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The banking sector is a vibrant segment of any economy offering various products and services best suited for the specific location. Islamic banking has a robust foothold in GCC countries with Islamic Banks assets growing threefold in comparison to those of conventional banks between 2008 and 2012.While Islamic banks serve the same functions as conventional banks, distinct and fundamental differences exist between the two. The paper provides an overview of the sharia-compliant products and services offered by Emirates Islamic Bank, highlighting their key features that differ from those offered under the conventional banking system.
Emirates Islamic bank was started in 2004 with the sole aim of providing tailor-made Islamic financial solutions for its target customers. It is a subsidiary of Emirates (EBD) and operates in personal, retail, and corporate segments, offering sharia-compliant products and services. The bank provides high quality service guided by principles of fairness, transparency, accessibility, and empathy to enhance customer experience. The bank has grown and attempts to achieve the leader status among the banks operating in the UAE. The goal can be realized through offering unrivaled innovative sharia-compliant products that meet the customer need in the market, which must also hugely contribute to the global penetration of Islamic banks into the GCC.
During the third quarter of 2017, the bank reported a fourfold increase in net profits to AED 498 million and a decrease of six percent in total income to AED 1.8 million in comparison to a similar period last year (Zawya, 2017). The decline in total income was caused by a fall in income from investment properties (“Emirates Islamic announces Q3 2017 results,” 2017). The bank reported a total income of AED 2.5 billion (net of distribution to the sukuk holders and share of profits for customers), while a net profit was AED 106 million in 2016.This represented a three percent growth in total income attributable to increase in customer deposits, finance, and investing income (Emirates Islamic, 2016) In 2015, the total income reported was 2.4 billion and the net profit AED 641 million. In 2014, the total income was 1.95 billion and the net profit earned was AED 364 million, while in 2013, the total income was 1.9 billion and the net income AED 139 million. The last declared dividend was AED 0.03 per share.
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Emirates Islamic Bank endeavors to occupy a primary position in the development of innovative products and services on the market. The most noteworthy recognition is its first mover strategy across the Islamic banks in the area of mobile application, offering a complete application suite supported by smart phones. It was the first to launch a mobile application for iPhones. This was a beneficial move, since mobile banking is the future of GCC retail banking, and the use of smart phones is commonplace in the region. Thus, the bank was able to boost its brand awareness and brand loyalty by providing an efficient, convenient, and cost-friendly platform that captured the unbanked population with an access to smart phones. The bank offers a complete suite given the immense opportunities presented by the mobile banking sector.
The Emirates Islamic Bank has won some industry awards in the recent years. Last year it received an accolade from Global Finance Magazine named an Innovator in Islamic Finance for El trade product, which is an online trade finance and supply chain platform (Zawya, 2016). The bank was also recognized as the fastest growing bank in the United Arab Emirates. Therefore, the innovation efforts made by the bank have positively impacted on its overall performance.
In 2013, it was called the best Islamic Bank in the UAE by the World Finance magazines and the sponsors of the award; it was also recognized as the best commercial, wealth management, and retail bank in the UAE (Zawya, 2017). These recognitions are due to the banks rapid growth over the years in terms of its assets, stable market presence in the UAE, and its stellar performance. In addition, the bank has established a strong customer base served by a vast network of branches and off-site ATMs.
Challenges facing the bank are linked to the global financial crisis and include sub-scale operations, asset quality, weak risk culture, and negative operating income from the mainstream activities. The decline in total income in the recent financial reports is attributable to the low income from the sale of investment properties.
Emirates Islamic Banks Shariah Supervisory Board (SSB)
The Shariah Supervisory Board (SSB) consists of three sharia scholars, a Chairman, and two members. Dr. Yousef Abdullah Al-Shubaily who is the Chairman acts as an executive member of the board. He is a researcher on the matters related to sharia in the Board of Grievances and a deputy dean at the Juridical Higher Institution. This man also serves as a sharia advisor of Al Zad International Investment and a member of Seera Investment Bank Sharia Supervisory Board. Dr. Mohamed Abdul Rahim Sultan Al Ulama, a member of the Emirates Islamic Sharia Board, received a doctorate from the Umm Al-Qura University and is also an expert in sharia law, helping several people in the capacity of either a chairman or member. Sheikh Essam Ishaq, a member of the SSB, is a political science graduate from McGill University in Canada. He is an expert in the practical application of sharia law in the area of Islamic finance. He teaches Fiqh, Tafseer, and Aqeeda classes in Bahrain and sits on the board of AAOIFI.
