Leveraging Hub Status


The proof is in the numbers; according to the World Economic Forum’s 2016-2017 Global Competitiveness Report, the UAE overall ranked 16th out of 138 countries with a score of 5.26 […]

The proof is in the numbers; according to the World Economic Forum’s 2016-2017 Global Competitiveness Report, the UAE overall ranked 16th out of 138 countries with a score of 5.26 out of 7, up from 17 and 5.24 YoY. This sealed its continued dominance of the MENA region. Among the nation’s competitive strengths is infrastructure, where it rests proudly in fourth position. More relevant here though, the UAE ranks 28th with a score of 4.72 for financial market development for 2016-17. Other relevant indicators are financial services meeting business needs where it ranks 13th, the affordability of financial services (24th), financing through the local equity market (21st), ease of access to loans (16th), venture capital availability (7th), and lastly the soundness of banks in 17th place—up from 21st place a year earlier.

Hub Status

Dubai has successfully positioned itself as a major financial hub and as the leading light in terms of sharia-compliant financial dealings. The state-owned financial free-zone Dubai International Financial Centre (DIFC), launched in 2004, is a vital component in the mix, and aims by 2024 to have welcomed 1,000 financial institutions. Interest has thus far been strong from key markets such as China and India, as well as the Middle East itself; 45% of firms are from Asia and the Middle East. By end-2016, 447 firms had already joined the party, marking a 10% YoY rise. The DIFC not only employs close to 22,000 people, but also boasted a gigantic balance sheet of USD144 billion in 2016.

CBUAE: An Overview

Dubai’s banking universe is overseen and regulated by the Central Bank of the UAE (CBUAE), the local Dubai office of which plays intermediary between the Emirate’s local banking sector and the Central Bank’s head office in the capital of the UAE. As the CBUAE points out, its primary tool is the dollar/dirham spot window providing banks two-way liquidity; that is to say, the ability to exchange USD against AED and vice-versa. In this manner, confidence in the CBUAE, vital to the financial sector, is maintained as the exchange rate is defended and the banks better manage their liquidity in both denominations. According to the Central Bank’s 2016 Annual Report, its total assets slipped from USD107,151 million in 2015 to USD99,202 million in 2016. The largest asset on the consolidated balance sheet is held-to-maturity foreign securities, which at USD40,649 million in 2016, nonetheless declined from 2015’s USD44,775 million. In a see-saw performance, deposits with the Central Bank rose 25.3% YoY from 76,917 million in 2014 to USD26,229 million in 2015, only to fall to USD16,644 million by year-end 2016. A continued uptrend was observed in cash and bank balances held by the Central Bank, which skyrocketed 87.16% YoY from USD11,433 million at end-2014 to USD21,398 million for 2015 and to USD24,538 million at end-2016. Meanwhile, derivative assets fell hugely during 2015—one of the only balance sheet items to do so—to just USD90.9 million from USD2 billion a year earlier, recovering strongly to USD2.38 billion at end-2016. Gold bullion stood at USD256 million at the close of 2015, rising to USD276 million a year later. The deficit of the UAE’s financial account widened by USD21.1 billion in 2016 to USD24.4 billion, comprising 6.6% of GDP; this largely resulted from banking sector activity.

Some Regulatory Developments

Recent regulatory advances have brought the UAE closer to full compliance with the Basel III liquidity standards by 2018-2019, notably the Liquidity Coverage and Net Stable Funding Ratios. It is noteworthy here that the total CARs of banks were comfortably above the 12% capital adequacy and 8% Tier-1 ratios stipulated by the CBUAE. A new framework identifying Domestic Systemically Important Banks (D-SIBs) is in place. Meanwhile, the new regulatory framework for non-bank financial institutions (NBFIs) licensed by the Central Bank is also on the way. As the CMUAE notes, the shifting sands and rising sophistication of the financial universe brings with it fresh risks to mitigate through legislation. Related risk assessment takes place at both the systemic and corporate level. For instance, in 2016 new regulations pertaining to crowd funding in the UAE emerged to protect both the individual and the reputation of the financial system itself.

UAE Banking Overview

As of year-end 2016, a total of 38 licensed foreign banks from 22 countries operated in the UAE as well as 114 foreign bank representative offices. Specifically, 23 local banks operated in the UAE with a total of 1,071 branches, electronic banking units, and pay offices. By end-2016, the total assets of banks in the UAE had climbed 5.4% YoY to USD711 billion fueled by a 6% jump in credit to USD428 billion by end-December 2016. By end-4Q2016, the total deposits of resident and non-resident customers at banks in the UAE had grown 6.2% YoY to USD425 billion. Meanwhile, private-sector deposit growth in 2016 remained largely the preserve of the participation banks, which we will come to shortly. Non-resident deposits in Islamic banks climbed 40.3% in 2016 in stark contrast to the 15% rise among conventional counterparts. Here, the UAE’s much-prized stability in a region of woe and seismic politics is working to its advantage as neighboring countries literally bank on its being a safe haven. Banks’ specific provisions for NPLs (6.3% of the total) rose to USD21.4 billion at end of 2016 from USD19.7 billion a year earlier, whereby NPLs were fully provisioned. Banks operating in the UAE are highly capitalized, and at end-2016 the CAR and Tier-1 capital of banks saw a three-year peak of 19% for CAR (17.3% for Tier-1 capital), comfortably exceeding the respective regulatory requirements of 12% and 8%. Local banks had an loan-deposit ratio of 102% at end-2016, unchanged YoY, while the foreign institutions’ ratio was 92.4%.

