The UAE’s economic diversification has accelerated in recent years following a concerted effort from government, government-related entities and the private sector to prepare the country for the time beyond oil. This comprehensive approach, which is not just concentrated in one or two industries, now has added importance following 2020’s coronavirus pandemic.
As the UAE’s socioeconomic development evolves over the coming years, Abu Dhabi Islamic bank (ADIB) will help the nation fulfill its ambitious goals by providing innovative banking products and services to support all areas of the economy. Transaction banking represents a big opportunity for ADIB, as it has a key role to play in supporting the numerous companies that are looking to grow and increasingly trade internationally.
Due to this, ADIB is upgrading its capabilities in this area to offer a powerful suite of transaction banking tools available to businesses through an easy-to-use digital platform. A prime example is the launch of ADIB Direct, a largely digital offering providing efficient in-office services that can save companies time and resources — a key factor for them to successfully compete in a modern, globalized world.
The UAE is already ranked 25th globally for competitiveness and first in the MENA region. The strategy to encourage the private sector in general — from start-ups to more mature companies — while supplying fiscal stimulus to provide liquidity and foster growth will only accelerate the nation’s productivity in the coming years.
Islamic banking has a major role to play in reaching these objectives. The industry has seen tremendous growth over the last 10 years, with most GCC countries building their Islamic financing capabilities and creating domestic Islamic finance hubs. Despite this impressive track record, S&P Global Ratings expects the Islamic finance industry’s growth to temper to low- to mid-single-digit levels in 2020–21 after a growth of 11.4% in 2019 following strong Sukuk market performance.
At the moment, key markets in the Islamic economy are Malaysia, Saudi Arabia, Indonesia and the UAE which is increasingly developing into a global hub. This is helped by the UAE being an ideal location at the center of the ‘Islamic Trade Corridor’ which connects Europe to the fast-growing Islamic-dominated economies of Southeast Asia. ADIB will therefore also continue to play a major role in structuring and arranging Sukuk issuances for the largest companies in the region while managing a strong retail banking proposition that can cater to expats and UAE nationals alike.
Despite a competitive banking environment in the UAE, ADIB has been able to maintain a strong market position with a 15% share of the UAE retail market. The bank has witnessed strong organic growth which has been complemented by select acquisitions, such as when the UAE retail banking unit of Barclays was successfully and rapidly integrated into ADIB.
Investing in digital banking has been a core focus for ADIB in recent years. This is based on the knowledge that complementing highly competitive, award-winning products with a leading digital banking proposition can attract customers from other banks.
Traditionally, Islamic banks are not known for their technological agility, but today they are successfully adopting transformational programs to become industry leaders in the digital era. It is pioneering technology such as blockchain, which is Shariah compliant, that can allow them to develop new competitive offerings and leap ahead of peers. ADIB’s focus has always been to deliver a highly personalized approach that values the human touch. However, today we have augmented this by providing cutting-edge banking services, delivered through digital channels.
On the corporate side, ADIB’s research shows that there is growing evidence that corporations which had never considered Islamic finance are now understanding the clear benefits of such solutions. Sukuk have established themselves globally as an increasingly attractive alternative for the funding of infrastructure and development projects.
According to Fitch Ratings, Sukuk issuances, which almost came to a standstill in March and April due to the fallout from COVID-19, rebounded in the second quarter of 2020 (Q2 2020), similar to the levels of the first two months of the year. This could indicate that both issuers and investors have readjusted their investment and funding strategies to reflect the new normal.
In general, Sukuk from the region have tended to outperform their conventional peers and achieve tighter spreads. This is driven by a combination of factors, including the relative scarcity of Sukuk issuance in general and the fact that the pool of Islamic investors keen to only partake in Shariah compliant instruments can lift demand for Sukuk by as much as 30% to 40% versus comparable conventional bonds from the region.
This investor demand also leads to a trend of outperformance on secondary markets, which in turn contributes to strong demand for new issuance. Sukuk issuances with a maturity of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan reached US$12 billion in Q2 2020, 42% higher than the previous quarter.
Sovereigns in key Islamic finance jurisdictions, many of which are net oil exporters, are expected to increasingly issue Sukuk to fund rising fiscal deficits due to oil price falls and coronavirus-related economic disruptions. S&P anticipates that the volume of global issuance will reach US$100 billion in 2020, against the US$162 billion seen in 2019, as COVID-19 could unlock the long-term potential of the sector. Despite the many challenges posed by the pandemic, there are also opportunities for Islamic finance. This includes a chance to seek more integrated and transformative growth with a higher degree of standardization, a stronger focus on the industry’s social role and a more meaningful adoption of financial technology.
According to Moody’s Investors Service, Sukuk issuance by Gulf sovereigns is expected to rise to around US$34 billion this year, from US$25 billion in 2019. The forecasted increase in Gulf Sukuk issuance is primarily driven by Saudi Arabia, which Moody’s expects to issue US$27 billion in Sukuk this year, up from US$19 billion. Although global issuance of Islamic Sukuk is expected to snap a four-year growth streak in 2020, Moody’s said it is still expected to be at the second-highest volume, with the rise in the Gulf partly offsetting a drop from Southeast Asia.
Overall Sukuk issuance from the UAE, Bahrain and Kuwait increased to a combined US$15 billion in the first half of 2020, from US$10.8 billion a year earlier, supported by higher issuance from Bahrain. The UAE was the fifth-largest Sukuk issuer in the first half of 2020, led by increased sales from corporate and financial institutions.
ADIB has a strong track record and has been involved in arranging multibillion-dollar structured and syndicated finance deals on behalf of clients operating across various industry sectors. ADIB has also advised a number of issuers on optimizing their capital and financing requirements, acting as the joint lead manager and bookrunner on a number of high-profile Sukuk mandates.
Most recently, ADIB acted as the mandated lead arranger and Islamic structuring bank for Egypt’s debut US$2 billion conventional and Islamic syndicated term facility. The transaction was the first sovereign debt that Egypt has raised from commercial banks and sets a strong precedent for similar transactions in the future. Within the last 12 months, ADIB has been the mandated lead arranger and bookrunner on financing raised for ACWA Power and on a US$692 million Islamic and conventional syndicated facility for Tabreed and last year, ADIB acted as the joint lead manager and bookrunner on the region’s first corporate green Sukuk, a US$600 million facility raised by Majid Al Futtaim.
The capital raised from this pioneering transaction is now being used to finance Majid Al Futtaim’s existing and future green projects, including green buildings, renewable energy, sustainable water management and energy efficiency. For ADIB, it represented a milestone achievement that sets a new benchmark for how organizations can use financing to achieve their environmental goals.
ADIB has been forced to demonstrate its resilience in the face of major challenges in 2020. As the recovery continues, the bank remains well placed to support customers and source new opportunities that support its long-term growth objectives.