Development of Islamic Banking in Uae

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Development of Islamic Banking in the UAE

Selected Topics in Finance
Development of
Islamic Banking in the UAE

Prepared by: Dalida Cheikh
ID number: 200911197

Supervised by: Dr. Al Gielani Al Sherief

Summer1- 2012

Contents

Abstract3
Introduction3
Islamic Banks and Conventional Banks4
Comparison of performance 2005 - 20105
Findings7
Conclusion13
References14
Appendix15

Acknowledgements

I would like to express my special gratitude to my boss, Prof. Badr Aboul-Ela for his continuous encouragement, support and guidance, special appreciation to my teacher Dr. Al Gielani Al Sherief for his efforts in providing me with the required knowledge and for improving of my research skills. I would also like to thank Ms. Wafaa from the Central Bank for providing me with the required data. Abstract

Though overall economic performance in 2008 was the worst since the Great Depression, there is significant variation in the effect of this Global Crisis on each of the Islamic Banks and Conventional Banks. This paper aims at studying the performance and profitability of “Abu Dhabi Islamic Bank (ADIB)” during and after the crisis of 2008, then, it will be compared with the financial status of “Abu Dhabi Commercial Bank (ADCB)” for the same period. The ratios and charts in this paper are calculated and formulated based on financial reports released by both banks on annual and quarterly basis. Return on Assets and Return on Equity were used as the proxies for the profitability. However, it is concluded from this study that ADIB as an Islamic bank was less affected by the economic crisis of 2008 than ADCB conventional bank. Introduction

Banking Industry is one of the most important industries that supports the development of a country. Like some other financial institutions and capital markets, banks are the institutions which are significantly needed by the real sectors in doing their business. An Islamic bank is a deposit-taking banking institution whose scope of activitie00s includes all currently known banking activities, excluding borrowing and lending on the basis of interest. On the liabilities side, it mobilizes funds on the basis of a Mudarabah or Wakalah (agent) contract. It can also accept demand deposits which are treated as interest-free loans from the clients to the bank and which are guaranteed. On the assets side, it advances funds on a profit-and–loss sharing or a debt-creating basis, in accordance with the principles of the Sharīah. It plays the role of an investment manager for the owners of time deposits, usually called investment deposits. In addition, equity holding as well as commodity and asset trading constitute an integral part of Islamic banking operations. An Islamic bank shares its net earnings with its depositors in a way that depends on the size and date-to-maturity of each deposit. Depositors must be informed beforehand of the formula used for sharing the net earnings with the bank. Commercial banking is based on a pure financial intermediation model, whereby banks mainly borrow from savers and then lend to enterprises or individuals. They make their profit from the margin between the borrowing and lending rates of interest. They also provide banking services, like letters of credit and guarantees. A proportion of their profit comes from the low-cost funds that they obtain through demand deposits. Commercial banks are prohibited from trading and their shareholding is severely restricted to a small proportion of their net worth. As the consequence, there are many parties which have the interests to require their banking industry running well. For the government, well organized banking industry would be favorable since it could show that monetary system, banking and payment system in that country are well run. For the business parties, the well-run banking industry will ease the transactions they make with their counterparties including financial scheme...
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