Development in the Middle East, and the Gulf Cooperation Council countries in particular, is being fueled by the growth of Islamic finance.

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The Islamic finance sector is set for further growth in 2015, with much of this expansion to take place in the Middle East—and the Gulf Cooperation Council (GCC) states are central players. The size of the Islamic finance market is now over $2 trillion, nearly all of it deriving from Islamic banking assets and the sukuk sector.

Growth in Islamic assets and activity in the Middle East over the past five years has come from both the retail and wholesale sectors, as households and companies are benefiting from new and innovative Islamic financing techniques. The first is for the purchase of homes and vehicles, the second to expand corporate growth.

Takaful services—Islamic insurance—continue to expand in the region, particularly in the large market of Saudi Arabia, with banks and insurance companies increasing their distribution channels. In the Middle East, the demand for shariah-compliant investment services is also growing, as both the breadth and sophistication of products increase.

The cost of sukuk financing is approaching that of conventional bond financing, but for many issuers the price is higher. Borrowers using sukuk need assets to underlie the debt. In addition, there is the cost of structuring the securities, which involves legal counsel and often requires significant input. Shariah scholars must also be hired to analyze the structure. Unfamiliarity with complex sukuk structures can translate into higher advisory fees for prospective issuers, while investors demand higher yields because of limited trading activity in secondary markets.

The Middle East, together with Malaysia, remains the epicenter of sukuk issuance. Sovereign and corporate funding needs continue to be serviced by Islamic finance, through both the banking industry and capital markets. GCC sovereigns and companies have been very active in sukuk issuance. Many large projects and economic developments are being supported by syndicated and bilateral Islamic financing, and this will continue to be the case in 2015. The Saudi-based Islamic Development Bank remains an important institution for financing and support. Infrastructure projects in the Middle East remain substantial and numerous, and the issuance of sukuk to fund these projects is growing.

Sovereign sukuk issuance is widening, with many non-Islamic countries seeking to tap this funding avenue to increase liquidity sources. With new countries issuing sukuk, benchmarks are being created, contributing to a growing appetite for further issues. A number of sovereigns, including the UK, South Africa and Luxembourg issued sukuk in 2014, and blue chip institutions such as Goldman Sachs also tapped the market. Middle East institutions have been actively involved in managing, arranging and placing sukuk deals, and many have also invested in sukuk assets.

The average yield on 10-year Malaysian sovereign sukuk tends to be around 20-30 basis points higher compared to non-Islamic notes of the same maturity. By comparison, Goldman Sachs’ five-year notes wyield around 20 basis points more than similar maturity non-shariah compliant debt the firm issued.

The average gap between issuance costs for sukuk and conventional bonds in the GCC, however, is very small or nonexistent—and in some cases, it has proved to be cheaper to issue sukuk than conventional bonds. This is because sukuk have become mainstream in most Gulf countries, with demand from liquid institutional investors often exceeding supply.


Islamic banking assets in the GCC region now approach $600 billion and continue to grow at around 15% annually. The proportion of Islamic banking assets to all banking assets is above 50% in Saudi Arabia, 45% in Kuwait and 25% in Qatar.Islamic banking in the UAE and Bahrain is experiencing strong growth. The percentage is rising sharply, although from a small base, as it currently stands at just 17% and 13%, respectively, of Islamic banking assets in those countries. The push to develop local currency bond and sukuk markets in the region will help to increase liquidity while lowering borrowing costs. Regulators in the area are designing rules to make it faster and cheaper for companies to issue Islamic and conventional bonds.

Moreover, more international banks are underwriting sukuk as markets become more familiar with this type of financing. However, the large banks in the Gulf and wider Middle East region remain very important to the success of sukuk issuance. In Goldman’s case, its success was very much due to the involvement of banks such as Abu Dhabi Islamic Bank, National Bank of Abu Dhabi, Emirates NBD and National Commercial Bank.

The financing focus varies among the GCC nations. In Saudi Arabia the corporate and commercial sectors dominate, while in Kuwait the key focus is household financing, particularly real estate.


