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Introduction
Islamic banking is a model for offering financial services in addition to the conventional banking system. It entails service delivery guided by the Sharia law requirements as opposed to the usual banking system that is guided mainly by non-religious regulations. Maghfuriyah et al. (2017) state that Islamic banking as the part of Islamic finance system is considered to be a developed segment of the global financial market with a broad perspective (p. 1407). Islamic banking has experienced high growth and market penetration rate in the countries affiliated with the Islam religion. Nevertheless, researchers revealed that Islamic banks have a higher liquidity risk, lower credit risk, lower insolvency risk, but encounter similar operational risk in comparison with conventional banks (Safiullah & Shamsuddin, 2018, p. 130). Suhartanto et al. (2018) add that for Islamic banks, developing customer loyalty is imperative as they could favourably impact on business outcomes such as deposit amount, cost of operation and future revenues (p. 67). The firms ensured they made viable connections and interrelationships to foster competitive advantages and benefit from the synergies competitive advantages. It is important for UAE to look at Islamic banking as the nation is a critical Islamic finance hub, which is substantiated by the fact that these categories of deposits and financing are equivalent of 29% of the total sector of deposit and financing as well as continuous growth of 3.6% in 2020 unlike traditional banks, indicating the resilience and underlying strength of Islamic banking as a key source financial provision for the nations of interest ( UAE Islamic banks dashboard, 2021).
The introduction of Sharia governed financial institutions has led to massive shifts of customers from traditional banks. The increase in demand for Islamic banking services in the Middle East and North African countries has been rising for the last two decades (Mahdi & Abbes, 2018). For example, the compound annual growth rate in the Middle East and North Africa constitutes 14% and is expected to grow by more than 10% further (Mordor Intelligence, 2020, para. 2). Islamic banking attracts clients with their ethical standards combined with the principles of profit and risk-sharing. (Azmat et al., 2020, p. 267). Among all, Asia and MENA region demonstrate growth in Islamic banking: Bangladesh, Indonesia, Malaysia, Iran, Egypt and Turkey (Cham, 2018, pp. 23-24). Countries that have adopted Islamic banking include Iran, Saudi Arabia, Kuwait, UAE, Bahrain, Qatar (in the Middle East); Malaysia, Indonesia, Bangladesh, Pakistan (in the South and Southeast Asia). Next, Sudan, Egypt, Tunis, Gambia (in Africa), UK, and Turkey have also utilized Islamic banking (Cham, 2018). Therefore, the system has a global implementation in countries that share Islamic religion and traditions.
Objective
The report mission is to develop the Islamic banking cluster in the UAE in order to be number one in Islamic Banking since UAE is standing at the second ranking after Malaysia (UAE Economy, 2021). By doing this, UAE will be placed itself as Islamic Hub globally. Hence, the strategy and policies should be in place to prove the way to this to happen.
Scope
The report aims to cover the situation with Islamic banking in UAE across all Emirates. The range of operations that Islamic banking offers are unique and can only be provided here. Such transactions include Ijar or a long-term lease transaction similar to a leasing transaction, Salam, or a financial transaction that is upfront financing similar to a contracting agreement this transaction is primarily used in the agricultural sector.
Added to this, the type of products is something to consider such as Takaful, Sukuk and Islamic funds. The suppliers of the cluster might come from national and international organizations. Islamic banking firms attempt to increase talent growth by employing high-skilled people to provide customized products and services as well as providing them with training and educational programs.
Technology is also be used in research and development, which are essential processes in product differentiation. Investment is essential indeed as it is the financial input required to process the services and products offered by the Islamic banking institutions to the customers.
Islamic Banking Cluster Definition
The Islamic banking cluster is a conglomeration of firms with similar goals of providing sharia-compliant financial services. The cluster is an alternative to the traditional or normal banking systems that lend money to customers to earn interest. (Suharto, 2018, p. 32). Interest rates for the common banks are determined by laws and regulations in the geographical territories in which the banks operate. However, being Sharia governed, Islamic banking does not necessitate interest as part of the business since riba is outlawed (Suharto, 2018). Islamic banking offers alternative means of enhancing businesses without outrightly charging interest on capital extended to customers (Al-Malkawi& Pillai, 2018). The management of the firms often organizes them into operational units with several players to ensure that each cluster has what it takes to do business efficiently.
Islamic banking is based on the principle of ethical competition and business conduct. The sharia law requires that the Muslim community behave and ethically relate to each other and outline ways of doing so (Ahmed et al., 2017). The prohibition of charging interest rate banks under the law is the reason why these institutions have been keen to develop Islamic banking. The organization and governance of these businesses are what sets them apart from the rest of financial institutions. Hence, Islamic Banking can be looked at using the 3 lenses mentioned in Exhibit 1.
Exhibit 1: Islamic Banking Cluster. Source: Ayesha Alzaabi.
