As the competition for retail customers intensifies in the UAE, banks are focusing their efforts to expand beyond their natural constituencies in search of new deposits and borrowers. And among the country’s 51 banks, Islamic banks have been particularly aggressive in pushing for market share.
Abu Dhabi Islamic Bank, which has the third-largest consumer banking network in the country, has been expanding into Dubai and pushing a bold mass-market campaign to cast its net wider than its traditional target audience of Muslims in Abu Dhabi. Returning the favour, Dubai-based Emirates Islamic Bank (EIB) is luring customers in Abu Dhabi with a rewards card that offers a range of benefits at local retail outlets.
This is probably a taste of things to come, which will give consumers greater choice and better deals.
ADIB, EIB and other Islamic banks such as Noor Bank and Al Hilal Bank have been keen to claw market share from the conventional banks. At the moment Islamic banks have about a 25 per cent market share. That figure is expected to double by 2020, according to EIB, which says that market studies estimate that at 19 per cent a year, growth in Islamic banking will outpace the growth in conventional banking. Not bad for an industry that first emerged in the 1970s and has had success in other parts of the globe such as in Malaysia.
Here in the Middle East, the UAE is emerging as a hub for such services and many local banks are expanding into neighbouring countries such as Egypt, Libya, Tunisia and Morocco with predominantly Muslim populations.
“Islamic banking has received a considerable boost, with Sharia-compliant financial products and services beginning to find greater acceptance and recognition in the market,” says Faisal Aqil, the deputy chief executive of consumer wealth management at EIB. “This has resulted in the introduction of several products and services that cater to the specific financial requirements of customers. We are particularly pleased to unveil the Abu Dhabi Rewards Credit Card, which will enable us to serve our growing customer base in Abu Dhabi and offer them exclusive benefits in their vicinity.”
Holders of the EIB Abu Dhabi Rewards platinum card will get two “choice” points for every dirham spent that can be redeemed across the capital at merchants in the Abu Dhabi Airport, Abu Dhabi Mall and Marina Mall.
So why the switch in focus from Dubai to Abu Dhabi?
“Our market research has indicated that residents of Abu Dhabi often prefer to shop at retail stores and outlets within the emirate for their daily needs and to fulfil their luxury aspirations,” says Harshvardhan Singh, the head of cards at EIB. “In launching this card, we have tried to meet this critical need.”
Consumer banking has become a priority for all UAE banks, whether Islamic or conventional. The shift towards the retail side of business began after the financial crash of 2008 when companies had less appetite for new debt and were struggling to pay off old loans. That competition has squeezed out smaller lenders, as it has became difficult for them to compete without scale.
ADCB, for example, bought the retail arm of the troubled Royal Bank of Scotland in 2010 for about US$100 million, adding more than 250,000 customers. HSBC bought Lloyds’s retail arm in 2012 for $769m and Emirates Islamic merged with Dubai Bank to create EIB in 2012. ADIB this month snapped up the retail banking operations of Barclays for Dh650m, taking on an 110,000 new customers.
International banks have suffered most here because Basel bank industry regulations geared towards preventing the kind of financial crash that occurred in 2008 are making many lenders scale back from some retail and small- and medium-sized lending operations. The Basel regulations, which will come into place in 2018, are aimed at ensuring financial institutions have enough cash at hand to deal with any losses by reining in how much they can borrow and lend.
The challenge for Islamic banks such as EIB and ADIB is not just about selling Sharia-compliant products. It is also competing in a tough local environment that is not only overbanked but full of formidable Islamic competitors. And the competition for retail banking will heat up even more as an improvements in the economic fortunes of the country and consumer confidence prompt an increase in demand for the entire spectrum of personal loans. That is good news for these banks because the margins they receive from lending to individuals are higher than those to corporations, where the risk is typically less. It is also good news for consumers, as banks outdo each other with offers to attract new customers.
“The market share of Islamic finance is slowly increasing, though not across all the banks,” says Jaap Meijer, a bank analyst at the Dubai-based investment bank Arqaam. “ADIB, Ajman Bank, EIB and Sharjah Islamic Bank have gained market share. However, Dubai Islamic Bank has lost some market share. We expect Dubai Islamic Bank to start growing faster than the market this year with 10-15 per cent loan growth, as the bank was preoccupied last year redeeming the expensive wholesale funding of Tamweel. Now that the funding costs have dropped, we expect Dubai Islamic Bank to reset its lending rates to improve its growth momentum, as illustrated by its attractive home-financing proposition.”
Banks have had a particularly good run after the economy grew more than 4 per cent last year on the tail of several years of lacklustre performance following the 2008 financial crash. Consumers have been running to the banks over the past year and a half to tap cheap financing to buy everything from cars to homes and washing machines.
The growth owes its credit to the Eibor, the interest rate at which banks lend to each other. The Eibor is hovering near an eight-year low, driven in part by flows of money into bank accounts, stocks and real estate from jittery investors in other emerging markets that view the UAE as an oasis of stability. The 12-month Eibor stands at 1.138 per cent. Since 2006, when records began, it has averaged 2.8 per cent, reaching a high of 5.52 per cent in 2007.
That has meant a boom for sellers of big-ticket items. Carmakers reported record sales last year. The Ford Taurus posted a 60 per cent growth in sales across the region last year and topped the saloon segment, according to a Middle East Automotive Council report. Property prices have also been heating up, especially after the removal of rental caps in Abu Dhabi. And prices advanced more than 30 per cent last year in the UAE as a whole, according to data from local property agents.
Islamic banks have been boosting their retail appeal with the launch of mass market campaigns to tap that growth. ADIB last month began enticing customers with a package that gives them the chance of winning 24 times their monthly income twice a year and throws in perks such as free monthly remittances. The bank is not only trying to win a greater share of the thriving consumer banking market, but it is also striving to make Sharia-compliant banking more palatable to western tastes.
It is not only in the domain of retail banking that Islamic lenders are expanding. Noor Bank has launched a stream of Islamic financial instruments for its small- and medium-sized business customers, such as murabaha financing for commodity trading.
Overall, surveys show a national trend of migration towards Islamic banks in the UAE, though a lack of understanding of how these banks work is holding back further growth. Souqalmal.com, a price comparison site, found that more than 60 per cent of the country’s residents have at least one Islamic bank product such as a credit card or home and car financing.
According to the website’s survey of 5,300 people of different nationalities, income and ages in November, a majority of those polled said that Islamic banking products had more attractive fees and rates than their conventional peers. Of those respondents who did not have any Islamic banking products, 43 per cent said that not fully grasping how Islamic banks operated had put them off.
mkassem@thenational.ae
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