centre for Islamic finance, Dubai would also be able to capitalise on other aspects of the sharia-compliant economy, such as the services, lifestyle and food sectors, he told the local media in early August.

If the initiative proves successful, the emirate will have to overcome stiff competition as it looks to expand its presence in the $1.5trn global Islamic finance market, which is estimated to be growing by 15-20% per year. Saudi Arabia, Kuwait and Qatar are all looking to broaden the base of their sharia-compliant financial sectors, while Bahrain has long been acknowledged as the industry leader in the Gulf region, having developed many of the instruments that have become standard in the marketplace. Further afield, Malaysia is considered to be a major player on the global stage.

Some positive signs have emerged from Dubai so far, including an uptick in the number of sukuks issued and listed in recent months. In April, Sharjah Islamic Bank (SIB) floated a $500m sharia-compliant bond, bringing the nominal value of sukuks listed on the emirate’s exchanges to more than $12bn, with $4.25bn of that coming since the launch of the Capital of Islamic Economy initiative was announced in January. In total, 15 sukuks are listed in Dubai – five on the Dubai Financial Market (DFM) and 10 on NASDAQ Dubai.

Both DFM and NASDAQ Dubai have been active in the push to bolster the Islamic financial services sector. In January, the DFM released new draft standards for the structuring of sukuks, calling for industry comments. The hope is that new regulations, if adopted more broadly, would attract investors to the emirate. Bahrain and Malaysia have both built up their positions in the Islamic finance sector in part by establishing regulatory regimes that are now influential worldwide.

Then in May, NASDAQ Dubai announced it was adding a platform that would allow trading of both Islamic and conventional bonds. The new system is expected to boost transparency and liquidity, as prices of NASDAQ Dubai-listed bonds will now be visible to all investors at the same time. Previously, these debt securities were traded only through banks offering over-the-counter trading.

While Dubai has the advantage of already being a recognised centre for banking and business, with the technical infrastructure in place, challenges remain when it comes to developing the broader sukuk market, not only in the UAE but elsewhere in the region. In part this is a general issue related to bond markets, quite apart from the Islamic finance sector. To date, the number of debt instruments issued by the government and corporations has been fairly modest, which has meant that the associated services sector – including market makers and primary dealers – has yet to develop fully.

Assuming that hurdle can be surmounted, the specialised concerns of the sharia market increasingly come to the fore, including a need for lawyers and bankers who specialise in Islamic finance. To some extent, the Dubai Centre for Islamic Banking and Finance should help in this regard, by training people that can staff these businesses and support the development of a more robust Islamic financial services sector in Dubai.

For more on Dubai’s plan to become the centre for Islamic Economy, be sure to check out the Global Islamic Economy Summit on 25-26 November 2013