Competitive Ranking
The fast growth rate experienced in adopting Islamic banking services worldwide is a sign of great potential. Currently, more than 500 Islamic banking and financial organizations with aggregate gross assets of more than $ 2 trillion have been created and operate in 105 countries of the world (Statista, 2020). The number of users of Islamic banking services in the world is estimated at 1.6 billion people (Rahmayati, 2021). The growth rate of the number of Islamic banks and the total number of users of their financial services indicates an expansion of Islamic finance in the world capital market. Muslims in the developed countries of Europe accounts for 50% of the savings of the Muslim middle class in the world (Statista, 2020). Islamic banking is developing most actively in the UK, and countries such as Great Britain, Italy, France, Luxembourg have already adopted legislation to ensure tax neutrality. The tendency for the most significant transnational and investment banks to complement traditional banking with financial products with Islamic specifics has strengthened.
The competitive ranking of the Islamic banking cluster depends on the smaller chunks of the whole system. It introduced culturally friendly services in a world mainly dominated by the Islamic religion. This process enhanced easier marketing of the products to the target customers. The adoption of Islamic banking products is also partly supported by the relevant authorities. For instance, the UAE government has observed the close relationship between Islamic banking advancement and economic growth designed policies to foster success in the industry (Gulf News, (2019). According to UAE Rankings (2021), the global innovation index for UAE is 34 as per the latest calculations, making UAE the best country in the Arab World (para. 7). Access to relevant policies and regulations adds to the competitive advantage of Islamic banks. The favorable legal framework offered by the countries in which the services dominate facilitate adequate grounds for growth.
Moreover, the innovation ranking can reflect how competitive an organization is in the market where different players struggle for the same customers. According the Global Innovation Index or GII of 2020, UAE was ranked in 34th place globally and as 1st place in the Arab region, which is a strong indicator of the innovative aspect and strategies of the Islamic banking in the country (Ismail & Bashir, 2021). Therefore, one might consider calculating the input and output efficiency ratio in accordance with the formula r=P/C, where product or P indicates the output, whereas cost or C indicates the input. The 2020s Global Innovation Index of 34 will be utilized as the output, where the innovation input is equal to 22 and innovation output is equal to 55 (GII 2020, 2021). The efficiency ratio calculations are as follows:
55/22 x 100 = 25 the input and output efficiency ratio for UAE for 2020. Within the context of the banks operations the efficiency indicates the rate of return on the banks inputs in relation to its outputs. The most efficient performance achievable lies at the point where the smallest amount of investment leads to the largest profit obtainable. To stay within the optimal bracket, the efficiency ratio should remain at 50% or below, which is the case for the exemplary bank, with it being at 25% in the example presented. A higher then 50% efficiency ratio would mean that the profits are decreasing when measured against investments that they require.
The use of technology has been a critical process for advancing Islamic banking services (Ali & Puah, 2017). These banks are run on innovative technological systems that make customer acquisition, service, and maintenance more efficient than the competition (Naeem, 2019). The management of the clusters acknowledges that offering quality services is one way of ensuring that the market share already won is maintained (Rahmayati, 2021). These banks can also benchmark their performance against the market average to enhance policy formulation to attain more success through technology.
Operations and Funding Sources
The main principle that governs Islamic banking is the rejection of future transactions. The concept of project investment applies to this model of carrying out activities, which is associated with the sharing of risks and equity participation (Laela et al., 2018). There are several transactions that are unique and exist only in Islamic banking. These include an operation similar to a leasing one, a financial transaction that is an advance financing similar to a contracting agreement. An agreement is also possible under which the client can purchase the equipment or structure that was previously leased. The rules and regulations that Islamic banking observes are the same for all financial institutions, regardless of a specific city or country. Islamic banks attract financial resources from individuals and institutions and channel them to commercial firms that need external financing to support their production activities. Thus, Islamic banks perform the same functions of financial intermediation as traditional banks. The main difference is how these functions are performed, that is, how they increase funds and use them.
Relationship between Islamic Banking and STI
Exhibit 2: Federal Laws of the UAE Regarding the Banking Field
Islamic banking cluster offers its services in the chosen markets in a way that can attract more customers. The process has all aspects of ordinary business management except that the institutions are governed by Sharia law. As represented in the Exhibit 2, there is a variety of federal laws, as well, that regulate the banking sector in the UAE. Suffice to say that UAE, indeed, have a proven and stable banking system, both for Islamic and international sectors. The Central Bank of UAE the main banking regulative organization maintains its duty of the organization of effective functioning, provision of support and supervision over the activities of the countrys banking system. In this regard, the UAE Central Bank issues various directives, policies, guidelines and recommendations, both general and individual.
UAE Vision 2030 is centered around the infrastructure, market demand, talent, funding, and legislative structure (TDRA, 2021). In the case of the Federal Law no. 4 on combating commercial fraud, it primarily contributes to the latter part of the vision since it is important for the nation to have strong judicial system of justice, which only allows fair practices and harnesses non-tolerance for fraudulent activities. In regards to the Federal Law no. 20 on the mortgage of movable property to secure debt, the regulatory point is related to the infrastructure and legislative structure objectives of the vision 2030. Standard Employment Contracts Equal Remuneration Convention as well as Rules and Conditions for the Termination of Employment Relations contributes to talent and market demand aspects of the vision.
