Development of Islamic Banking in the UAE Essay Sample

I would wish to show my particular gratitude to my foreman. Prof. Badr Aboul-Ela for his uninterrupted encouragement. support and counsel. particular grasp to my instructor Dr. Al Gielani Al Sherief for his attempts in supplying me with the needed cognition and for bettering of my research accomplishments. I would besides wish to thank Ms. Wafaa from the Central Bank for supplying me with the needed informations. Abstract

Though overall economic public presentation in 2008 was the worst since the Great Depression. there is important fluctuation in the consequence of this Global Crisis on each of the Islamic Banks and Conventional Banks. This paper aims at analyzing the public presentation and profitableness of “Abu Dhabi Islamic Bank ( ADIB ) ” during and after the crisis of 2008. so. it will be compared with the fiscal position of “Abu Dhabi Commercial Bank ( ADCB ) ” for the same period. The ratios and charts in this paper are calculated and formulated based on fiscal studies released by both Bankss on one-year and quarterly footing. Return on Assetss and Return on Equity were used as the placeholders for the profitableness. However. it is concluded from this survey that ADIB as an Islamic bank was less affected by the economic crisis of 2008 than ADCB conventional bank. Introduction

Banking Industry is one of the most of import industries that supports the development of a state. Like some other fiscal establishments and capital markets. Bankss are the establishments which are significantly needed by the existent sectors in making their concern. An Islamic bank is a deposit-taking banking establishment whose range of activitie00s includes all presently known banking activities. excepting adoption and loaning on the footing of involvement. On the liabilities side. it mobilizes financess on the footing of a Mudarabah or Wakalah ( agent ) contract. It can besides accept demand sedimentations which are treated as interest-free loans from the clients to the bank and which are guaranteed. On the assets side. it advances financess on a profit-and–loss sharing or a debt-creating footing. in conformity with the rules of the Shariah. It plays the function of an investing director for the proprietors of clip sedimentations. normally called investing sedimentations. In add-on. equity keeping every bit good as trade good and plus trading constitute an built-in portion of Islamic banking operations. An Islamic bank portions its net net incomes with its depositors in a manner that depends on the size and date-to-maturity of each sedimentation.

Depositors must be informed beforehand of the expression used for sharing the net net incomes with the bank. Commercial banking is based on a pure fiscal intermediation theoretical account. whereby Bankss chiefly borrow from rescuers and so impart to endeavors or persons. They make their net income from the border between the adoption and loaning rates of involvement. They besides provide banking services. like letters of recognition and warrants. A proportion of their net income comes from the low-priced financess that they obtain through demand sedimentations. Commercial Bankss are prohibited from trading and their shareholding is badly restricted to a little proportion of their net worth. As the effect. there are many parties which have the involvements to necessitate their banking industry running good.

For the authorities. good organized banking industry would be favourable since it could demo that pecuniary system. banking and payment system in that state are good run. For the concern parties. the well-run banking industry will ease the minutess they make with their counterparties including fiscal strategy when required. For the direction of Bankss themselves. the sound bank direction for each bank would go positive points to carry through the duties to the shareholders. The choice of ADIB and ADCB was based on their well repute and public presentation in UAE. In other words. these two Bankss were noted as two of the successful Bankss in UAE. Islamic Banks and Conventional Banks

Islamic banking is considered as an option of banking establishments that are immune to dazes in macroeconomic conditions or fiscal market. Based on the information from World Bank ( 2011 ) . after the universe economic crisis period. it was claimed that the Islamic Bankss had a comparatively better recovery compared to conventional banking establishments as indicated by the comparatively low non-performing funding ( NPF ) ratio and there was no happening of negative spread in their operations. The information besides indicates that Muslim Bankss were comparatively more capable of imparting financess to the production sector with the funding to lodge ratio ( FDR ) returning to the degree over 100 % . while conventional banks’ loan to lodge ratio ( LDR ) dropped below 50 % . Million $

Throughout the recent planetary fiscal crisis. the Islamic banking industry in UAE has besides demonstrated resiliency. evidenced by comparatively high growing public presentation of this industry and a reasonably stable degree of NPF. However. there are two factors considered protecting the Muslim Bankss from the direct impact of dazes in the planetary fiscal system illustration the exposure of Islamic banking funding was still more geared to the domestic economic system. Despite of its terrible impact. the planetary fiscal crisis has triggered an progressively attending oppugning the resiliency of Islamic Bankss and their relationship with fiscal stableness. Comparison of public presentation 2005 – 2010

In this survey. the period chosen is between 2005 & A ; 2010. The ratios are calculated on one-year footing and quarterly bases utilizing the balance sheets and the income statements of both Bankss ADIB & A ; ADCB taking into consideration that the bank fiscal studies are published quarterly and yearly with each describing being compared to that achieved in the same period of the old twelvemonth.

