When it comes to news on economic trends and policies in the UAE, government and business leaders turn to the Abu Dhabi Council for Economic Development’s Economic Review. Tahseen Consulting is honored to have its work on Islamic finance highlighted in the publication’s August issue. Recently, Tahseen Consulting’s Chief operating Officer, Wes Schwalje, spoke with representatives from the Abu Dhabi Council for Economic Development regarding his thoughts on the evolution of Islamic finance in the UAE. In a wide-ranging discussion, Schwalje laid out a broad vision of the future, the need to benchmark best practices for other financial hubs, and how human capital is essential to the UAE’s aspirations.

1. Issue 12 2013
Financing
the Future
Abu Dhabi’s financial sector
is laying the foundation for
diversified growth
PAGE 06
The vision of Global
Marketplace Abu Dhabi
PAGE 16
The growth potential of
Islamic financial services
PAGE 20
Abu Dhabi’s banks are growing
thanks to sound policies

2. 16 | Feature Islamic Finance
The potential
of Islamic
finance
A
s Abu Dhabi seeks to diversify
its income away from oil as
part of its Vision 2030, the
biggest oil exporter in the
United Arab Emirates is grooming itself to
become a financial hub and expanding its
Islamic finance sector.
Global Islamic banking assets with
commercial banks grew nearly 20 per
cent in 2012 to reach $1.55 trillion, and
are projected to reach $2 trillion by 2015
according to Ernst Young. The National
Bank of Abu Dhabi (NBAD) saw a 5.1 per
cent rise in net income from its Islamic
financial services in 2012 to $1.66 billion.
First Gulf Bank reported growth of nine
per cent in its Islamic banking sector, while
Union National Bank reported a 6.2 per cent
increase. Abu Dhabi’s interest in developing
its Islamic finance industry further is
therefore well founded.
“Wealth creation due to high oil prices
among Sharia-sensitive investors was
the single largest contributor to the
development of Islamic finance in the
UAE,” says Ashar Nazim from the Global
Islamic Banking Centre of Excellence at
Ernst Young.
“Realisation of the market demand from
high net worth individuals for Sharia-
compliant investments made setting up
Islamic banks a necessity, and from there the
requirement for Islamic assets drove the rapid
development of Islamic finance in the UAE.”
Abu Dhabi Islamic Bank (ADIB), which
began operations in 1998, is the biggest
Islamic lender in the country by market
value. The other Islamic bank based in Abu
Dhabi is government-owned Hilal Bank,
which began operations in 2008.
IllustrationbyTarakParekh
The Islamic financial services
industry in Abu Dhabi has been
growing steadily, but there is
room for improvement, reports
Dania Saadi.

3. The Economic Review | 17
With regards
to product
innovation,
Islamic banks
need to expand
their range
of products
and address
a bigger
percentage
of small and
medium size
enterprises,
which form a
big percentage
of businesses
in the UAE
and Gulf as a
whole.
Although Abu Dhabi’s Islamic
financial services industry is
nascent, local banks have catered
to demand with innovative
new products, including sukuk,
Islamic insurance or Takaful, and
expanding their presence. The
UAE’s total sukuk issuance more
than doubled in 2012 to reach
$6.5 billion from $2.95 billion a
year earlier.
ADIB is an innovator in the area
of sukuk issuance. Last year it
launched the world’s first Sharia-
compliant hybrid perpetual sukuk
to help raise its Tier 1 capital ratio
and comply with the new banking
standards of Basel III.
“Because it behaves like equity
and is deeply subordinated, the
Tier 1 hybrid sukuk is more attune
to the principle of sharing risk
and reward, which is one of the
fundamental tenets of Sharia,”
explains Alex Roussos, a counsel at
law firm Norton Rose Fullbright.
Several Abu Dhabi institutions
have utilised Islamic finance in
projects such as Dolphin Energy,
Zayed University and the Abu
Dhabi Water and Electricity
Authority. However, the capital’s
Islamic banks still have room to
grow in the space of sukuk and
other financial products.
“With the impending
requirements of Basel III on the
horizon, there will be a number
of financial institutions that will
be looking to structure Islamic
debt issuances for raising capital
requirements,” says Baljeet Kaur
Grewal, managing director of
Kuwait Finance House Research.
“One other area is the innovation
of retail sukuk that aims to expand
access to smaller investors. This
will be an important aspect of
sukuk structuring that will allow
greater demand in a time when
bond yields are rising.”
Sukuk issuance could become
more frequent as Abu Dhabi
improves legislation for the
industry. Currently Islamic
banks hold a large percentage of
sukuks, but greater liquidity in the
secondary market trading of sukuks
is needed to help encourage more
investors to buy these instruments.
The Abu Dhabi authorities can
help in this regard by encouraging
the setting up of institutions
investing in sukuks, such as pension
and saving funds.
“If you get to a situation where
you have real institutional money
accounts such as pension funds that
are more motivated by generating
total return rather than just earning
coupon income, then you will get
sukuks that are more tradable and
create even better liquidity,” says
Abdul Kadir Hussain, CEO of
Mashreq Capital.
“An expansion of the investor
base from just Islamic banks
to institutions like insurance
companies and pension funds
can help. Regulators can help by
coming up with regulation that
force Takaful companies to maintain
a certain percentage of their capital
in sukuks.”
With regards to product
innovation, Islamic banks need to
expand their range of products and
address a bigger percentage of small
and medium size enterprises, which
form a big percentage of businesses
in the UAE and Gulf as a whole.
There is a whole gamut of sectors
Islamic finance can target in Abu
Dhabi and elsewhere in the UAE.
“There are a whole host of
products that are available in
other Islamic hubs which are
less developed in the UAE. This
includes trade and lease financing
products for businesses,’’ says Wes
Schwalje, Chief Operating Officer of
Tahseen Consulting.
“Wealth management, retirement
and healthcare financing, and debt
financing for households are not as
developed as elsewhere globally.
Also many equity financing
and capital market products –
which would facilitate economic
diversification into high-value
added industries, attract foreign
direct investment and funds from
international capital markets - are
still underdeveloped.”
Trade finance is another area
where Islamic banks in Abu
Dhabi can develop their offerings,
especially as the UAE is a major
regional trading hub. To expand
trade finance and connect with
other banks, they need to invest in
technology that will take advantage