Functions of the Sharia Supervisory Board
The Shariah Supervisory Board serves three core functions that include certification, supervision, and consultation. The first function means that the board reviews transactions and contracts executed by the Emirates Islamic Bank to certify that they are in line with the sharia rulings. The second function entails supervising: the board ensures that financial products are consistent with the sharia law. Apart from this, the board monitors the entire operations of the bank to ensure that they are compliant with the principles of Islamic law. The AAOIFI sharia standards of the IFSB should be strictly adhered to as well. The board also ensures that the profit allocation or charging losses to investment accounts abide by the approved basis. It also makes certain that all profits realized from prohibited sources are distributed to charitable causes. Thus, the supervisory board must guarantee that the method used to calculate Zakat complies with the Banks Article of Association and sharia guidelines. Lastly, the board plays a consultative or advisory role in the matters concerning new services, financial products, funds, or investment policy (Casper, 2012, p. 6).
Emirates Islamic offer a number of products under retail and corporate banking segments. To the strong products provided by the bank belong Ijara, Takaful, and Sukuk (Emirates Islamic, 2016).
Ijara is a lease or a service-based contract that gives one party the legal right to use, enjoy another persons property, and reap the profits of the property. It takes the form of a hire purchase agreement or rent of an asset in exchange for a fixed rental fee paid within a certain period of time as specified in the contract.
Under the Ijara agreement, Emirates Islamic Bank leases the use of non-consumable fixed assets such as equipment, plant, buildings, and machinery. Through these products, the bank provides short-term financing and medium-term financing for individuals and its corporate customers. Parties involved in an Ijara contract include the lessor (Muajir), the bank who is the owner of the asset, and lessee (Mustajir) the customer who rents the asset. The asset (Majur) should have benefits (Al Manfaah) and be able to generate substantial income in the future. There is an offer (Ijab) and acceptance (Qabul), according to which the bank transfers the use of the asset to the lessee given the agreed rental (Ujrah) amount.
Types of Ijara or lease include an operating and financial lease. The distinct difference between the two is that a financial lease, which is similar to a hire purchase agreement done under the conventional banking system, has the option of ownership transfer of the asset at the end of the lease period. Under the financial Ijara, the rental payments are made in two parts. The first part covers the use of an asset, while the second one covers the installments paid to cater for the purchase price. Financial Ijara or lease is best suited to assets with a low resale value and the use for a limited period of time. Operating Ijara rental payments is necessary only for the use of the asset. The rental payments are not high so as to cover the initial cost of the asset. Thus, managing Ijara is suitable for costly assets such as aircrafts and ships.
Finally, according to the conditions of the Ijara contract, ownership or physical possession and liabilities for the use of an asset lies with the lessee during the lease period. If the lessee defaults on the lease payments or fails to maintain the asset, the asset can be repossessed with the lessee covering the repossession costs.
It is a sharia-compliant insurance product offered by Emirates Islamic Bank that guarantees two parties or a joint mutual business transactions (Emirates Islamic, 2016). The Takaful participants must be sincere in their intention to gift, donate, or contribute to those undergoing difficulties. Takaful pays for a defined loss from a defined pool of funds. Under Takaful, much stress is put on the unity, responsibility, and cooperation aspects among participants of the contract willing to prevent numerous risks.
This contract must be approved by the sharia board. Takaful consists of two parts called Mudaraba and Tabarru. Mudaraba is a profit sharing element between the bank (Takaful operator) and the participant to the contract, while Tabarru is deemed as donation. The Takaful investment-pool (Mudaraba) is managed by the Takaful operator according to Mudaraba principles, while the other fund is managed according to the Tabarru principle. Profit from the earnings of Takaful can only be shared after the obligation of helping the participants in need has been discharged. Takaful contract applies to both parties and is binding in nature. Under no circumstance is premium forfeited. In addition, the end of premium contributions does not invalidate the policy.
Sukuk (Islamic bond) is a certificate representing ownership of assets of equal value. It is characterized by the partial ownership of an underlying asset by shareholders; the certificates are a representation of proportionate ownership of a recognized asset, and it is a promise to pay only the loan. The assets involved can be both tangible and intangible; for example, real estate property, airport, right to derive benefits from property, or services such as patents or education program.
Sukuk product by Emirates Islamic Bank provides liquidity management tools for corporate customers, which ultimately leads to an equitable distribution of wealth. Sukuk is used by corporations to finance heavy infrastructural projects leading to the development in the GCC countries. The Sukuk holders have adequate liquidity to make investments or trade in secondary securities markets. Under Sukuk, investors can partner with corporate entities and governments; hence, they have a diversified investment portfolio that reduces exposure to various risks.
The design of the sharia-compliant products and services offered by Islamic banks has been harshly bombarded with claims that they are a mere remodel of conventional products. The involved sharia arbitrage contravenes the moral foundations of sharia (Ahmed, 2014, p. 15). For instance, Sukuk product issuances that represent legal ownership of an identified asset require payment for the time-value of money given a fixed return; these are deemed to be central tenets within which the interest rate in conventional banks is charged.
