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Sat 10 Dec 2016 12:38 AM

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Islamic financing growth in the UAE slows during 2016, says Fitch

New report says growth will still remain ahead of conventional banks but impaired loans will be higher

Islamic financing growth in the UAE slows during 2016, says Fitch

Islamic financing growth in the UAE has slowed in 2016 but remains above that of conventional banks, supported by enhanced recognition of Islamic finance and wider adoption of sharia products, especially in retail, according to a new report.

Fitch Ratings said that the share of total bank gross financing held by the six largest Islamic banks and the Islamic windows of conventional banks was around 26 percent at the end of June, up 1 percent on the year-earlier period.

The ratings agency said lending was up 4 percent year-on-year, based on the 17 Fitch-rated banks in the UAE.

"We expect growth of Islamic bank financing to be in high single digits in 2016, still higher than that of conventional banks," Fitch added.

The Islamic banks' average impaired financing/gross financing ratio was 6 percent at the end of June, down from 11.5 percent at the end of 2012, assisted by rapid growth of Islamic financing.

However, Fitch noted that this remains worse than the conventional banks' 4.9 percent, partly due to Islamic banks' large proportion of retail financing (including residential mortgages) which increases their vulnerability to a cyclical downturn relative to conventional banks.

Fitch said in its report that liquidity conditions have tightened in the UAE since 2015, mainly reflected in a higher cost of funding, but also some government deposit withdrawals from Abu Dhabi banks, which have partly receded in 2016.

The UAE's central bank set up a central sharia board in early 2016 to provide unified supervision and guidance to financial institutions on Islamic finance. Islamic banks also have their own sharia boards, which can give different fatwas on product or bank activities.

Fitch said the new authority is positive for the Islamic finance industry, as it will introduce more transparency and harmonisation, adding that it is not yet clear whether the new rules will increase or limit a specific bank's product offering.

"Lower GDP growth, combined with less ample and more expensive funding, will continue to put pressure on Islamic banks' financing and revenue growth, as for the conventional banks. However, GDP growth will remain positive and most banks have been successful in repricing their financing books," said Fitch.

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