Before the crisis. the net net income of ADCB was much higher than the net net income of ADIB. During the crisis. the net net income of ADCB went below nothing ( complete loss ) . while ADIB could prolong a small sum of net income although it was besides affected by the crisis

Table 1: ( Data collected from both bank’s balance sheet ) Internet Net income

Million AED

Using Abu Dhabi Islamic Bank’s and Abu Dhabi Commercial Bank’s balance sheet and income statement. the return of assets ( ROA ) . return on equity ( ROE ) . and net income growing are calculated.

Figure 1: Tax return on Assetss ( Annual )

Noting that the return on assets ( ROA ) is calculated as an index of how profitable a company is comparative to its entire assets. it can be seen that in ADCB. the curve of the ROA went directly down during the crisis making below nothing after the crisis of 2008 while the curve of ADIB went a spot high during the crisis so somewhat down after the crisis and did non travel below nothing. After the crisis. both Bankss started to retrieve. ADIB was retrieving more quickly than ADCB as it shows in the above curve of the one-year chart.

Reason:
Because of the net loss on hedge of net investing in foreign operations. the net income went ( 151. 138 ) below nothing doing a great loss. Knowing that the return on assets is calculated by spliting the net income over the entire assets. the loss in the net income was reflected on the return on plus.

Figure 2: Tax return on Assetss ( One-fourth )

Notice the curve in the one-fourth chart. ADCB was affected by the crisis during the first one-fourth of 2008 which caused its ROA to travel down before it tries to retrieve and so fall once more and remain in weak public presentation till the 3rd one-fourth of 2010 when it aggressively increased once more. while ADIB’s public presentation was good during the first three quarters of 2008 before it was affected after the crisis. it tried to retrieve in the beginning of 2009. but once more failed in the 4th one-fourth of 2009. and once more recovered quickly in the first three quarters of 2010 to fall once more in the last one-fourth of 2010. The public presentation of ADIB is already fluctuating all over the quarters ( 2008 – 2011 ) that means the alteration is its tendency is non because of the crisis. while that of ADCB shows alterations during the crisis period.

Reason:
Although the operating income. specifically net income from Murabaha. Mudaraba. Ijara and other Islamic funding is considered high during the last one-fourth of 2009 in ADIB. the operating disbursals besides increased dreadfully 81. 24 % compared to the same period of 2008. That caused the net income to diminish by 90. 83 % compared to the same period of 2008. This monolithic lessening caused the ROA of ADIB to travel below nothing in the last one-fourth of 2009. ADCB’s public presentation in the 2nd one-fourth of 2010 was important. In order to retrieve. ADCB increased its involvement income and decreased its staff disbursals and depreciation doing the net net income to increase as it shows in the 3rd and 4th one-fourth of 2010 in the chart above. Figure 3: Tax return on Equity ( yearly )

One of the most of import profitableness prosodies is return on equity. ROE reveals how much net income a company earned in comparing to the entire sum of stockholder equity found on the balance sheet. ADIB was executing good during the crisis period ; the profitableness even was higher during the crisis 2008. After crisis. and specifically in 2009. the profitableness of ADIB was affected but could straight be maintained. Due to Share of consequences of associates of 14. 798 in 2010 compared to ( 3. 219 ) in 2009 with an addition rate of 559. 70 % ! ! ! The public presentation of ADCB went approximately down during the crisis and even after the crisis boulder clay it increased its involvement income and decreased the staff disbursals.

Reason:
This Huge addition in the portion of consequences of associates in ADIB is due to the big investings of conventional Bankss in Islamic fiscal establishments because they found refugee to the daze they faced. This was reflected on the net income and instead on the ROE rate. ADCB noticed that the Islamic fiscal Institutions are less affected by the crisis due to absence of involvement in their operations. So. they started a section of Islamic finance including Murabaha. Mudaraba. Musharaka. Ijara and other Islamic services. Figure 4: Tax return on Equity ( Quarterly )

Since ROE indicates how good a company is being managed to let net income on its shareholder’s money. and since it is a dependable index of a company’s future net incomes. the chart above shows the great net incomes on its shareholder’s money that ADIB achieved during the crisis. After crisis. the net incomes on shareholder’s money decreased. to retrieve once more in the 3rd one-fourth of 2009 and purely worsen in the 4th one-fourth of 2009 to quickly retrieve during the first three quarters of 2010. and unluckily worsen once more in the 4th one-fourth of 2010. ADCB has small net income on shareholder’s money and sometimes it had losingss all through the studied period.

