Islamic home finance gains in the UAE

Islamic home finance gains in the UAEImage Credit: Archives,

Driven by improved economic fundamentals and rising investor confidence, the real estate investment sector in the UAE has been recently posting significant growth. According to the Dubai Land Department, around 17,289 real estate transactions worth Dh37.5 billion were conducted in Dubai in the first half of this year.

While many real estate buyers in the UAE still prefer cash transactions, the demand for home finance is growing steadily. Lenders also point out that increased sales in the property sector has led to a surge in Islamic home finance.

''There were only a handful of lenders providing Islamic home finance in the UAE in 2011 and with stringent financing terms,'' says Caetano Fernandes, Senior Vice-President and Head of Mashreq Gold. ''But in the past 24 months, a number of Islamic financial institutions have entered the market to tap opportunities.

''The outlook for the Islamic home finance sector remains positive for the rest of the year, as we expect transaction volumes to improve further in the fourth quarter.'' With restricted supply from the primary property market, home finance solutions are now primarily being offered for secondary market deals, points out Mufaddal Khumri Idris, Head of RAK Bank Amal.

''Additionally, customers are now approaching Islamic banks for a more secure mode of refinancing option through Ijarah, where a bank buys the property from the owner and leases it back to the customer, while keeping the value of the property higher than the amount financed by the bank,'' Idris explains.

The most significant trend witnessed over the past few years is the institutionalization of the Islamic home finance sector as a key pillar of the Islamic retail asset suite.

''Financial institutions have now developed a better understanding of the legal system with regard to Islamic home finance,'' says Faisal Aqil, Deputy CEO of Consumer Wealth Management at Emirates Islamic. ''This experience has aided the sector in establishing know-how, improved understanding of risks and overall confidence in the legal system.

''Our internal analysis shows that Islamic institutions currently serve more than 50 per cent of the market demand, up from approximately 35 per cent last year. This underlines a shift in consumer mindset and overall acceptability of Islamic financing products in the market.''

He adds: ''Going forward, we expect Islamic players to continue to serve the majority of demand as consumers start to realise the value Islamic solution providers bring to the table.''

According to a report by Thomson Reuters, Islamic financial assets were estimated to be worth $1.35 trillion (Dh4.95 trillion) globally in 2012 and they are growing at 15-20 per cent per year in most core markets.

The Islamic Finance Development Indicator, a numerical measure representing the overall health and growth of the Islamic finance industry worldwide, shows the UAE as the fourth largest Islamic finance industry in the world, with $118 billion in total Islamic finance assets. The indicator was created by Thomson Reuters and the Islamic Corporation for the Development of the Private Sector, the private sector development arm of the Islamic Development Bank.

Experts say the plan of His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, to establish the emirate as a hub for the global Islamic economy will inject new growth momentum into the Islamic finance industry.

''Islamic banking is a recent development in the financial services industry and is based on a robust set of principles rooted in fairness and transparency,'' says Varun Sood, Chief of Home Finance at Dubai Islamic Bank. ''Following the financial crisis, the Islamic banking sector has been increasingly coming to the fore, eventually surpassing the conventional lending segment in terms of growth rates. While Islamic banking assets in the UAE increased by 15 per cent last year, [assets] for conventional lenders rose less than 10 per cent.

''With further growth expected in the sector, we are positive about the opportunities that lie ahead. We also believe that Islamic banking products can compete on an equal footing with conventional banking services.''


To regulate property financing and increase transparency, the UAE Central Bank proposed caps on loan-to-value ratios for residential mortgages last year. It set a limit of 75 per cent of the purchase price for expatriates and 80 per cent for Emiratis for first home loans, and 60 per cent for expats and 65 per cent for UAE nationals for subsequent property purchases.

Bankers unanimously point out that the implementation of the mortgage regulation was an affirmative step in the UAE real estate and mortgage sectors.

''It has further strengthened lender confidence as it provides an adequate cover for risk, if any, on individual property,'' says Fernandes. ''In addition, such regulatory measures will positively impact consumer behaviour in the long run.''

However, he adds that the new regulations have also posed certain challenges.

''Over the past few months home finance lenders have witnessed lower volume of resale transactions in the secondary market owing to the new finance-to value regulations,'' he says. ''The increase in property registration fee has also affected home finance volumes as compared to last year.''

The Central Bank's regulations have a similar impact on Islamic and conventional mortgages, particularly because the product offerings of the two models are similar from a customer's point of view.

''The Central Bank's new mortgage rules will boost the long-term credit risk profiles of banks in the country,'' says Arshad Rana, Head of Secured Assets at Noor Bank. ''The new regulation has made the market more competitive, resulting in both conventional and Islamic banks offering enhanced products.''

Fahad Al Shaer, Managing Director of Abu Dhabi National Islamic Finance, agrees that the Central Bank regulations have instilled a sense of stability, almost akin to creating a level playing field in terms of prices.

''It has definitely helped to cool down prices, which is a boon for serious buyers,'' says Al Shaer. ''I believe that actual buyers with at least 25-30 per cent cash in hand will be available in the market for finance.''


While the Islamic financial products were initially introduced to cater to Muslims — Islam prohibits interest in financial transactions — non-Muslim customers have now started to take advantage of the growing suite of Islamic products and solutions offering competitive returns.

Bankers, however, say the lack of consumer awareness about the differences between conventional and Islamic banking products is one of the biggest challenges in the sector.

''Since the Islamic finance industry is still in the nascent stage of growth, awareness about Islamic finance is very elementary among consumers,'' says Idris. ''Besides, compared to conventional banking products, Islamic products have traditionally been process intensive and documentation heavy. In some Muslim-majority markets, the regulators often don't have a clear mandate of growing the Islamic finance sector.

''While Islamic banks place a great emphasis on Sharia compliance, there remains a greater need to upscale the service levels.''

It is important for Islamic banks to understand that as they enter a new and sustained phase of growth, their products and risk-management structures will experience significant room for improvement, points out Aqil.

''Regulatory norms, risk assessment and governance will play a critical part and there will be more emphasis on ethics and social values rather than legalistic mechanics and modified contracts,'' says Aqil. ''Moreover, competition from conventional banking remains intense and product innovation with credible allocation of credit and risk will become more pressing.''

The ABC of Islamic finance by Hari Bhambra, Senior Partner, Praesidium, a regulatory and client advisory firm

Murabaha: The financier would acquire the property and sell it back to the buyer with a mark-up. The financier carries all of the credit risks, unless risk mitigators are put in place.

Ijarah: The financier typically acquires the property for the buyer and then leases it to the buyer. The rental income constitutes the repayment. At the end of the lease term, the property is then transferred to the buyer, usually through a nominal sales agreement. The financier retains ownership rights and associated ownership risk during the term of the Ijarah.

Diminishing Musharaka: The buyer and financier acquire the property together, with the buyer's share typically constituting the down payment. The financier then leases its
share of the property to the buyer in return for a rental payment and over time, as per the agreement, will transfer shares in the property to the buyer as payment milestones are achieved. This mode is perhaps the most prudent for a financier as the risk is shared proportionately between the buyer and financier.

Istisna: The financing of an asset that is yet to be produced. This could be utilised for new builds or off-plan financing.

Learn how to manage your property portfolio in the UAE

Source: Chiranti Sengupta, Features Writer, Property Weekly


For Rent


View more properties

For Sale


View more properties