Islamic Banking | Coming Soon in UAE
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Islamic Banking

Islamic Banking - Coming Soon in UAE
3 October 2019

A characteristic feature of the UAE and other Muslim countries, unusual from the point of view of a Westerner, is the penetration of religious norms and principles into all spheres of life.

The banking sector, in which there is such a thing as Islamic banking, is no exception.

What is Islamic Banking

The principles of Islamic banking, based on Sharia law, state that the receipt of interest from financial transactions is strictly prohibited as an activity. Сharging interest on loans or other transactions is called “riba”, usually, this term is understood as usury, although there is disagreement among Muslims regarding a precise definition. 

This may seem like a dead end to the banking system, but it is far from the case. UAE banks provide such a service as Islamic banking to their customers and at the same time do not remain unprofitable.

The main rule that banks adhere to in this situation is the absence of interest payments for all types of transactions, for example, when issuing loans. And at the same time, the bank takes part in the profits and losses of the client (so-called equity participation), receiving in this way the profit from operations, replacing the receipt and payment of interest.

If a businessman wants to get a loan in a bank according to the principles of Islamic banking, he will not pay interest on the loaned amount of money, but gives the bank the right to receive a certain share of profit in his enterprise. Moreover, if the company is unsuccessful, then this operation will be unprofitable for the bank.

What is Islamic Banking

The basic principles of Islamic banking

As we have already seen, receiving interest from operations is not wright, according to Sharia law. This principle is deeper than it might seem at first glance. According to it, in order to receive income, one must earn it. It is necessary to make money with one’s own labor, and not just lend and receive interest. Another aspect of the negative attitude to the usual methods of earning for the Western banking system is that it is considered improper and unprincipled to raise interest rates for those in need.

The Islamic banking system is considered more socially responsible in comparison with the traditional banking system. Financial flows should not be aimed at earning more interest, but on projects that comply with ethical standards in the first place. Naturally, this cannot be gambling or dubious entertainment, on the contrary, the priority is the real economy and projects that benefit the community.

Islamic banking proponents emphasize that such a banking system is more stable and less exposed to risks. Unacceptable from the point of view of a religious approach is such a thing as gharar – uncertainty, or chance or risk. Thus, many financial instruments, such as investment in derivatives, cannot be used. All information on possible investments should be disclosed before making an investment, not allowing the investor to make risky decisions.

Islamic Banking in the UAE

About two dozen specialized Islamic banks operate in the UAE. Also in the emirates, as in many other Islamic countries, there is a practice where conventional banks offer their customers who want to adhere to religious laws, the so-called Islamic window operations. In this case, the bank can conduct both ordinary operations and those that comply with Sharia law, depending on the needs of the client. 

An interesting trend in the development of Islamic banking is that it is rapidly gaining popularity, its share in the UAE market has already exceeded 20 percent and continues to grow. Customers are increasingly demanding Sharia-compliant services and products from banks. 

An important factor is that banks offer more modern solutions in the field of Islamic banking, making such operations simple and easy for customers who increasingly rely on such products and see them as more trustworthy. For many residents of the UAE, Islamic banking in the field of personal finance, auto financing and lending looks more attractive, as it allows them to get higher profit rates (analog for interest rates in traditional banks) and pay lower amounts for late payments. Interestingly, the services of Islamic banking in the UAE are equally used by Muslims and non-Muslims.

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