Reason:
In the 4th one-fourth of 2009. Provision for damage in the operating disbursals of ADIB increased from ( 459. 680 ) in 2008 to ( 1. 448. 819 ) in 2009 with 215. 17 % addition. This addition in the operating disbursals decreased the net income. and instead. decreased the ROE below nothing. In the first three quarters of 2010 ADIB’s public presentation nourished. declined and improved its best public presentation in the 3rd one-fourth of 2011. ADCB happening its refugee in the Islamic banking and increasing its involvement income helped better its public presentation during the last one-fourth of 2010 and so the three quarters of 2011.

Figure 5: Net Income Growth ( yearly )

The net income of ADIB decreased somewhat after the crisis and so it could retrieve and increase its net income starting 2009 and go oning to turn in 2010 quickly. The net income of ADCB decreased during the crisis and continued to diminish after the crisis as a effect of the crisis.

Reason:
After the crisis. the proviso for damage at the operating disbursals decreased from ( 1. 448. 819 ) in 2009 to go ( 749. 212 ) in 2010. On the other manus. the distribution to depositors and sukuk holders increased from ( 977. 968 ) in 2009 to be ( 1. 045. 006 ) in 2010. This addition lead to the addition in the net income and instead reflected on its growing as it shows in the above chart. ADCB suffered badly after crisis the same as all conventional Bankss. Despite their tests to increase the involvement income and diminish the staff disbursals. that program could non retrieve the crisis and was non considered as a good redress to alleviation.

Figure 6: Net Income Growth ( quarterly )

On quarterly footing. the net income shows immense growing at ADCD in the 3rd one-fourth of 2010. Reviewing the balance sheet that for the 3rd one-fourth of 2010. the undermentioned observations were made: 1- The net income from Islamic funding increased from 31. 272 in 2009 to 139. 980 in 2010 with a growing of 347. 62 % . . 2- The addition in the involvement income and lessening in the involvement disbursals besides affected the net income. 3- The addition in net net income from 390. 615 in 2009 to go 3. 045. 111 in 2010 appears clearly in the net income growing on quarterly footing.

On the other manus. ADIB could keep the stableness in its growing all through the period after retrieving from the crisis effects in 2009.

Decision
In General. it can be concluded that. net income and assets and liabilities direction are the most of import factors that determine the bank’s profitableness. The consequence of this research has shown that the ROA and ROE calculated on one-year footing and quarterly shown can supply indicant of the bank’s public presentation and profitableness. During the crisis of 2008 ADCB as a conventional bank was more affected than ADIB the Islamic fiscal establishment. With the reappraisal of the balance sheets and income statements and the available one-year and one-fourth studies. it was concluded that the conventional investings with involvement rates were affected badly by the crisis. while the Islamic fiscal establishment was less affected due to the prohibition of involvement ( Riba ) by Shariaa’ .

After the crisis. the conventional bank ADCB found that Islamic funding can be a good helper to assist it work decently once more. So they introduced the Islamic funding to their merchandises and services. Taking this action. ADCB – and other conventional Bankss every bit good – started to vie with the Islamic fiscal establishment ADIB and other Islamic fiscal establishments. Opening this Islamic fiscal service. they took a portion in the market cut downing the portion of ADIB. On the other manus. investors trust in the Islamic fiscal operation increased and most of them shifted to the Islamic banking to avoid the involvement on their loans. Finally. I hope that this research could function as a good survey on the consequence of the involvement on the fiscal state of affairs and the importance of Islamic operations in salvaging the economic stableness.

Mentions

[ 1 ] . World Bank one-year study 2011 – p 69
[ 2 ] . ADIB one-year studies ( 2005. 2006. 2007. 2008. 2009. 2010 ) [ 3 ] . ADCB one-year studies ( 2005. 2006. 2007. 2008. 2009. 2010 ) [ 4 ] . Data collected from ADIB & A ; ADCB quarterly studies for the period 2008 – 2010