Islamic Banks Product Development

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Islamic banking has gained immense popularity in all parts of the world. It has emerged as an alternative for conventional banking, which focuses on profit generation and does not give any regard to social welfare and distribution of wealth. Dubai Islamic Bank was the first Islamic bank in the UAE. Almost every bank in the UAE is offering Islamic banking services.

Over the years, Islamic banks have developed various products and accounts that are offered to customers worldwide. The Islamic banking framework is based on Islamic teachings and Shariah. It faces challenges as there is no central regulatory body to oversee the regulations and policies of banks. However, there are RSBs that are working on the individual level to ensure that the services of Islamic banks comply with Shariah.

History of Islamic Bank in the UAE

Over the last few decades, Islamic banking has emerged as a popular form of banking that has gained wide recognition in both Islamic and Western countries. The concept of Islamic banking denotes banking without interest (riba) free charged on products and services. After analyzing the market forces supporting the Islamic banking structure and framework, Ahmed (2011) suggested that Islamic banking is expected to grow at a phenomenal rate in the coming years.

It is suggested that the increase in the oil wealth of Arab countries, including the UAE, was considered as one of the major factors that contributed to the development of Islamic banking framework. Ahamad & Pradhan (2012) highlighted that the Islamic Banking and Finance (IBF) proved its strong position, which was based on the interest-free principles, in the recent financial crisis. In the last seven years, IBF has experienced phenomenal growth of 400%. Moreover, it is expected to grow significantly in the coming years.

In recent years, Islamic Banking in the UAE recorded a growth of 15-18%, which is more than the conventional banking. Moreover, 10% of the UAE’s total banking assets held by 46 operating banks comprises of Islamic finance assets (Islamic banking and finance center, 2014).

In1975, Dubai Islamic Bank (DIB) became the first Islamic bank incorporated in the UAE. It is the largest Islamic bank in the UAE in terms of its market capitalization. The bank offers products that are based on Islamic principles and traditions (Dubai Islamic Bank overview, 2014). A recent study revealed that Islamic banking in the UAE remained behind Bahrain, which is a global leader in Islamic banking services.

Moreover, in terms of total assets held by UAE Islamic banks, the country is second to Saudi Arabia. The Islamic banking services have allowed banks to have a steady stream of non-interest based revenues, which have provided greater stability to the banking sector. Interest rate fluctuations are less affecting the overall performance of the UAE banking sector.

The Islamic banks in the UAE offer different Islamic banking and finance services. The major source of income of the UAE Islamic banks is derived from finance provided to businesses and property finance (Hameed & Ahamed, 2010).

Islamic Banking Products

Islamic banks offer different products that could be categorized in the following classes.

Trade: The product class fulfills customized requirements by providing tailor-made solutions to customers. Trade services involve organizing and maintaining letters of credit as per the requirements of customers, which can include a transferable or gyrating letter of credits, etc.

Besides these, trade services also include many financial instruments such as Letters of Guarantee (LoG) that are made for permitted services under Shariah including bids bonds, performance bonds, advance payment bonds, labor and custom duties, etc. (Ahmed, 2011).

Ijara: Ijara is an Islamic product used by UAE banks to provide lease contracts to customers. Ijara refers to rental payments that have to be made for a specific period for using different assets. After all payments are made, banks transfer assets to customers. Ijara is leasing, which makes it easier for people to get ownership of any asset without making a purchase. Thus, it reduces the burden of outright expenditure. The period of a typical Ijara is between 3 to 7 years (Ahmed, 2011).

Murabaha: It is an Islamic banking product that involves a sales contract between the customer and his bank. The bank fixes a price of a certain asset through an agreement, and both parties agree on the settlement terms. There is an agreed profit margin for both entities. It makes it easier for the client to purchase an asset for his use. Concerning raw materials or goods, the Murabaha financing may be for 90 to 180 days, but it has a longer period of about five years for heavy machinery or equipment (Ahmed, 2011).

Mutharika: Banks offer Mutharika through which the partnership is established for carrying out long-term projects or acquiring a business share. The bank, at the end of the term, provides ownership of the assets involved, and profits are shared between the two parties based on the terms of the agreement (Ahmed, 2011).

