Development in the Middle East, and the Gulf Cooperation Council countries in particular, is being fueled by the growth of Islamic finance.

Author: Darren Stubing


In line with the Middle East’s economic strides, regional Islamic banks are raising capital. In January 2015, for example, Dubai Islamic Bank (DIB) successfully priced a $1 billion, Tier 1 capital-eligible issuance with a perpetual maturity. Given the growth in its business, and the fact that this momentum is expected to continue for 2015, DIB wanted to tap the market for additional core capital, says Adnan Chilwan, chief executive officer of DIB.

The issue received 80 orders, amounting to more than $2.5 billion,reflecting strong investor demand. DIB’s principal plan for 2015 and 2016 is to grow its core businesses of consumer, corporate, treasury and commercial real estate across the UAE. The bank also aims to expand its existing geographic footprint through a variety of options, including acquisitions, the establishment of new subsidiaries and branches and cooperation agreements with local partners in Asia, Africa and the Gulf.

In 2014, DIB completed the acquisition of a 24.9% stake in Bank Panin Syariah in Indonesia.

The push to develop local currency bond and sukuk markets in the region will help to increase liquidity and lower borrowing costs.

Abu Dhabi Islamic Bank is also positive about 2015, following a good year in 2014. With the growing acceptance of Islamic banking worldwide, ADIB is increasingly turning its attention to geographic expansion, notes Tirad Mahmoud, ADIB’s CEO. This began in Egypt with the acquisition via a joint venture of National Bank of Development, followed by the establishment of Iraq, UK, and Saudi Arabia operations. New operations are now slated for Qatar and Sudan.

On the wholesale side, ADIB was very active in landmark sukuk deals in 2014, including transactions in Indonesia and Hong Kong. The offerings underscored ADIB’s distribution strength in the Middle East and elsewhere.

Other regional Islamic banks are also witnessing strong growth. Qatar’s Al Rayan Bank’s financing facilities grew by 40% in 2014. The bank is also expanding its investment fund offerings, which now include an exchange-traded fund that will be the largest in the market.

National Commercial Bank, the biggest bank in Saudi Arabia, has decided to turn itself into a fully Islamic bank over the next five years. The state-run bank’s decision came amid a $6 billion initial public offering—the largest-ever equity sale in the Arab financial world. NCB works along shariah-compliant Islamic banking guidelines but also follows certain Western banking conventions.

Kuwait Finance House maintains its prominent role in major development projects in the region and elsewhere. KFH succeeded in structuring a $500 million syndicated ijarah (rent-then-buy leasing) facility for Sharjah Electricity & Water Authority. KFH’s $120 million participation in the transaction was the largest among the mandated lead arrangers, which included Gulf International Bank, ABC Islamic Bank, Sharjah Islamic Bank and Barwa Bank. SEWA will use the proceeds to finance its current and future projects, which include infrastructure expansion to meet the growth needs that Sharjah is witnessing.  KFH’s trading volume in the secondary sukuk market surpassed $3 billion in 2014.


Such deals have contributed significantly to the increase of liquidity and support of Islamic financial markets, with sukuk issuance providing liquidity to infrastructure projects in Asia and Africa as well as GCC countries and playing a major role in both the public and private sectors.

The growth of the Islamic finance industry, particularly in banking and capital markets, also provides a strong platform for the financing of household spending on big-ticket items and public finances. As it does, key Islamic finance regions such as the Middle East will no doubt benefit, thanks to the increasing sophistication and product offering of Islamic finance institutions.


Infrastructure spending will remain a key theme for the Gulf Cooperation Council countries and the wider Middle East region in 2015, as improvements are made to transportation infrastructure, as well as to that of power and utilities. In addition, the recovery in the real estate market in Dubai is likely to raise demand for housing and construction financing. Increased stability in the Kuwait real estate sector should also spur demand. In Saudi Arabia the mortgage law will clarify the regulations around shariah-compliant mortgage structures in the country. It is expected to increase demand for mortgage financing, as the ongoing changes to the law would provide more regulatory clarity on home financing.

Islamic banks profit from helping customers purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank.

Islamic mortgages, or house purchase plans, can involve ijara, where the purchaser is technically leasing the property from the bank, or diminishing Musharaka, where the purchaser is in partnership with the bank and monthly repayments gradually buy it out.

Growth in the years ahead is likely to be targeted toward small and medium-size enterprises throughout the region.

Many of the larger Islamic financing deals continue to be connected to infrastructure and real estate developments. Abu Dhabi Islamic Bank recently finalized a 1 billion Arab emirate dirham ($270 million) finance facility for Baniyas Investment and Development Company, the investment arm of Baniyas Sports Club. The transaction refinanced BIDC’s existing conventional debt, which was secured against the construction of Bawabat Al Sharq Mall, as well as part of the residential apartments and villas that were constructed in the first phase of BIDC’s Bawabat Al Sharq Development in Abu Dhabi. According to Arif Usmani, global head of wholesale banking at ADIB, the financing facility demonstrates the bank’s growing ability to fund large-scale projects, which play a major role in the economic development of the UAE.

As the investment and development arm of the Baniyas Sports Club, BIDC’s core competencies are in investment, development and management of real estate projects. Bawabat Al Sharq is a mixed-use community development which represents the first of several pioneering projects by BIDC, notes Subhi Benkhadra, CEO of BIDC.

ADIB was involved in a number of corporate real estate financing deals in 2014, and that could pave the way for more in 2015. It arranged a $650 million sukuk for Damac—the first international corporate sukuk issuance by a non-investment-grade, private-sector real estate company in the UAE. This sukuk has reopened the non-investment-grade market for regional real estate corporates, and more  issuance is expected this year. ADIB also acted as joint lead manager and bookrunner for Emaar Malls Group’s successful pricing of a $750 million, 10-year debut sukuk. Home financing also grew significantly in 2014 for ADIB, from 3.2 billion to 5.8 billion Arab emirate dirhams, representing 15% of its total portfolio.