Adnan Chilwan, Group CEO, Dubai Islamic Bank: Interview

Interview: Adnan Chilwan

How will the opening of Islamic windows in conventional banks affect competition?

ADNAN CHILWAN: I am a firm believer in the fact that growth does not come from being a niche player. Truly dynamic or progressive organisations focus on the entire market. Keeping that in mind, competition with Islamic banking comes from every bank in the market, not just other sharia-compliant players. Hence, the concept of Islamic windows within a conventional setup should be viewed more as a defensive strategy.

How can Islamic finance further its growth as a whole without risking asset quality?

CHILWAN: The Islamic banking assets in the UAE stand at over Dh530bn, with growth of about 7% recorded since 2016. It represents nearly a fifth of the entire UAE banking sector and is nearly three times overall credit expansion. In the Middle East and Asia, Islamic finance is viewed as a key growth sector, and Dubai is aspiring to become a leading Islamic economy. Backed by strong retail demand and proactive government legislation, Islamic banks in the region are continuing to broadly outpace conventional ones.

High growth does not necessarily mean possible future deterioration in asset quality, as long as strong governance standards are there. That said, I believe there are other factors that can continue to support the growth in this sector, such as innovation, education and standardisation. Innovation is needed in areas involved in the expansion of services; we need to embrace the use of digital technologies and improve the quality of our products to increase the appeal of Islamic finance to a wider range of customers. Once word about Islamic finance spreads globally, education will have an important role to play.

And of course, for true globalisation, standardisation is non-negotiable. Considerable progress has already been made in areas of accounting and financial regulations with the Accounting and Auditing Organisation for Islamic Financial Institutions, amongst others, but the regulatory environment is still largely based on jurisdiction. With more involvement from multilateral lending institutions, standardising legal structures that are in accordance with sharia law could easily be achieved. The UAE has made great strides in this area by establishing the Dubai Islamic Economy Development Centre and a central sharia board to provide unified supervision and guidance for Islamic finance institutions, but further work needs to be done to standardise Islamic finance worldwide.

What are your expectations for sukuk (Islamic bond) issuances from the corporate sector?

CHILWAN: During the first half of 2017, we saw global sukuk issuance increasing by around 37% to more than $40bn compared to the same period a year earlier. This was primarily driven by large GCC issuances, and in particular Saudi Arabia, which undertook the largest sukuk issued globally to date of $9bn. Sukuk is rapidly becoming the preferred method for corporates and sovereigns across the globe as it allows them to diversify their investor base and benefit from the relatively stronger liquidity conditions in the domestic and international financial markets. For 2018 we expect the issuances to be higher than last year, reaching more than $70bn given that regional and global liquidity remains robust with the stabilising oil prices.

I believe that sukuk markets will remain sturdy because of the legal instrument’s attractive return to the issuer – that is, a wider investor base and the consequent tightening of prices due to demand – and also because there continues to be a hunger for quality credit in the market from liquid investors. With the availability of hybrids and perpetuals, capitalisation requirements can also be met through additional Tier-1 sukuk. Hence, these may be preferred by corporates as they provide liquidity and equity credit and are not dilutive as would be the case with an equity issuance.