Sukuk: The term Sukuk refers to Islamic bonds, which may have the same features as any other bond except the fact that they provide beneficial ownership of an asset. Moreover, the return is generated from the customer’s lease of this asset.

Mudaraba: Mudaraba sets up a partnership between the bank and its corporate clients. In this arrangement, both parties agree on a specific profit margin from an investment in a capital project (Ahmed, 2011).

Istisna: It is a sales contract that is offered by Islamic banks to their customers for a defined period. It is widely used to finance buildings, warehouses, shops, and manufacturing machinery (Ahmed, 2011).

Comparison of Islamic Banking Products

There are conceptual differences between Islamic banking and conventional banking. The conventional banking is based on profit generation on contracts between banks and their clients to earn interest. On the other hand, it is suggested that unlike conventional banking, Islamic banking is not dependent on interest. Instead of charging interest on transactions, the Islamic form of banking is based on profit and loss sharing (Hassan & Lewis, 2007).

The conventional banking offers credit to individuals or businesses once they receive collateral from them. Conventional banks charge interest on the principal amount. Even if, borrowers are not able to generate profit from the borrowed amount invested, they are liable to pay the interest and repay the principal amount (El Tiby, 2011).

In contrast to this, earnings of the Islamic banks are tied up with the success of their clients. The Islamic banks do not pay any interest on the current accounts. Instead, account holders receive a share of profits generated by banks referred to as Hiba. In this way, Islamic banks become partners with entrepreneurs that borrow funds from them.

It could be suggested that the Islamic banking principles are aimed to reduce the inequality gap and distribute funds on a fair basis between depositors and investors. They allow credit upon ensuring that the invested capital would be used for Islamic compliant purposes. Furthermore, unlike conventional banking, the Islamic bank requires transactions to be recorded at a spot rather than by using forward rates or prices. It eliminates the concept of interest rate differentials (Hassan & Lewis, 2007).

Laws and Regulations in Islamic Banking

The Islamic banking framework is based on Islamic Law. Ahmed (2011) highlighted that the sources of Islamic knowledge are of two types, including revealed and derived. The Quran and Sunnah revelations provided clear guidelines prohibiting interest (riba).

Moreover, the derived knowledge based on Shariah and fatwas of Islamic scholars in the form of ijtihad rejects the use of interest (riba) in contractual and commercial dealings. Islamic banking is based on Islamic principles, and it adopted Islamic laws in the product and services development (Ahamad & Pradhan, 2012).

The UAE’s Federal Law 6 was the first law implemented by the government in 1985 to deal with Shariah supervisory issues related to the Islamic banks and finance companies. Article 3 of the law granted permission to the existing banks or new banks to provide Islamic banking services in the UAE that conform with Shariah.

Article 4 of the law is the most crucial one that distinguishes Islamic banks from others as it allows Islamic banks to undertake industrial and commercial activities involving acquisition or trade of goods.

It facilitates Marhaba by Islamic banks. Also, it permits Islamic banks to invest in immovable properties/assets to undertake ijara. Article 5 of the law sets out the establishment of the higher Shariah authority to oversee banking activities of Islamic banks and finance companies. However, so far, no such authority has been established in the UAE (Wilson, 2012).

Instead, there are Religious Supervisory Boards (RSB) in all Islamic banks operating in the UAE that have the authority to examine contracts and other activities of Islamic banks to ensure that they comply with Shariah. Therefore, it could be suggested that their role is more like independent auditors to certify that Islamic banks are adhering to the Islamic principles of providing interest (riba) free services to its clients (Saeed, 1999).

However, RSBs has been criticized for performing regulatory tasks on an individual bank’s level. Differences in interpretations between RSBs could lead to disparities in the decisions made by the Islamic banks. Moreover, Islamic banking lacks methods adopted by the conventional banks to perform the credit analysis of entrepreneurs (Hassan & Lewis, 2007).

Prohibition under Shariah

Islamic Shariah prohibits interest (riba). