The Importance of Islamic Banks in the

UAE's growth of economy

Abstract

With over 300 institutions in 75 countries, Islamic banking is one of the financial market's
fastest-rising categories. Economic growth has long been linked to financial institution
expansion, but research on the association among Islamic bank's spread as well as the
development of economic is few. As part of this research, we want to experimentally examine
the economic growth-determining power of Islamic banking institutions. According to a previous
study, the prevalence of Muslims in a population is the furthermost momentous aspect in the
spread of Islamic banks. 2SLS makes use of an external instrument, regressions demonstrate that
Islamic banks are not strongly associated with other financial institutions' expansion of the
economy. The inclusion of Islamic banking instruments has a significant impact on the strength
of beta convergence. Convergence is demonstrated with the simplest Solovian specifications
occurring; countries having a higher GDP per capita at the start of the century tend to grow at a
slower rate. After the numbers are crunched the statistical significance of this impact diminishes
as Islamic banking becomes more prevalent.

Introduction -

The association among the economic structure as well as economic expansion makes a broad
sense, such as growing the scale of institutions' financial services, banking transactions of
financial intermediation, and so on. It has been widely concerned by the researchers and scholars
because they both are interdependent to each other. Nations' greater emphasis on the financial
sector underlines their responsibilities in growth in the economy. Commercial bank and Islamic
banks are the two main types of financial institutions. During last 2 decades, the Islamic banking
system has evolved as a replacement or alternate to interest-based institutions, establishing its
status in the globe, particularly in Muslim nations. Recently, substantial growth rates in Islamic
banks have been documented in over 60 nations of the globe. According to financial experts,
Islamic banks will regulate about half of all deposited amount in the Muslim nations throughout
the coming years.

Literature Review -

Several experts have conducted significant research on the association between the expansion of
the financial system and economic expansion. Since financing is seen as a significant role in
economic expansion, the recent study on the link of banks and economic progress is quite
contentious. Since the increase of Islamic capital instruments and the quantity of Islamic banks
has been significant globally all through that period, experts have concentrated more towards
influence of Islamic bank systems, particularly on growth of economy. Western nations may
currently be striving to adopt Islamic banking procedures into their banks, and they have been
adding Islamic financial assets to keep up with their quick expansion and strong need.

1. Impacts of Islamic Banks in creating Financial Stability

Farahani and Dastan (2013) evaluated the association among Islamic bank’s expansion and
growth of economy. The UAE and other nations in the Middle East were among the 8 countries
studied. They studied the creation and evolution of Islamic banking system in these countries
over the previous years and revealed that Islamic financial expansion is associated to long-
standing productivity expansion. The relevance of Islamic banks and their comparative density
over traditional banks. They observed at 22 Islamic nations and discovered an association among
Market share of Islamic banks and growth of economy, as well as the expansion of banking
institution in Islamic-majority nations. In terms of market share, they discovered that Islamic
banks are more efficient than regular banks.

2. UAE’s Economic Growth and Islamic Banks

The United Arab Emirates area is a fast-rising commercial sector, related to banking sectors. The
banking industry in the United Arab Emirates serves an essential and stimulating influence on
the economy since it is able to guide capital backing to all those industries that require them the
most. It is critical that the banking industry develops so that more money and resources may be
devoted to beneficial purpose. The deployment of monetary backing will result in more tangible
capital equipment, ensuring economic progress. Global and local banks have thrived in recent
years in the relatively active and advanced market. Islamic banks, as per UAE bankers, have
supported tremendously to the UAE's longstanding economic prosperity. Islamic banking has
slowly acquired interest and eventual development in the UAE. United Arab Emirates 2 largest
financial institution are Abu Dhabi Islamic Bank and Dubai Islamic Bank. Even traditional banks
in the United Arab Emirates are looking for to fulfil of standard Islamic banking system, with
few leading the charge by establishing Shariah-compliant affiliates to enable transaction in a
Islamic way (Tabash, 2018).

Research Methodology -

For the current study, the qualitative research paradigm has been used. Qualitative research is a
primary sort of study that collects and works with numerical data and tries to extract meaning
from it in order to better understand phenomena by considering information about the targeted
person or place (Kumar, 2019). For the current study United Arab Emirates is the place of
interest or can also be called the sample of the study because of the existence and speedy
development of Islamic banks in the region. The vast number of study on the association of
Islamic banking and growth of economy but there are just very few studies which have
specifically talked about the United Arab Emirates. So, the exploratory research design was most
appropriate for the current study because it has researched a previously unexplored area of UAE
specs. (Silverman, 2016).

