Shari’ah standardisation is expected to lead to greater market confidence but implementation and adoption risks remain, particularly in realigning existing products and processes to governance requirements and reporting procedures.
Sunday 28, July 2019 BY KUDAKWASHE MUZORIWA
UAE Islamic banks’ financing growth continued to fall with varying degrees in 2018 and was in line with conventional banks.
According to Fitch ratings, financing growth still benefitted from broader adoption and innovative structuring of Shari’ah-compliant products as well as young and fast-growing franchises in some Islamic banks.
The lenders’ operating profit-risk weighted assets ratio improved in 2018 due to reduced financing impairment charges but remained slightly below conventional banks.
Additionally, UAE Islamic banks’ cost-to-income ratios have declined but remain significantly above that of conventional banks due to larger branch networks for the size of the banks' franchise.
The UAE continues to progress on Islamic banks regulations, the Federal law No. 14 of 2018 established a Higher Shari’ah Authority, which operates under the Central Bank of the UAE and oversees Shari’ah compliance.
The lenders’ asset-quality metrics in 2019 is projected to remain under pressure, particularly for Islamic banks with weaker and younger franchises, while financing growth is expected to be above mid-single digits.
Fitch stated that Islamic banks must now adhere to Shari’ah standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
The banks are required to produce a gap analysis between current practises and AAOIFI standards by mid-2019, followed by an impact assessment before year-end, added Fitch.