Three-way Abu Dhabi banks merger: Islamic economy start-ups, SMEs could benefit with fintech development, say analysts

FILE PHOTO: A branch of UAE based bank Al Hilal is seen in Jumeirah, May 16, 2013. REUTERS/Jumana El Heloueh

Late last month, Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank agreed to merge, with Al Hilal Bank operating as a separate Islamic entity within the merged bank.

With 420 billion dirhams ($114.35 billion) in assets, the merged bank will be the third largest lender in the UAE and fifth biggest in the Gulf Cooperation Council (GCC) region.

A bank of such a big size, however, does not guarantee that UAE Islamic economy start-ups and micro, small- and medium-sized enterprises (MSMEs) will be better-served, say analysts, unless fintech is further developed.

“Unlike mature markets, the GCC MSME/start-up markets are complicated by the expatriate nature of the population and the associated skip phenomenon, this makes quality underwriting more expensive in terms of human capital - although maybe AI/fintech is the solution here,” Khalid Howladar, managing director of risk, rating and Islamic finance advisory firm Acreditus told Salaam Gateway.

The “skip phenomenon” refers to borrowers who leave the country without settling bills or paying debts. Around 85 percent of the UAE’s 9 million population are foreign, or expatriate workers.

Rafi-uddin Shikoh, director of Dubai-based start-up incubator Goodforce Labs, whose underlying “ethical” focus is based on the Islamic economy, told Salaam Gateway the merger culminating in a larger Shariah-compliant unit bodes well for a bigger focus on Islamic fintech.

However, he doesn’t see this happening any time soon.

“The merger will go through its basic process of optimising and realising operational efficiency,” said Shikoh, who is also founder and managing director of U.S.-headquartered Islamic economy consultancy DinarStandard.

Shariah-compliant Al Hilal Bank has already made a headstart in fintech, which bodes well for its prospects catering to start-ups and SMEs moving forward.

In November, the Shariah-compliant bank executed the world’s first sukuk transaction using blockchain.

It used the ledger technology to sell and settle in the secondary market a small portion of its $500 million five-year sukuk issued in September.

However, Islamic financing via sukuk and the capital markets is overwhelmingly reserved for large transactions and has been off-limits for start-ups and SMEs, although one initiative led by Blossom Finance is trying to change that.

Recognising this need to cater to small transactions, bigger banks in the UAE have addressed start-ups and SMEs in a different way.

According to Shikoh, Goodforce Labs has learned that “big banks need help to work more closely with entrepreneurs and make basic banking needs easier.”

“The DIFC (Dubai International Financial Centre) Fintech Hive is the foremost initiative and we have one Goodforce Lab member company that also participated [in it].  It's a programme supported by the big banks and there are also Islamic finance-related start-ups,” said Shikoh.

DIFC Fintech Hive runs accelerator programmes for start-ups that are given access to financial institutions, including Shariah-compliant banks Abu Dhabi Islamic Bank (ADIB), Emirates Islamic (EI) and Noor Bank.  

Compared to ADIB and EI, Al Hilal Bank by itself is a small player – in 2017 its assets stood at 44.8 billion dirhams. To put this in perspective, UAE’s biggest standalone Shariah-compliant financial institution, Dubai Islamic Bank (DIB), reported assets of 223.7 billion dirhams for 2018.

Howladar believes the merger could help Al Hilal’s growth.

“Nowadays it is very expensive to run a bank, technology, compliance and regulatory costs are all climbing – Al Hilal Bank will have access to the middle and back office of the larger entity – this is definitely a positive for them,” he said.

Still, the bank would need to innovate if it wants to make an impact on the UAE Islamic banking market.

“Islamic banking in the UAE is well serviced with the likes of DIB and ADIB. It remains to be seen if they have anything new or innovative to offer customers in what is a very competitive and perhaps saturated market,” Howladar added.

ADIB, the UAE’s second largest standalone Islamic bank, last week said its digital banking platforms enabled it to attract over 60,000 new customers. Its customer base surpassed 1 million last year and the bank holds 125.2 billion dirhams in assets.

Shikoh believes there is still room for the new merged bank to compete in the Islamic banking sector.

“With a stronger balance sheet, supported by $114 billion in assets, the bank can make a smart strategic push into a broad range of Islamic banking products, including the $186 billion trade finance industry,” said Shikoh.

($1 = 3.6725 Emirati dirhams)

(Reporting by Emmy Abdul Alim; Editing by Seban Scaria [email protected])

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