In line with the Middle East’s economic strides, regional Islamic banks are raising capital. In January 2015, for example, Dubai Islamic Bank (DIB) successfully priced a $1 billion, Tier 1 capital-eligible issuance with a perpetual maturity. Given the growth in its business, and the fact that this momentum is expected to continue for 2015, DIB wanted to tap the market for additional core capital, says Adnan Chilwan, chief executive officer of DIB.

The issue received 80 orders, amounting to more than $2.5 billion,reflecting strong investor demand. DIB’s principal plan for 2015 and 2016 is to grow its core businesses of consumer, corporate, treasury and commercial real estate across the UAE. The bank also aims to expand its existing geographic footprint through a variety of options, including acquisitions, the establishment of new subsidiaries and branches and cooperation agreements with local partners in Asia, Africa and the Gulf.

In 2014, DIB completed the acquisition of a 24.9% stake in Bank Panin Syariah in Indonesia.

The push to develop local currency bond and sukuk markets in the region will help to increase liquidity and lower borrowing costs.

Abu Dhabi Islamic Bank is also positive about 2015, following a good year in 2014. With the growing acceptance of Islamic banking worldwide, ADIB is increasingly turning its attention to geographic expansion, notes Tirad Mahmoud, ADIB’s CEO. This began in Egypt with the acquisition via a joint venture of National Bank of Development, followed by the establishment of Iraq, UK, and Saudi Arabia operations. New operations are now slated for Qatar and Sudan.

On the wholesale side, ADIB was very active in landmark sukuk deals in 2014, including transactions in Indonesia and Hong Kong. The offerings underscored ADIB’s distribution strength in the Middle East and elsewhere.

Other regional Islamic banks are also witnessing strong growth. Qatar’s Al Rayan Bank’s financing facilities grew by 40% in 2014. The bank is also expanding its investment fund offerings, which now include an exchange-traded fund that will be the largest in the market.

National Commercial Bank, the biggest bank in Saudi Arabia, has decided to turn itself into a fully Islamic bank over the next five years. The state-run bank’s decision came amid a $6 billion initial public offering—the largest-ever equity sale in the Arab financial world. NCB works along shariah-compliant Islamic banking guidelines but also follows certain Western banking conventions.

Kuwait Finance House maintains its prominent role in major development projects in the region and elsewhere. KFH succeeded in structuring a $500 million syndicated ijarah (rent-then-buy leasing) facility for Sharjah Electricity & Water Authority. KFH’s $120 million participation in the transaction was the largest among the mandated lead arrangers, which included Gulf International Bank, ABC Islamic Bank, Sharjah Islamic Bank and Barwa Bank. SEWA will use the proceeds to finance its current and future projects, which include infrastructure expansion to meet the growth needs that Sharjah is witnessing. KFH’s trading volume in the secondary sukuk market surpassed $3 billion in 2014.


Such deals have contributed significantly to the increase of liquidity and support of Islamic financial markets, with sukuk issuance providing liquidity to infrastructure projects in Asia and Africa as well as GCC countries and playing a major role in both the public and private sectors.

The growth of the Islamic finance industry, particularly in banking and capital markets, also provides a strong platform for the financing of household spending on big-ticket items and public finances. As it does, key Islamic finance regions such as the Middle East will no doubt benefit, thanks to the increasing sophistication and product offering of Islamic finance institutions.


Infrastructure spending will remain a key theme for the Gulf Cooperation Council countries and the wider Middle East region in 2015, as improvements are made to transportation infrastructure, as well as to that of power and utilities. In addition, the recovery in the real estate market in Dubai is likely to raise demand for housing and construction financing. Increased stability in the Kuwait real estate sector should also spur demand. In Saudi Arabia the mortgage law will clarify the regulations around shariah-compliant mortgage structures in the country. It is expected to increase demand for mortgage financing, as the ongoing changes to the law would provide more regulatory clarity on home financing.

Islamic banks profit from helping customers purchase a property using a ijara or murabaha scheme. With an ijara scheme the bank makes money by charging the customer rent; with a murabaha scheme, a price is agreed at the outset which is more than the market value. This profit is deemed to be a reward for the risk that is assumed by the bank.