4. 18 | Feature Islamic Finance
of the young tech-savvy populace
and improve their links globally.
“Islamic banks in the UAE should
take part in trade finance by offering
the best products. For example, the
Murabahah contract is a good fit
with financing trade, and its short
term nature helps with the need for
liquidity in the sector,” says Grewal.
“Similarly, small and medium sized
enterprises (SMEs) are the backbone
of any country. It is estimated that
there are approximately nine to 11
million SMEs across the Middle
East. Recognising this business
opportunity a few banks in the
region have launched funds, which
specifically cater to the cross-border
trading requirements of SMEs.’’
Islamic banks also have to engage
more stakeholders in the process,
including lawyers, sharia scholars
and experienced bankers. There
needs to be a greater clarity in terms
of the legality of Islamic products
on offer, and a requirement for an
Islamic centre for dispute resolution
where cases regarding Islamic
financing disputes can be handled
by judges well versed in Islamic law.
“Islamic banks need to spend
more efforts on research and
product development to meet
market needs; some products have
inherent issues under UAE law,’’
says Oliver Agha, partner and
head of Islamic Finance MENA
practices at law firm Holland
and Knight. “What is needed is
to include industry experts and
lawyers at the Sharia board level of
product development to ensure the
structure being developed meets
legal and industry acceptability.”
The UAE government has issued
several federal Islamic banking and
capital market legislations, which
help govern the Islamic finance
industry. The UAE central bank
has also aided Islamic banking.
In 2011 it issued a collateralised
Murabaha facility to help Islamic
banks better manage their liquidity,
which is a major issue globally for
the Islamic finance industry. Abu
Dhabi has also announced a new
financial centre free zone, similar to
the Dubai International Financial
Centre (DIFC), which is expected to
include Islamic capital.
“An Abu Dhabi-based financial
centre focused on Islamic finance
will be able to offer a unique
alternative to the DIFC for Islamic
institutions,’’ says Kuwait Finance
House’s Grewal. “The centre
will play a role in developing
the internationalisation of the
industry, with more Islamic capital
flows expected to be generated
throughout the region.”
The free zone would have to
come up with specific laws to help
further develop the Islamic finance
industry. Such laws should include
guidelines for sukuk issuance and
trading, among other legislation,
lawyers said.
“What we would like to see
is a clear set of guidelines and
specific legislation issued at Federal
government level and by relevant free
zones that promote and regulate the
issuance of sukuks by UAE and free
zone-incorporated entities – whether
to international or domestic investors,’’
said Norton’s Roussos. “This would
give issuers and investors alike more
clarity about certain key issues relating
to sukuk instruments, including how
the underlying assets are treated
on enforcement and what recourse
What is needed
is to include
industry experts
and lawyers at
the Sharia board
level of product
development
to ensure the
structure being
developed
meets legal
and industry
acceptability.

