Dubai aims to be a centre of global Islamic finance

With Dubai now putting the global financial crisis behind it, policymakers are seeking new opportunities to shape the emirate’s economic narrative in the years to come. The lead-up to Expo 2020, which will require major development efforts to accommodate an influx in tourists, will serve as a guideline for forecasting growth in highly correlated sectors such as construction, real estate and tourism. However, a second, much different planned development came in the end of 2013, when Dubai announced its aspiration to become the global capital of the Islamic economy.

Creating A Name

While no such title formally exists, the emirate aims to pursue this goal by addressing several economic sectors specific and common to Muslims worldwide, providing them with a platform for development, standardisation and growth. Much like the religion itself, which has four separate schools of thought and no central authority or adjudicating body, Muslim economic activities around the globe remain decentralised. In offering a venue for leaders, Dubai hopes to reinforce its role as a focal point for Islamic commerce. The initiative should add to GDP by bringing new economic activities, and will also reinforce some existing ones — for example, the emirate’s status as a hub for sharia-compliant finance, as a meeting place and tourism destination for Muslims, and as a centre of global trade. For the global Muslim community, the opportunity inherent in this plan comes from a recasting of the Islamic economy in a systematic way that can improve the quality of goods and services as well as identify new opportunities.

Announced as a goal in late 2013, the emirate provided a timeline of three years to make this unofficial role a widely accepted one. It kicked off the process with a conference at the end of 2013 called the Global Islamic Economic Summit, and hosted a second one in October 2014. The emirate has also created the Dubai Islamic Economy Development Centre (DIEDC), a government agency that has produced a master plan, with seven pillars and 46 corresponding action plans, toward meeting this aim. Some of these plans have already been introduced, and all are set to become active within three years of October 2013.

Measuring Opportnity

The first step in this effort was defining and valuing the Islamic economy in the hope of branching out beyond more familiar elements of the segment, such as the fast-growing field of Islamic finance and the halal foods and consumer goods industry. The emirate partnered with the global news and information provider Thomson Reuters to study the sharia-compliant economy worldwide.

According to this research, the 57 Muslim-majority countries that are members of the Organisation of Islamic Cooperation (OIC) accounted for 8.9% of global GDP in 2012, or $6.4trn. GDP for the group is projected to grow at an average annual rate of 6.3% from 2013 to 2018, according to IMF projections, compared with an overall average of 5.3%. According to the Pew Research Centre’s Forum on Religion and Public Life, Muslims accounted for 23.4% of the world’s population in 2010, a number that will rise to 26.4%, or 2.2bn people, by 2030. The average annual growth rate is seen at 1.5% for Muslims and 0.7% for others. The planet’s Islamic population is also younger: 62% of Muslims are under 30, compared to 51% overall, according to DIEDC.

A Look At Finance

The seven pillars of the DIEDC plan are finance, halal products, tourism, Islamic arts, knowledge, standards and digital infrastructure. While not all of the pillars correlate to a specific economic activity that can be valued, two in particular stand out as measurable and key elements of the effort: financial services and consumer purchases.

As of late 2014 the global value of assets held by sharia-compliant financial institutions or in sharia-compliant financial instruments stood at about $1.8trn, according to Standard & Poor’s, and is growing at a rate of about 15% to 20% annually. Thomson Reuters believes the ultimate potential of Islamic banking itself in its core Muslim markets is $4.1trn, as measured by assets in the system – that compares with $985bn in assets at the time of the estimate, in 2012. In consumer goods, the Thomson Reuters study pegged the overall value of the market at $1.62trn as of 2013, and likely to reach $2.47trn by 2018.

Dubai is currently a major financial centre for sharia-compliant activity, and one of six countries in which Islamic financial assets are currently concentrated (the others being Saudi Arabia, Qatar, Indonesia, Turkey and Malaysia). Dubai’s government and corporations are leading issuers of sukuk, or the sharia-compliant alternative to bonds. To build human resources in the Islamic finance sector, the Dubai Centre for Islamic Banking and Finance (DCIBF) of Hamdan Bin Mohammad Smart University, is offering an executive masters of business administration (MBA) for Islamic finance.

One of the 46 initiatives of the global-capital plan has been to develop Dubai’s capital markets as a platform for secondary trading in sukuk. One of the first initiatives to be implemented, the establishment of the Dubai Global Sukuk Centre, was carried out with the stated aim of listing sukuk on either of the country’s two main securities exchanges, the Dubai Financial Market (DFM) and NASDAQ Dubai.

The centre was launched in 2013 and by year-end 11 new sukuk were listed, bringing the total listed value to $13.28bn, according to the annual report of the DFM. Dubai now counts as the third-largest sukuk market worldwide, behind London and Kuala Lumpur, and the emirate expects the sukuk market to grow from $251bn in issues outstanding in 2012 to $421bn by 2017, according to DIEDC figures.

Halal Goods

Total Muslim spending in the food-and-beverage sector totalled $1.09bn in 2012, or 16.6% of the global total – a figure that is expected to grow to $1.63bn by 2018, according to Thomson Reuters. Currently 75% of halal food is produced in non-Muslim countries, making this more of an untapped opportunity to be captured than, for example, tourism or Islamic finance, where Dubai is already a leader.

While food may seem the most obvious area in which halal rules are necessary, halal concepts can be applied in a number of other industries, including pharmaceuticals, clothing, media, cosmetics and tourism. Clothing, a key element of the halal consumer typology, accounted for $224bn in 2012, or 10.6% of global expenditure, according to Thomson Reuters. Brands emerging in the cosmetics sector, such as Wardah, Ivy and OnePure, guarantee users that all of the ingredients used in their production are halal.

Attempting to provide a home base of sorts for global Islamic financial markets could prove tremendously profitable for Dubai. However, though the emirate has many factors in its favour, already being a major Islamic finance centre with easy access to global markets, the same things that have presented challenges to centralising the global Islamic economy in the past – such as setting standards for transactions in a wide range of cultures – will continue to pose difficulties.