Due to its influence and the services it offers, the size of Islamic finance in the UAE market is significant. Serious prospects for financial growth and a poverty decline have made Islamic finance attract international market players, whether independent or profit-making organizations. Market suppliers and national authorities have the right to use opportunities of the presence of a clear legal and supervisory structure and the accessibility of adequate market information.
In the United Arab Emirates, Sharia compliance is a unique feature of Islamic banks based on protecting the integrity of Islamic financial institutions. A governing body rules over the latter and their financial products. The Islamic Financial Services Board (IFSB) is a member of an international standard-setting organization. It began functioning on November 3, 2002 and started operations on March 10, 2003 (Al-Tamimi & Jabnoun, 2002). The mandate of the IFSB involves promoting and enhancing the soundness and stability of the Islamic financial services industry.
The IFSB achieves its main goal by issuing worldwide standards and guiding values for the industry covering banking, capital markets, and insurance sectors broadly. The IFSB prepares standards that follow the due process outlined in its Guidelines and Procedures. The issuance of exposure drafts and holding of workshops alongside public hearings constitute the elements of the standards. Alongside coordinating initiatives concerning industry-related issues, the IFSB also conducts research. It takes stock of the progress in the Islamic financial services sector through testing the existing international economic setting. The IFSB also examines relevant strategies and essential building blocks in the quest for strengthening the resilience of Islamic finance in the UAE and advancing global engagements. Promoting financial stability in the Islamic financial system has become part of the IFSB reform process. It stresses the need for Islamic banks to have a mechanism introduced based on applying rulings from Sharia scholars and monitoring the compliance with the Sharia law. In line with IFSB recommendations, the Sharia Supervisory Board has the responsibility of approving products and services and conducting reviews to ensure the respect of Sharia. One notable advantage of a centralized SSB is the ability to harmonize the rulings of Sharia reducing Islamic banks’ costs associated with Sharia compliance. In the UAE, the centralized SSB has been set up as an independent public institution (Rehman, 2012).
In the UAE, there exist another governing body tasked with ruling over the Islamic financial services and monetary products. The Dubai Financial Services Authority (DFSA) is a unified regulatory body responsible for the approval, permission and registration of institutions and individuals wishing to provide financial services in or from the DIFC. Another mandate is supervising and regulating members of the DIFC. Aside from making rules and regulations, the DFSA develops strategies on relevant market issues based on issuing protocols (Al-Tamimi & Jabnoun, 2002).
The IFSB relates positively to financial institutions offering Islamic financial products and services. Islamic banks and institutions have adopted the policy of enhanced transparency and disclosure requirements. Through IFSB guidance, they develop appropriate strategies for promoting good business practices and protecting stakeholders and can take enforcement measures in case of noncompliance. The IFSB provides technical assistance to Islamic banks and encourages the buildup of experience by supervisory authorities within their jurisdictions. However, the challenge of Sharia compliance remains inevitable. Liquidity represents the most pressing issue for Islamic finance institutions because they can operate only in a small secondary market. Moreover, they have scarce resources for managing liquidity as compared to their conservative counterparts. Documents for Islamic financial products mostly become tailor-made for detailed dealings as the product range and contract volumes become low. Expenses related to this lack of regulation increase as transaction volumes rise (Rehman, 2012).
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The lack of awareness is brought about by the failure to educate users on the Islamic financial products. The absence of qualified skills and sustaining a competent workforce pose a challenge and may cause damage to the affluence of the institution due to ineffective management. Different Sharia regulatory frameworks result into various explanations of the Islamic law (Hossain & Leo, 2009).
The Sharia law in the UAE forms the basis of the fundamental legislation of the country. Applicants for Islamic banking licenses must provide information on their plans for Sharia compliance. An application entails proving that a strong corporate governance structure tailored to Islamic banking is functional. Islamic financial institutions shall have to comply with the provisions of the Islamic Sharia law and perform their activities in agreement with this law. To get started, they shall be focused on following the union law and other established legislation and policies in their current performance. Institutions will take the structure of public joint stock companies, on most occasions set in agreement with the requirements of the law. The licensing, administration and assessment are often regulated by the UAE Central Bank in line with the legislation and in the way not floating the terms of the law. These financial institutions shall get the right to proceed with all or part of banking, financial and investment services and products. The related articles and memorandum of association of these institutions should clearly show that the Sharia supervision authority of minimum three members is formed. The enactment allows financial institutions to operate according with the provisions of the Islamic Sharia law. Significant articles of association determine the way in which the Sharia supervision authority is created and in which way it will execute its duties. Names of persons selected as members of such regulatory body is automatically forwarded to the senior authority for approval. Institutions that have existed by the time this law is enacted will have to determine their situation in the period of one year from the date of application. Through their relevant jurisdictions, ministers in the UAE implement the terms and provisions of the law. A written request can be sent to the DFSA to get to know how it intends to fulfill the licensing procedures, and copies of articles and the memorandum of agreement on the application must come with an applicable fee. The applying institution must conform to all licensing requirements. A certified list of securities makes the system perform duties in a sound and rational way (Hossain & Leo, 2009).
Among the banks offering Islamic financial services and products, there are the Dubai Islamic Bank, Emirates Islamic Bank and Noor Islamic Bank regulated by the Central Bank of the UAE. Abu Dhabi-based United Arabs Emirates central bank unanimously supervises and regulates the domestic banking sector. To ensure banks’ financial stability, they are organized by the Central Bank of the UAE. It permits banks in the United Arab Emirates to calculate their minimum capital requirements for credit risk on the internal basis in line with estimates of risk components (Al-Tamimi & Al-Amiri, 2003).
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The Dubai Islamic Bank in the United Arab Emirates provides different Islamic financial services and products. Among the latter there are transaction and financial services for manufacturing and infrastructure. It also provides electronic banking services. Currency contracts and profit-enhanced products represent some of the products offered by the bank. The Emirates Islamic Bank operates with the sole aim of providing selective customers with Islamic financial solutions. Its goods and services are developed based on the highest standards. Among the services offered by the bank, there are unique property investment and point of sale services. The products offered include personal banking, priority banking, and business banking.
Contrasting the two banks, the Dubai Islamic Bank as the world’s first full-service Islamic bank surpasses the Emirate Islamic Bank that is ranked third in the United Arab Emirates. Besides, the Dubai Islamic Bank boasts of dominance in relation to assets and operating profits. Being established in 1975, it has survived to form one of the biggest consumer bases in the UAE. It boasts over 1.25 million customers as compared to the Emirates Islamic Bank established in 2004 with just 200, 000 customers. The Dubai Islamic Bank has an extensive network of 80 branches unlike the Emirates Islamic Bank, which has a network of 50 branches. Having gone through trials of time, the Dubai Islamic Bank has an established record system and banking knowledge. However, the EIB has also gone through the test of time and has won the credibility of customers (Al-Tamimi & Al-Amiri, 2003).