5. The Economic Review | 19
investors have to the originator, which
in itself would help the development
of liquid local sukuk markets.”
One of the major challenges of
developing an Islamic financial centre
in Abu Dhabi is a talent shortage.
This is a global issue in Islamic
finance, but it is more acute in the
Gulf due to the fast pace of growth.
Tahseen Consulting projects
that $71 billion could potentially
enter the Islamic banking system
in the UAE by 2015. This would
create approximately 7,800 new
jobs at local Islamic banks if current
asset concentration ratios remain
similar. The firm also forecast that
another 500 jobs would be created
by 2015 in other Islamic financial
services segments.
“Talent attraction and
development is the single most
worrisome challenge to the evolution
of Islamic banking, not only in the
UAE but globally,” says Tahseen’s
Schwalje. “To meet this growing
demand for employees trained in
Islamic finance the UAE will need to
significantly broaden its education
and training options to ensure the
availability of human capital does
not stall growth of the sector.’’
Although Zayed University
and Hamdan Bin Mohammed
e-University, offer in-depth
Islamic finance and economics
courses, there is a need for more
institutions that offer programmes
targeting new entrants and
senior level leaders, rather than
just courses aimed at mid-level
employees, he added.
Some analysts believe Abu
Dhabi requires a regulator to help
supervise Sharia boards, similar to
Malaysia’s own authority.
“There have been discussions
about a central Sharia governing
body to bring greater harmonisation
to the industry, as well as new
guidelines being issued on specific
matters such as sukuk issuance and
trading, that will provide a greater
level of certainty to investors and
issuers,” says Nazim. “However,
substantial work is still required
to create an inclusive legal and
regulatory framework that involves
Sharia-compliant businesses in
financial services and other sectors.”
Abu Dhabi’s Islamic finance
industry also has to expand beyond
the UAE to help create scale and
develop international links that
will allow it to expand in areas
such as trade finance, financing for
small and medium sized firms, and
other vital sectors.
Banks in Abu Dhabi have already
taken up this challenge. ADIB,
which operates in the UK, Qatar,
Saudi Arabia and Sudan, became
the first UAE lender in 2012 to
open a branch in Iraq. Hilal Bank,
which mainly operates in the UAE,
opened a branch in Kazakhstan
in 2010. It was the first Islamic
lender to operate in the energy-rich
central Asian country, which is fast
embracing Islamic finance.
“Lack of scale is the biggest
factor challenging the industry,”
says Ernst and Young’s Nazim.
“In the short term this requires
transforming operations to be
more flexible and responsive to
new segments and markets. In the
medium term, one has to look at
expanding regionally and building
institutions that are able to serve
cross-border needs of the top-end of
their business clientele.” ◆
One of
the major
challenges of
developing
an Islamic
financial centre
in Abu Dhabi
is a talent
shortage. This
is a global
issue in Islamic
finance, but it
is more acute
in the Gulf due
to the fast pace
of growth.
Left:
Zayed University and Hamdan
Bin Mohammed e-University,
offer in-depth Islamic finance
and economics courses.

6. Welcome | 25
Cover Illustration by Tarak Parekh
The Economic Review is a quarterly publication issued by
the Abu Dhabi Council for Economic Development.
Chief Editor and translator Dr. Hadi AlTaie
Production Dima Al Bawardi
Coordination Noura Al Obaidli
Abu Dhabi Council for Economic Development is a statutory body,
established in May 2006, to facilitate economic diversification and growth
through creating greater understanding, cooperation and engagement
between the public and private sectors of the Emirate of Abu Dhabi.
Abu Dhabi Council for Economic Development
PO Box 44484, Abu Dhabi, UAE
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@ADCED_TER
Published by
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© Copyright Abu Dhabi Council for Economic Development
Reproduction, copying or extraction by any means of the whole or part of
this publication must not be undertaken without the written permission of
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The views expressed in this publication are not necessarily those of the
Abu Dhabi Council for Economic Development.
Special thanks to:
His Excellency Sultan Bin
Saeed Al Mansouri, the
UAE’s Minister of Economy
and chairman of the capital
markets regulator Securities
and Commodities Authority
(SCA); Abdullah Al Turifi,
Securities and Commodities
Authority; Madhi Mattar,
Finance House Capital – Abu
Dhabi; Essa Kazim, Dubai
Financial Market; Rashed
Al-Baloushi, Abu Dhabi
Securities Market; Dr. Giyas
Gokkent, National Bank of
Abu Dhabi; Imelda Dunlop,
Pearl Initiative; Ala’a Eraiqat,
Commercial Bank; Tariq
Qaqish, Al Mal Capital;
Stephen Forster, Al Tamimi
Co – Abu Dhabi; Mohammed
Yasin, National Bank of Abu
Dhabi; Hamad Abdullah Al
Mass, Abu Dhabi Department
of Economic Department;
Ashar Nazim, Ernst Young;
Alex Roussos, Norton Rose
Fullbright; Baljeet Kaur
Grewal, Kuwait Finance
House Research; Abdul Kadir
Hussain, Mashreq Capital;
Wes Schwalje, Tahseen
Consulting; Oliver Agha,
Holland and Knight