Islamic banks witnessed a 5 per cent growth in assets in 2020 with a compounded annual growth rate of 5.6 per cent in last five years. Image Credit: Supplied

Dubai: Islamic banks witnessed a 5 per cent growth in assets in 2020 with a compounded annual growth rate of 5.6 per cent in last five years, according to Central Bank of UAE (CBUAE) data.

Fully-fledged Islamic banks’ assets in the UAE during 2020 accounted for about 19 per cent of total banking system assets, while Islamic windows’ (Islamic financial services offered by conventional banks) assets decreased by 2.4 per cent accounting for approximately 5 per cent of total banking system assets.

The UAE has a well-established Islamic financial sector, comprising fully-fledged Islamic banks, Islamic windows and Islamic finance companies with total assets size of Dh782 billion.

There are currently eight fully-fledged local Islamic banks and two fully-fledged foreign Islamic banks licensed to operate in the UAE. In addition, 17 conventional banks have established Islamic windows with asset size of approximately Dh166.2 billion in 2020. In addition, there are 11 Islamic finance companies in the UAE accounting for around 55 per cent (Dh17.6 billion) of the total assets of the finance companies’ sector in 2020.

UAE based fully-fledged Islamic banks’ assets comprised mainly of financing, accounting for about 65 per cent of the total assets followed by investments in financial assets of about 11 per cent, while the remaining comprised of balances at the central banks, interbank financing and other assets.

Financing portfolio

UAE Islamic banks’ financing portfolio comprised largely of private corporate and retail financing. Financing extended to government and GREs have gained prominence with the share to total financing increasing to 22 per cent in 2020, while the Islamic banks’ financing of SMEs have remained relatively small as a share of the overall portfolio.

Retail portfolio composition is mainly in retail mortgages accounting for 42 per cent of total retail portfolio followed by personal consumer financing at 41 per cent. In terms of financing by economic sector, construction and real estate sector financing exposure comprised about 21 per cent of total financing portfolio, while trade and services sectors accounted for 16 per cent.

Funding and liquidity

Islamic banks in the UAE are largely funded domestically, with resident deposits accounting for about 93 per cent of total deposits. Deposits comprised 80 per cent of total liabilities while capital market issuances formed about 6 per cent.

Retail deposits accounted for the highest share of total deposits at 39 per cent, private corporates at 24 per cent followed by deposits from Government and GREs. Although accounting for about 6 per cent of total liabilities, sukuk issuances gained prominence during 2020, reflected by a strong capital market funding growth.

Majority of the sukuk issuances were in foreign currency representing 77 per cent, while dirham denominated sukuk accounted for only 23 per cent of total issuances.

The sukuk issuances in recent years have been particularly in longer-term maturities, which improves the overall funding stability. As of end of 2020, medium term (1-5 year) sukuk issuance accounted for about 46 per cent of total portfolio while issuance of more than five-year maturity, which began in 2020 accounted for 15 per cent of portfolio.