Islamic retail banking: choices and some question marks

July 17, 2011 12:07 pm

In the first-half of 2011, the UAE’s Islamic retail banks have been busy in promoting new products and services. In January, Noor Islamic Bank opened its largest branch for Islamic insurances Noor Takaful.

Ajman Bank has recently launched the Mahra Ladies Banking as “around a quarter of the UAE’s private wealth is controlled by women,” Maryam Al Shorafa, Head of Ajman Bank’s Ladies Banking, told Dubai Bank, one of the smallest local banks in the UAE, has also just opened a new branch at Dubai’s prestigious Jumeira Road. People who drive down the road from the famous Jumeira Mosque to Burj Al Arab can’t miss the huge building near the “Miraj” Islamic Art Centre.

Also in June, Dubai Islamic Bank launched access to a new Shari’ah-compliant fund, the Prudential Shari’ah Opportunities – Asia Pacific Equity Fund. And Abu Dhabi Islamic Bank (ADIB) offers 25% discounts on online transactions for those who open an online brokerage account, along with the chance to win an iPad.

Search for stability

But behind the glittering façade, question marks, here and there, remain. On May 16, the Dubai government took over control over Dubai Bank in order to “ensure all depositors’ interests are safe”. Before this move, Dubai Bank was jointly owned by Emaar Properties and Dubai Holding at 30% and 70%, respectively. It remains unclear whether Dubai Bank will be sold or merged with another Islamic bank.

Dubai’s Noor Islamic Bank has repeatedly denied any intention to merge with other local Islamic banks. Noor apparently had to postpone its foreign expansion plans, as Group CEO Hussain Al-Qemzi said in January. Noor Islamic Bank also closed its branch in Dubai Media City, but opened the Noor Takaful Center at Sheikh Zayed Road near the same-named Dubai metro station. According to Dr. Ahmed Al-Janahi, Managing Directorat Noor Takaful, “sales of Islamic insurances doubled in 2010”.

Despite having obviously financing issues, at Dubai Bank holders of a “Kunooz Account” still have a chance to win Dhs1m every month and Dhs30,000 every day (accept on Fridays, Saturdays and on holidays) “For every Dhs1,000 in your account, you could win one of three daily prizes of Dhs10,000 (excluding Fridays, Saturdays and Public Holidays). For every Dhs5,000 in your account you could win the Grand Monthly Prize of Dhs1m,” the offer posted on the banks’ website says. That means, the bank distributes around Dhs20m per year to lucky customers.

Depositor incentives

Asked by why the Kunooz raffle scheme is halal, Dubai Bank responded: “Deposits received by our customers in Kunooz are part of Mudaraba pool, which are invested in Shariah compliant investments.” Under the Islamic financing structure of Mudaraba, the investors (Dubai Bank’s customers in this case) provide money to an entrepreneur (Dubai Bank) in order to finance a specific project. “Therefore the return on Mudaraba pool investments are shared with the deposit holders according to the terms and conditions of Kunooz product,” a Dubai Bank spokesperson explained.

While gambling is haram in Islam, this raffle is approved as halal, because each customer does a contribution to the well-being of the bank by paying money into the account. At Islamic banks, customer accounts are not regarded as the banks’ liability like at conventional financial institutions, but are added to the bank’s own capital as both parties share profits and losses.

ADIB tries to attract clients with a similar saving scheme, called a Ghina savings account. Every time a client saves Dhs20,000 on his Ghina account, he or she gets a raffle coupon every month. There are three winners per year for Dhs2m per year, three for Dhs500,000 and 250 winners for Dhs10,000. Nevertheless, ADIB is apparently in a much better shape than Dubai bank. Its net earnings in the first quarter of 2011 soared 17% year-on-year to Dhs339.3m. ADIB shares, listed at the ADX in Abu Dhabi, have advanced 16% during the first half-year.

As the UAE is still overbanked (more than 50 banks serve 8.2m people) consolidation in the industry will be inevitable, and this trend will not stop at Islamic financial institutions.