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UAE’s Islamic finance sector outpaces conventional banking: Fitch

November 2015

November 24, 2015 | 17:20 | Dubai

The UAE’s Islamic finance sector has continued to outpace the UAE’s conventional banking sector’s growth in 2015, Fitch Ratings has said. The six largest Fitch-rated Islamic banks’ share of total bank gross loans was around 21%, up 3% in 1H15, and they had around 20% of total assets at end-1H15. “We expect demand for UAE Islamic banks’ lending to continue to grow, supported by wider acceptance and an expanding customer base,” it said in its ‘UAE Islamic Banks Monitor 2015 – 2016 Outlook’.

The Islamic banks’ impaired loans /gross loans ratio was 5.3% at end-1H15, down from 11.5% at end-2012. Significant improvement continues and partly reflects increasing gross loans, but asset quality remains weaker than the conventional banks’ average of 4%-6%. This is partly due to the larger proportion of retail loans at the Islamic banks (including personal residential mortgages), which made up more than 40% of their loans at end-2014. This has resulted in vulnerability and potentially large losses compared with conventional banks when the cycle turns. Positively for their ratings, Islamic banks have managed to reduce exposure to the real-estate sector, which was historically higher than for conventional banks, the ratings agency said. UAE Islamic banks will benefit from the central bank’s decision this year to include sharia-compliant securities in the range of instruments it accepts as collateral for accessing liquidity. Islamic banks often hold these securities but in the past have had to hold liquidity either in cash or monthly offerings of central bank sukuk, with maturities of three to six months. This puts them at a disadvantage to conventional banks, which have a wide range of interest-earning liquidity management options, it added.

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