Over the last fifty years, the UAE has established itself as a prominent center for Islamic finance, significantly transforming the region’s financial landscape as well as its global standing. The thriving sector has benefited from a vibrant economy paired with robust regulatory frameworks that endorse Shariah-compliant financial practices.
The development of Islamic banking in the UAE over the past five decades is undeniably noteworthy, showcasing a journey marked by progress, creativity, and perseverance. This sector has not only enriched the local financial scene but has also made considerable contributions to the global Islamic finance market, which now boasts assets exceeding $2.44 trillion and is growing at a notable rate of 11.4 percent.
Since the inception of Dubai Islamic Bank in 1975, recognized as the first Islamic bank globally, the sector has witnessed remarkable growth and has become an essential component of the national economy. This pioneering institution validated the concept of Shariah-compliant banking as a viable and sustainable alternative to conventional financing that avoids interest-based transactions and promotes ethical investment.
The establishment of Dubai Islamic Bank facilitated the promotion of Islamic finance throughout the UAE. During the 1980s and 1990s, the sector experienced substantial development with the emergence of numerous banks and financial institutions, including Abu Dhabi Islamic Bank and Sharjah Islamic Bank, to meet the increasing demand for Shariah-compliant financial products.
The government of the UAE has been instrumental in fostering the growth of this promising sector through policies that create a supportive environment for Islamic financial institutions. Key regulatory bodies, such as the Central Bank of the UAE and the Higher Shariah Authority, have been established alongside initiatives aimed at standardizing Islamic financial offerings, markedly contributing to the sector’s progress over the last fifty years.
A pivotal moment for Islamic finance in the UAE was the launch of the Dubai International Financial Centre in 2004, which provided a sophisticated regulatory framework and an international platform specifically for Islamic finance. This center has not only attracted numerous Islamic financial entities but has also played a vital role in positioning the UAE as a leader in the Islamic finance sector globally.
Optimistic Future
Currently, the UAE is recognized as a key market for Islamic finance, possessing a well-established industry that includes Islamic banks, Islamic banking windows, Islamic finance firms, and Takaful insurance companies. For three consecutive years, it has ranked among the top three Islamic economies in the 2022 State of the Global Islamic Economy Report. Additionally, it was placed fourth globally in terms of Islamic financial market assets, according to the 2023 Islamic Finance Development Indicator.
A recent survey by the Central Bank of the UAE revealed that 79 percent of Islamic banks have implemented sustainability strategies, with 74 percent at the board approval level. All Islamic banks have established sustainability plans, while some conventional banks with Islamic divisions are still developing theirs.
According to the latest data from the Central Bank of the UAE for September 2024, Islamic banks contribute approximately 22 percent of the total banking credit in the country, with investments reaching Dh152.3 billion by the end of the third quarter of 2024.
Fitch Ratings forecasts that Islamic banks in the UAE will experience faster growth compared to conventional banks in the medium term, driven by favorable operating conditions expected in 2024 and 2025. The agency recently upgraded the UAE’s banking environment score to ‘bbb+’ from ‘bbb,’ recognizing the emirate as a key hub for Islamic finance due to favorable economic conditions, ongoing non-oil sector expansion, strong liquidity, and improved asset quality.
Furthermore, the agency reported that Islamic financing represented 29 percent of total sector financing by the end of the first half of 2024, marking a rise of 5.7 percent compared to 5.3 percent for conventional banks during the same period.
S&P Global Ratings anticipates continued robust growth in the UAE’s Islamic finance sector in the coming years, driven by the impressive performance of the non-oil economy.
Leading Sukuks and Takaful
In addition to banking, the UAE is also enhancing its Takaful sector and sukuk issuances, supported by a strong presence of Islamic financial institutions and a suitable industrial ecosystem. The first takaful insurance company in the UAE, Islamic Arab Insurance Company (Salama), was established in 1979 to ensure the availability of Shariah-compliant insurance products.
The UAE has actively encouraged sukuk issuances, establishing itself as one of the largest markets globally for Islamic bonds. The government’s focus on sustainable development has promoted the growth of green sukuk, aligning financial practices with environmental and social governance (ESG) criteria.
The emergence of Islamic investment funds and sukuk has enabled businesses and governments to raise capital in compliance with Shariah principles, reflecting the emirate’s commitment to enhancing economic strategies and laws that support Islamic finance and the wider Islamic economy.
Currently, the UAE accounts for 6.6 percent of the global sukuk market, ranking fourth in all currencies, making it a leading destination for sukuk issuances. Nasdaq Dubai, the largest exchange globally for sukuk, reported that the total value of sukuk listed in Dubai reached $98.9 billion as of last December.
As indicated by Fitch Ratings, sukuk and bond issuances in the UAE recorded a year-on-year increase of 13.1 percent, reaching $294.4 billion by the third quarter of 2024, with sukuk comprising around 20 percent of total issuances.
The sukuk market in the UAE has expanded significantly, supported by the Federal Government’s introduction of dirham-denominated Islamic Treasury Sukuk, which encourages broader participation in the sector. The introduction of Green Sukuk since 2019 has stimulated growth in sustainable financing, positioning the UAE as the foremost in the region and second globally in outstanding sustainability sukuk.
Looking ahead, the future of Islamic finance in the UAE looks promising, as the growing global interest in ethical finance and sustainable investing closely aligns with Islamic finance principles. As the world shifts towards responsible financial models, the UAE is well-equipped to take a leading role.
Key Milestones in UAE Islamic Finance
1975: Establishment of Dubai Islamic Bank, the first Islamic commercial bank in the UAE and the world.
1979: Creation of Islamic Arab Insurance Company (Salama), the first takaful insurance company in the UAE.
1985: Introduction of the UAE Islamic banking law and Higher Shariah Authority under Federal Law 1985.
1998: Launch of Abu Dhabi Islamic Bank, the UAE’s second Islamic bank.
2002: Sharjah Islamic Bank becomes the first bank to fully transition to an Islamic banking model.
2010: Central Bank of the UAE issues the Islamic Certificate of Deposit.
2011: Islamic banking assets reach 9.1% of total banking assets.
2014: Government of Sharjah issues its debut sukuk.
2017: The Higher Shariah Authority is established, commencing operations in 2018.
2018: Islamic bank assets comprise 25% of total banking assets.
2019: Launch of the DFM Shariah Index by DFM, the first of its kind in the UAE.
2020: Consolidation of Dubai Islamic Bank and Noor Bank.
2022: Debut of the sustainable sukuk by Dubai Islamic Bank.
2023: First Abu Dhabi Bank issues the first local currency green sukuk.
2024: Islamic financing accounts for 29% of total sector financing by the end of the first half of 2024.