The research's results and outcomes are solely gathered from different sources. The secondary
data is generally defined as the secondhand data used for the research purpose but was collected
by someone else either for research purpose or maybe for any other reason. There are several
existing researches that examines the nexus of Islamic banking system and economic growth, so
the qualitative research approach has been used to review such literature especially that include
UAE in particular. The sources used for reviewing the literature includes the academic scholarly
journals, online newspapers (like Gulf news), press release, documents, reports that represents
the financial data. The use of secondary data has helped to collect the larger amount of
information about the topic also it has created the understanding to make comparison of Islamic
banking system a conventional banking system in the context of UAE. The United Arab
Emirates' Gross Domestic Product has been considered as the primary gauge of productivity
expansion whilst the Islamic financial assets, products and services represent the Islamic banking
system (Johnston, 2017).

The relevant theoretical literature and prior academic studies have been thoroughly reviewed in
order to discover the implications of Islamic banks on the UAE's GDP and overall economic
growth. The studies that highlighted the case of GCC countries, MENA countries, Middle East
countries, and specifically those conducted in the context of the UAE, were taken in order to
derive the most appropriate outcomes and to identify the impacts of the Islamic banking system
on the growth of economy of the United Arab Emirates. The current study has been designed by
utilizing the observational methods for collecting the information from historical theoretical and
statistical data on the banks of UAE and its economy. The analysis of the study required no rigid
procedures or requirements as the current study is qualitative in nature, so the researcher didn’t
need to use codes, analytical techniques or and statistical test to analyses the data but the
investigator or researcher has just relied on his understanding developed with the help of
studying the extensive literature about the phenomena under study (Mihas, 2019).

Empirical Analysis -

Islamic financing of the banking system has been the most notable innovation in the banking
industry in the last two decades globally. Worldwide, and over 350 Islamic banks and financial
institutions operate in about 60 countries, the majority of which are Islamic. The present value of
worldwide Islamic financial assets is reaching US$1 trillion, and it is predicted to grow to US$4
trillion by 2020. Islamic financial assets and services provide a feasible alternate method of
investing and financing, particularly for individuals who were non-bankers prior to the growth of
Islamic banks. In the UAE, the Islamic banking business has fully-fledged considerably during
the past 20 years. Following are some findings that represent the contribution of United Arab
Emirates in the global growth of Islamic financing (Muhammad et al., 2019).

1. Demand of Islamic Banks in UAE

United Arab Emirates is a Muslim state thus the people of United Arab Emirates demand Islamic
banking system more than conventional banking system and this is giving the raise to the
numbers of Islamic banks in United Arab Emirates. According to figures recently provided by
the Dubai Centre for Statistics, Islamic financial institutions in the United Arab Emirates
generated approximately 8.3 percent of the UAE's GDP in 2018. The Islamic economic
institutions cover several sectors like the Islamic finance sector, the business sector, the sector of
transformational industry etc. but the contribution by the financial sector was largest. The
percentage of participation of Islamic financing to GDP has been growing. The ratio was 22.2
percent in 2014, climbed to 24.7 percent in 2015, and reached 26.3 percent in 2016. In money
units, the contributions reached 32.77 billion Emirati Dirham in 2016, up from 28.78 billion
Emirati Dirham in 2014. Meanwhile, data reveal that development has stabilized and did not
improve in 2018 compared to 2017. But the analysts expect the rapid increase in the Islamic
banks and their financial assets’ growth by 2021 (Muhammad et al., 2019).

The data revealed by Gulf News Press Release (2019) shows the growth of 7% in the total
Islamic bank’s financial assets which is higher than its counterpart, conventional banks (4-4.5%).
Consequently, Islamic banking growing rapidly in the UAE market, rising from a single-digit
market share to more than 20% and continuing expanding. The demand for Shariah-compliant
offerings was cited as a significant driver of growth. Furthermore, Islamic banks have been
starting to catch up to their standard products in service quality, product choices, and digital
strategy, making the transfer simpler for clients. Over half of UAE customers (55%) owned at
least one Islamic financial instrument in the previous year, a 3% increase over 2017. It is also
projected that Islamic banking adoption in the UAE would exceed 25% in the next years
(Alqahtani, Mayes and Brown, 2017).