The Rise and Rise of Islamic Banking

The full spectrum of Islamic financial instruments is growing exponentially worldwide, and Dubai prides itself on championing the field. Indeed, Dubai’s own Vision 2021 seeks to position the Emirate as the capital of sharia compliance. In 2016, in the 10th annual outing of The Banker’s Top Islamic Financial Institutions ranking, the title observed total global sharia-compliant assets of USD1.440 trillion on a CAGR of 12.72%, up from USD386 billion in 2006.

Official data for the UAE reveals conventional banks to have been better capitalized in 2016 than their Islamic counterparts (CAR of 19.4%, vs. 17.1% and Tier-1 capital 17.5%, vs. 16.5% respectively). Examining conventional and Islamic institutions side by side, we note that the respective L/D ratio is 102% and 96.1% at end-2016, with a YoY decrease for conventional banks, but rise for their sharia-compliant counterparts, whose overall credit grew substantially during the year from the 2015 levels of 103.4% and 92.2%, respectively. Eight banks in the UAE are exclusively sharia compliant, while four conventional institutions operate sharia-compliant windows. Dubai Islamic Bank is the largest wholly sharia-compliant lender in the Emirate, and moreover the third-largest bank overall. Indeed, The Banker survey reveals it to be the world’s 20th largest Islamic institution in 2016. In February 2017, it confirmed its board approval for a USD5 billion sukuk program, enabling it to raise funds at its own discretion should the economy become volatile and liquidity become tight given prevailing deflated oil prices. In the same month, the bank listed a USD1 billion sukuk on the Nasdaq Dubai exchange, taking its total issuances there to USD4.25 billion. Islamic bonds were the preferred instrument of the companies, governments, and banks alike in the Arabian Gulf region to the tune of USD60 billion in 2016, to narrow gaps in vital capex needs and to enable lending to boost economic performance. Interest has spread far beyond traditional markets, and the Bank of Tokyo-Mitsubishi UFJ opened its own Islamic finance arm in Dubai in late 2015, having cut its teeth in another vast sharia-compliant market, Malaysia. The bank aims for its Islamic arm to ultimately account for roughly 15% of its credit business in the Middle East from the current 5%, according to its Managing Director & Regional Head for the Middle East, Shichito Tobari.

Emirates NBD arose in 2007 upon the merger of Emirates Bank International and the National Bank of Dubai, and is the UAE’s largest lender and the Emirate’s biggest bank by assets. A much-awarded institution, in 2016 for the second consecutive year it was named “Bank of the Year“ in the UAE by The Banker, acknowledging a robust financial profile and frontrunner approach to the digitalization of banking according to the bank. Select metrics for 2016 indicate total assets of USD122 billion, up 10% YoY, albeit accompanied by a net interest income decline of 1% YoY as a margin contraction offset asset growth. Net profit of USD2 billion was up 2% YoY, while customer loans of USD79 billion saw a 7% YoY climb and customer deposits of USD84.6 billion marked an 8% rise from end-2015. The big news in Dubai’s capital markets in March 2017 was the start to the UAE’s IPO activity for the year, as Emirates NBD’s real estate investment trust, ENBD REIT, was strongly oversubscribed ahead of listing on the Nasdaq Dubai. It offered 94,594,595 ordinary shares at USD1.11/share, whereby the stock rose 5.17% to USD1.17/share. Mashreqbank, another major name, is looking to expand its international footprint in key markets such as China, India, and Egypt in diversifying its source of income away from the oil-dependent Arabian Gulf. The bank targets this business delivering 30% of operating income (USD1.7 billion in total for 2016) from the current 24%. For 2016 it held total assets of USD33.4 billion, up 6.6% YoY. Loans and advances rose 1.4% to USD16.6 billion fueled by a whopping 14.4% growth in Islamic finance. The liquid-assets-to-total-assets ratio was at 30.4%, and the loan-to total-assets ratio of 49.7% was down from 52.3% at end-2015. Customer deposits rose 4.6% YoY to USD21 billion. For the year, the bank printed a net profit of USD 517 million. An innovator in the retail banking segment, Mashreqbank, in 4Q2016 introduced the UAE’s First “Mashreq Bot,“ a futuristic AI chat-bot that simulates human interaction while explaining bank products to customers.

Dubai remains a financial hub to be reckoned with, and, moreover, slightly higher anticipated growth of c.3.4% in 2017 will be fueled by higher investment in the approaching Expo 2020, all reflected at the bank.