According to the UAE Islamic Finance Report 2023 released by the Central Bank of the UAE (CBUAE), the main Islamic financial markets are concentrated in the Gulf Cooperation Council (GCC), Southeast Asia, and South Asia. The UAE is ranked fourth among the largest Islamic financial markets globally in terms of assets, as stated in the Islamic Finance Development Indicator report 2023 (IFDI 2023).
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The report by CBUAE highlights that the Islamic finance sector experienced an 11 percent growth in 2022, resulting in the global value of Islamic financial assets reaching AED16.5 trillion ($4.5 trillion). Over the past five years, the sector has seen a significant 69 percent increase, while the growth over the past decade amounts to a remarkable 163 percent.
The report explains that Islamic finance has flourished in the UAE since the establishment of the first Islamic bank in 1975. It encompasses various sectors, including Islamic banking, takaful insurance, and sukuk. Islamic finance has become an essential component of the UAE’s financial sector due to a robust regulatory environment that effectively balances regulatory and legal requirements with the principles of Islamic law.
CBUAE indicates that the assets of Islamic banks and Islamic banking windows in conventional banks currently account for 23 percent of total banking assets in the UAE. This represents a growth of 16 percent over the past five years. Furthermore, the sukuk market in the UAE is expanding, as evidenced by the recent issuance of Islamic treasury sukuk in UAE dirham by the federal government. This issuance could serve as a catalyst for other entities to issue Islamic sukuk.
Focus on harmonizing Shari’ah requirements
The report highlights that in recent years, there has been an increased focus on initiatives related to harmonizing and aligning Shari’ah requirements to promote the stability and growth of Islamic finance. These initiatives aim to create an enabling environment for the development of innovative products and services. Federal Law Decree No. (50) of 2022, concerning the issuance of the Commercial Transactions Law, plays a significant role in supporting the prosperity of Islamic finance by enhancing legal certainty in its transactions and activities, thereby fostering trust among all relevant parties.
Islamic finance sector’s growing role in global sustainability
The report also highlights that the Islamic finance sector has been playing a growing role in global sustainability efforts. The compatibility between the principles of Islamic law and the Sustainable Development Goals has contributed to this trend. Notably, the issuance of sukuk related to Environmental, Social, and Governance (ESG) factors has experienced rapid growth. By the first half of 2023, the total value of ESG-related sukuk issuances reached AED120.3 billion.
Sustainable finance has witnessed substantial growth in the UAE since the issuance of the country’s first green sukuk in 2019, both through Islamic capital markets and Islamic financing. In fact, ESG sukuk issuances in the UAE accounted for 15 percent of the global market.
CBUAE’s commitment to sustainability
The report underscores the central bank’s commitment to sustainability and sustainable finance through various initiatives. These include integrating sustainability standards into reserve management, supporting digital transformation in the financial system, transitioning internally towards sustainability, conducting stress tests for climate-related risks, supervising climate-related financial risks, monitoring sustainability standards in the financial sector, establishing principles for managing climate-related financial risks effectively, and developing the sustainable Islamic finance sector.
Encouragement from Higher Shari’ah Authority
The Higher Shari’ah Authority at the central bank has encouraged Islamic financial institutions to actively participate in sustainable finance by adopting a balanced approach to environmental and social aspects. In 2023, the authority issued guiding principles on sustainable Islamic finance, emphasizing Shari’ah principles and methodologies for incorporating sustainability into Islamic finance. The report also highlights that sustainability considerations fall within the Shari’ah responsibilities of individual ownership, striking a balance between individual and public interests, including the environment and society.
Moreover, the Higher Shari’ah Authority introduced ten requirements and recommendations for sustainable Islamic finance. The central bank and the council continue to collaborate with Islamic financial institutions in the UAE to further develop this field.
A survey conducted on the UAE Islamic banking sector, covering both local and foreign full-fledged Islamic banks, as well as Islamic banking windows of conventional banks, revealed that 79 percent of the institutions have a sustainability strategy. Additionally, 74 percent reported that their strategies have been approved at the board level.
While all Islamic banks have sustainability strategies in place, some conventional banks with Islamic windows are still in the process of developing their strategies or awaiting formalization for publication in the upcoming year.
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