Islamic mortgages, or house purchase plans, can involve ijara, where the purchaser is technically leasing the property from the bank, or diminishing Musharaka, where the purchaser is in partnership with the bank and monthly repayments gradually buy it out.

Growth in the years ahead is likely to be targeted toward small and medium-size enterprises throughout the region.

Many of the larger Islamic financing deals continue to be connected to infrastructure and real estate developments. Abu Dhabi Islamic Bank recently finalized a 1 billion Arab emirate dirham ($270 million) finance facility for Baniyas Investment and Development Company, the investment arm of Baniyas Sports Club. The transaction refinanced BIDC’s existing conventional debt, which was secured against the construction of Bawabat Al Sharq Mall, as well as part of the residential apartments and villas that were constructed in the first phase of BIDC’s Bawabat Al Sharq Development in Abu Dhabi. According to Arif Usmani, global head of wholesale banking at ADIB, the financing facility demonstrates the bank’s growing ability to fund large-scale projects, which play a major role in the economic development of the UAE.

As the investment and development arm of the Baniyas Sports Club, BIDC’s core competencies are in investment, development and management of real estate projects. Bawabat Al Sharq is a mixed-use community development which represents the first of several pioneering projects by BIDC, notes Subhi Benkhadra, CEO of BIDC.

ADIB was involved in a number of corporate real estate financing deals in 2014, and that could pave the way for more in 2015. It arranged a $650 million sukuk for Damac—the first international corporate sukuk issuance by a non-investment-grade, private-sector real estate company in the UAE. This sukuk has reopened the non-investment-grade market for regional real estate corporates, and more issuance is expected this year. ADIB also acted as joint lead manager and bookrunner for Emaar Malls Group’s successful pricing of a $750 million, 10-year debut sukuk. Home financing also grew significantly in 2014 for ADIB, from 3.2 billion to 5.8 billion Arab emirate dirhams, representing 15% of its total portfolio.

Growth in the years ahead is likely to be targeted toward small and medium- size enterprises throughout the region.

Dubai Islamic Bank plays a significant role in supporting corporate real estate developments, including the construction of commercial property and residential estates. DIB provides financing to contractors building electrical and mechanical infrastructure works across such sectors as oil, gas, power and water. DIB also has an 86.5% stake in Tamweel, a provider of regional real estate financing.

Sukuk issuance in the GCC served mainly to support sovereign funding and infrastructure plans. A $1.2 billion issue by Saudi Electricity will be used to improve power services in the kingdom. A newcomer to the GCC sukuk market is the Fawaz Alhokair Group, a major retail franchise owner in Saudi Arabia that issued $133.3 million for the purpose of funding its expansion plans, including over 400 new stores.

Some of the biggest Islamic financing deals in 2014 originated in the GCC, led by offerings in the aviation and real estate sectors. Emaar Malls Group secured $1.5 billion to repay an existing conventional loan. At the end of the year, Marafiq, a utility services provider to two industrial cities in Saudi Arabia, signed a $666 million deal to finance its existing utilities projects.

Marafiq arranged financing for over $1 billion for the Gold Line Metro rail project in Qatar. Emaar, the Economic City, signed a 1,250 million Saudi Arabian riyal ($333 million) murabaha agreement with Alinma Bank to develop the Haramain district in King Abdullah Economic City, with the loan guaranteed by mortgage lands within the city.

These deals should help bring other issuers to the market in 2015.

Key growth drivers for Islamic finance in the Middle East will remain infrastructure projects, commercial real estate transactions and, on the retail front, the rise of home financing, particularly in the large Saudi and UAE markets. Islamic finance firms will continue to innovate, introducing new products to a growing and deeper market.

Although Islamic financing continues to expand, there remains debate about the shariah-compliance of some products. Bai’ al ‘inah, in which there is a transaction of buying and selling between the customer and the financial institution, is one such Islamic finance product and is seen in Islamic mortgages and credit cards. There are differing opinions among Middle Eastern and South East Asian scholars on whether Bai’ al ‘inah is an acceptable financial practice. In Malaysia, the shariah scholars allowed it despite the fact that they agree that the majority of scholars globally prohibit the transaction due to its loan-type characteristic.