For example, in order to obtain a license, the UAE Central Bank puts forward stringent requirements for commercial banks. However, the majority of the banks successfully operate in the country according to the Islamic banking system. Moreover, the policies also regulate the sector of investment banks as a separate type of banking. The Central Banks legislations are easily accessible for anyone in the sector, and support the general strategic vision of the country by working closely with other branches of UAEs economy.
Strategy, technology, and investment policies (STI) are ways available to the management teams of Islamic banking institutions to foster healthy competition. If well used as management tools, they can enhance the clusters competitive advantage, placing these institutions in better positions.
Strategy refers to a plan through which an organization aims to achieve its objectives. Strategies can be formulated from different aspects of business, such as referring to the strengths, weaknesses, risks, or opportunities available in the current period or future (Laela et al., 2018). Strategies revolving around strengths target making the clusters stronger than the competitors. The plans revolving around the weaknesses entail finding alternative ways to sail through the challenges without adversely affecting customers or the business. Strategic planning based on risks looks at the future by observing trends and positioning the cluster in safer places on the market in all aspects.
Technology is closely connected to Islamic banking because it is a tool through which the SWOT analysis can be actualized. Through technology, innovation can also be achieved, and it can be geared towards improving the quality of services (Al-Malkawi & Pillai, 2018). Technological advancements are, therefore, the link between the human aspect in management and the unseen information that can be manipulated to benefit the cluster.
Investment is the financial input required to process the services and products offered by the Islamic banking institutions to the customers. Each investment represents the actualization of a strategic plan, having considered alternative ways to improve the cluster (Kalim & Arshed, 2018). The alternative investment options available are scrutinized with technological inputs, and finally, one among the competing opportunities is settled on. That becomes the institutions strategy over a certain period until there is a need for a change.
Identify Stakeholders
Islamic banking cluster is composed of many stakeholders, and each has a value to add to the supply chain process. The government lays down the legal and regulatory framework upon which the institutions operate. It is, therefore, an integral part of the composition of the cluster. The individual firms forming the cluster must be aware of the local and international laws in the banking business. The clusters also require funding from other organizations, which form an essential part of the supply chain. Funding sources can be shareholders who raise capital to start Islamic banking services, but they do not manage the daily affairs of the institutions (Smaoui et al., 2020). They offer the funding needed to cover some of the risks, such as liquidity risks.
Stakeholders can also be classified in terms of their being publicly or privately owned or affiliated. Mainly, Islamic banking works with private institutions, forming the cluster and creating the base for strong customer service. Other stakeholders associated with Islamic banking are the research and development institutions (Janahi & Al Mubarak, 2017). These associates research on behalf of the financial institutions to unravel new investment trends and other relevant trends. They project futuristic overviews of markets to enable the product development teams in the Islamic banking sector to device viable products for each market. Proper market research is significant for the success of Islamic banking products because it helps identify new opportunities (Al-Malkawi, & Pillai, 2018). Moreover, market research can outline risks associated with specific markets and provide relevant information for the management to make appropriate decisions.
Stakeholder analysis
The stakeholders have direct or indirect interrelationships, and these affiliations are important for the functioning of the clusters. For instance, some of the firms in the cluster have better knowledge about research and development than the rest. Other firms have specializations in product marketing, and all these are synergies required to keep the cluster strong. The government sets the regulations for fair trade and, in turn, benefits from the growth of the countrys economy when the Islamic banking firms thrive in the business. For example, Federal Law No. 14 passed in 2018 in UAE establishes authority over Islamic banking for regulation purposes (Warsame & Ireri, 2018). The ripple effect is a mutual benefit to both the firms and the government. The shareholders in the firms provide the capital needed for strategic positioning and, in turn, expect the management of the institutions to facilitate an ethical trade for the benefit of all.
Exhibit 3: Stakeholder analysis
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H: High
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M: Medium
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L: Low
Exhibit 4: Stakeholder Classification Icon
| Icon | Name of Stakeholder | Type |
 |
Central Bank | Government |
|
Ministry of Finance (all UAE) | Government |
|
Minister of Finance | Government |
 |
HSBC | Private |
 |
Shareholders | Representative office/ Funding Source |
 |
Board of Directors | Representative office |
|
Executive Level Managers | Representative office |
|
Depositors and investors | Funding Source |
 |
The Public | Potential Funding Source |
|
Sharia Board | Government |
|
Auditors | Government/ Private |
 |
Dubai Islamic Economy Development Center | R&D |
|
Department of Economic Development (DED) | Government |
 |
Dubai Islamic Bank (DIB) | Semi-Government |
|
Abu Dhabi Islamic Bank (ADIB) | Semi-Government |
|
Emirates International Accreditation Centre | Government |
|
Dubai Global Sukuk Center | Government |
|
Dubai Center for Islamic Banking and Finance | R&D |
|
Mohammed V University Abu Dhabi | Academic Institute/ R&D |
|
UAE University AlAin | Academic Institute/ R&D |
|
Emirates Center for Strategic Studies and Researches | R&D |
|
Federal Competitive and Statistic Authority | Government |
|
National Research Foundation | R&D |
 |
Digit
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