Comparison with the Products Offered under Conventional Banking.
Both Ijara and sale contracts offered by conventional banks are leases that provide financing for the long-term and short-term needs. However, Ijara differs significantly from the sale agreements. The first difference is that the ownership of the asset is retained by the bank and the only usufruct is transferred, while both ownership and beneficial rights are duly transferred to the lessee when the sale agreement is executed and the asset is delivered. The second difference is that expenses and risks are borne by the lessor (bank) that retains ownership of the asset. Risks and rewards under sale agreements in conventional banks are transferred to the lessee. A sale is only effective after the execution of the sale contract, while an Ijara contract is enforceable instantly or in the future. Possession of an asset can be obtained before or after the Ijara contract is enforced.
Both Takaful and conventional insurance aim to reduce the impact of the major risks involved. Nevertheless, Takaful is different from conventional insurance because, under Takaful, participants share the responsibilities for a given risk. Since the risk is shared, the bank only acts as a trust fund. Conventional insurance endorses elements of uncertainty, interest (Riba), and gambling (Maisir) that violate the Islamic sharia. The payment of premium is not certain since the timing and amounts payable in future are not known.
Sukuk issuance is in line with the Islamic sharia that neglects interest charges or Riba. Bonds issued in conventional banks have a fixed interest. The distinct differences between the two are as follows: the pricing of Sukuk is performed in accordance with the value of sharia-compliant assets used as collateral, while credit rating is used to price bonds. Sukuk indicated ownership of a given asset while a bond is a debt obligation. The value of Sukuk increases with an increase in an asset value while profits earned from a bond related to a fixed interest are regarded as Riba under sharia.
Ijara, Takaful, and Sukuk Comparison Table
Practical Application of Sharia Compliance by Emirates Islamic Bank
Sharia Compliance you have learned (from PPT)
Conventional Banking Product
-Contracts vetted by the banks Sharia Board.
-Payments are made in equal installments when the customer has the usufruct rights.
-The cost and period of an Ijara contract are pre-determined.-The lessor owns the asset and bears all liabilities arising from the ownership.
-No compounding of interest on defaults or late payments.
-Use of assets adhered to as specified in the Ijara contract.
Under a sale contract, the cost, and repayment period determined by the agreement.
-The ownership rights transferred to the lessee when the sale contract is executed.
-Interest on late payments of installments compounded.
-Use of asset leased not specified.
The efforts to avoid or mitigate the impact of eventuality by applying various means.
There is a profit-sharing element between the bank and the individual members of a group
Takaful pool-fund invested in the methods lawful in Islam.
Must be approved by the Sharia Board.
Strict prohibition of interest (Riba), uncertainty and
Based on the principles of the contract and the utmost good faith.
-Shared responsibility or guarantee.
-Aspect of donation or gift Tabarru.
Conventional Insurance is based on the law of the contract.
Uncertainty present since the premium payable in future and timing not.
Based on the principles of a contract such as the utmost good faith.
-No mutual responsibility between the parties.
-Lacks the aspect of Tabarru.
-Equitable distribution of wealth.
Strict prohibition of interest or Riba.
-Liquidity management tool.
-Trust Certificates that grant their holder the ownership stake in the asset.
-Represents physical assets.
Bonds are acceptable as interest-bearing instruments.
-Liquidity management tool.
-Debt certificates that confer a debt to the issuer.
-Represent receivables or financial assets.
New Sharia Compliance Product
The new product is called Mustaqbal. This is a sharia-compliant scheme that is web-based. It is aimed at providing corporate employees and individuals with a retirement plan for their future. The features of the product include profits derived from the fund: it is interest-free, there is mutual sharing of the risks between two parties, the product allows for only permissible cash-based assets, and the option of retirement annuity is prohibited. The equivalent product offered by non-Islamic banks is the conventional pension fund scheme, where a part of the premiums is invested in government securities or bonds that earn interest, albeit low. The nature and type of the investments are not restricted.
Comparison Table for Mustaqbal and Conventional Pension Plans
Sharia Compliant Mustaqbal
Conventional Pension Plan
Backed by equities and properties.
Proscribed investments such as gambling or the sale of alcohol or pork.
Backed by bonds and government security.
There are no restrictions on the nature of investment a fund can make.
Retirement annuities not allowed.
Fixed annuity payments.
Interest is charged.
Element of sharing
Mutual sharing of profits and risks.
Risk of an investment borne by one party.
In conclusion, based on transparency and ethical standards, Emirates Islamic Bank has been able to provide excellent convenient customer care and efficient sharia-compliant products and services that serve the needs of their customers. The resounding success of the institution has also promoted Islamic banking and finance. This is enhanced by organizing the Shariah Supervisory Board that oversees the operations of the bank with regards to Ijara, Takaful, and Sukuk contracts among other aspects.
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