2. Islamic Banks in UAE and Customer’s Experience

It can be seen that in UAE, Islamic banks have been making significant progress and
transforming consumer perceptions. It has also been enhancing the experiences and propositions
of the customers. Customers trust the United Arab Emirates because it looks more in path
feasiblity to expand the growth of Islamic banking and Islamic finance. It is possible to predict a
rise in demand for Islamic financing securities and commodities, and due to increased customer
fulfilment, supplementary uptakes can be anticipated among both Islamic and non- Islamic
clients.
As per data, 55% of United Arab Emirates consumers utilized at least one Islamic banking
product in the preceding year. Non-Muslim clients have climbed by 12 percent. (Shome and
colleagues, 2018)

Conclusion -

Since its dramatic ascent over the previous 20 years, the link among Islamic banking and
economic growth has attracted the interest of numerous experts. Nevertheless, relatively few
scholars have a specific or complete focus on the UAE. The most recent study looked on the link
between Islamic banking and growth of economy in the UAE, which is the 3 rd biggest
marketplace for Islamic banks in terms of Islamic financial asset growth. The data for this study
came solely from secondary sources. One of the key reasons for attracting domestic and overseas
investors is Islamic banking's qualities, particularly risk sharing. Because they conform with all
Shariah requirements, Shariah-compliant financial goods and services have encouraged
individuals who cannot bank to utilize them. Customers trust Islamic banks more than regular
banks, particularly in the United Arab Emirates. Increasing consumer demand will help Muslim
banks in the UAE increase profits, while increased investment demand will help banks generate
revenue.

The increase in FDI by foreign investors will add to the GDP of the UAE. As a result, the
Islamic banking system may be considered to promote economic growth. Alternatively, the UAE
government may be pressed to implement additional rules and monitor Islamic banks in order to
close the gap. Banks should assess their present performance against the central bank's
requirements and report and remedy any flaws. The current functioning of Islamic banks in the
UAE has come to a halt, but analysts believe that Islamic banking will grow significantly in the
future. As a result, Islamic banks and their surrounding nations must give importance to Islamic
banking's evolution. Islamic banks also offer to collaborate with regular and international Islamic
banks. To reach the highest objective of encouraging the expansion of Islamic financial products,
goods, and services, a solid legislative framework must be built. Islamic banks must seek to
identify new and improved ways to offer services and bringing new and unique Islamic financial
products to market in order to give a great client encounter.

References -

Abedifar, P., Hasan, I. and Tarazi, A., (2016). Finance-growth nexus and dual-banking systems:
Relative importance of Islamic banks. Journal of Economic Behavior & Organization, 132,
pp.198-215.

Al-Malkawi, H.A.N. and Pillai, R., (2018). Analyzing financial performance by integrating
conventional governance mechanisms into the GCC Islamic banking framework. Managerial
Finance, 44(5), pp.604-623.

Alqahtani, F., Mayes, D.G. and Brown, K., (2017). Reprint of Economic turmoil and Islamic
banking: Evidence from the Gulf Cooperation Council. Pacific-Basin Finance Journal, 42,
pp.113-125.

Daly, S., & Frikha, M. (2016). Banks and economic growth in developing countries: What about
Islamic banks?. Cogent Economics & Finance, 4(1), 1168728.

Farahani, Y. G., & Dastan, M. (2013). Analysis of Islamic banks' financing and economic
growth: a panel cointegration approach. International Journal of Islamic and Middle Eastern
Finance and Management.
Ledhem, M. A., & Mekidiche, M. (2020). Economic growth and financial performance of
Islamic banks: a CAMELS approach. Islamic Economic Studies.

Shome, A., Jabeen, F. and Rajaguru, R., (2018). What drives consumer choice of Islamic
banking services in the United Arab Emirates?. International Journal of Islamic and Middle
Eastern Finance and Management, 11(1), pp.79-95.

Supriani, I., Fianto, B. A., Fauziah, N. N., & Maulayati, R. R. (2021). Revisiting the
Contribution of Islamic Banks’ Financing to Economic Growth: The Indonesian Experience.
Shirkah: Journal of Economics and Business, 6(1), 18-37.

Tabash, M.I., (2018). Islamic financial investments and economic growth evidence from the
emerging economy, United Arab Emirates. International Journal of Economics and Business
Research, 15(1), pp.125-139.

Tabash, M. I., & Dhankar, R. S. (2014). Islamic Financial Development and Economic Growth--
Empirical Evidence from United Arab Emirates. Journal of Emerging Economies and Islamic
Research, 2(3), 15-31.