Islamic banking has existed for more than three decades ago. The institution has expanded to become distinct and fast growing segment of capital markets and international banking (Hassan & Lewis, 2007). More than 200 Islamic banks are on operation in over 70 countries with a majority in Muslim states and others in western countries (Hassan and Lewis, 2007, p.1). A majority takes interest in Islamic banking based on its contrasting features to conventional banking. In its broadest sense, Islamic or shari’ah compliant banking refers to the provision and use of financial products and services in line with the Islamic religious practices and laws (Cihak & Hesse, 2008, p.4).
By and large, an Islamic banking and financial system is meant to provide a variety of religiously accepted financial services to Muslims. The institutions are solely dedicated to contribute richly to the socio-economic goals set by Islam. This includes an economic well being and socio economic justice coupled with equitable distribution of wealth and income (Hassan & Lewis, 2007, p. 2). As such, financial systems play a vital role in mobilization and investment of savings for economic growth and stability as far as monetary valuation goes. Contrary to convention banking, Islamic banking prioritizes and adds a religious dimension into its systems. That is, the opportunity to carry out religious legitimate financial operations has more weight than the mode of financial operation itself (Hassan & Lewis, 2007).
Financial systems based in Islamic tenets serve as to eliminate payment and receipt interests in all forms. Most banks in UAE mainstream teachings from the Holy Qur’an, in which, they derive their raison d’être from the fact that Islamic order has no place for institution of interest. Rejection of interest by Islam sets it apart from the conventional banking such that unique functional mechanisms and frameworks are put in place to ensure effective operation. In place of transaction interests as is the case in convention banking, Islamic banking makes use of PLS. Also known as the profit-and-loss sharing, the mechanism is one of the institution’s characteristics in resource allocation (Hassan & Lewis, 2007). A large number of transactions feature in Islamic banks but certain types are grouped or termed as central. For instance, ‘mark-up’ methods, equity participation (musharaka) and trustee finance (mudaraba). The business partnership technique employed the mudaraba; a principle that was coined by Prophet Muhammad when acting as an agent to his wife (Hassan & Lewis, 2007, p. 3).
There are almost fifty banks in the United Arab Emirates, placing it second in terms of banking volume in the Gulf Cooperation Council after Bahrain (Oxford Business Group, 2007, p. 61). Of this, almost half are foreign based while the rest transact financial services on domestic basis. A case in point is the Al Hilal Bank established by the Abu Dhabi after its license issuance in 2007 (Oxford Business Group, 2007, p. 61). Statistics from the UAE Central Bank shows some of the top performing banks in 2005: the National Bank of Abu Dhabi (NBAD), Emirates Bank International (EBI), Abu Dhabi Commercial Bank, and the National Bank of Dubai among others. However, the top ten banks in UAE control almost half of the total assets, deposits and total loans (Oxford Business Group, 2007). A comprehensive list of national banks is accessible in the Abu Dhabi Securities Markets.
Islamic banking revolves around countless yet well established concepts. While some are based on the Islamic canons, others operate within the framework of the religion; based on Qur’an and Sunna (ADIB, n.d., par. 1). This means that all transactions, regardless of the level and nature of business, are subject to halal activities. Most of these principles are meant to ensure ethics and integrity is held while at the same time, operating within the religious boundaries. Activities such as gambling, hoarding, liquor usage and usury based lending are strictly avoided. As mentioned, interest or Reba is forbidden rendering all transactions subject to profit and loss sharing. Rather than earn interests, depositors are guaranteed a share of the bank’s profit (ADIB, n.d., par. 2).
Another of its principles is based on the profit sharing partnership between parties involved in a transaction (ADIB, n.d., par. 2). Returns on investment accounts and savings are heavily dependent on profits from halal transactions and the bank’s performance. Parallel to common belief, profits are not guaranteed and are therefore subject to a certain measure of risk (ADIB, n.d., par 4). Additionally, these profits are managed by practitioners who ensure higher yields as compared to conventional alternatives. Current accounts are exempted from earning income as they are considered qard from bank depositors. This is so as they can be drawn on demand by clients without notice (ADIB, n.d., par 5). Finally, transactions deemed as Gharar are forbidden as it denotes varying degrees of deception pertaining quality and price of commodities received by party at the expense of others. Conventional banking systems allow trading and derivatives while Islamic banking is keen on prohibition of gharar. As such, ADIB consider derivatives to contain elements of gharar and are therefore not permitted.
The Abu Dhabi Islamic banking provides a number of banking products to its esteemed customers. Among these include personal banking that ensemble other multiple products like savings, current, children’s and electron accounts. In addition, ADIB provides financing solutions and takaful products that act as insurance or cover policies to clients. The business banking sector specializes in a variety of banking programs related tied to its field. For instance, business accounts management, transactional services, 24 hour customer support among others. Another of the institution’s services is the specialized whole banking that incorporates government and public sector, corporate banking, community banking and global transaction services.
Wholesale banking provides a numbers of banking services to large cooperation, non profit communities, the government and the general public. More specifically, corporate banking offers a wide range of Shari’ah compliant Islamic banking solutions. This includes, but not limited to Istisnaa, Ijara, Murabaha and Islamic covered drawings (ADIB, n.d.). The corporate banking client profile is segmented into public and government sector entities, financial firms and a diversified private base of trading (ADIB, n.d.). To ensure origination of risks in specified segments, the bank makes use of specific screening criteria in line with prudent guidelines set as per the brand. The whole essence of corporate banking is to build a transparent and value added bond between the banks and its clients. The advantages that come with corporate banking include structured finance solutions and project finance advisory conforming to the shari’ah laws.
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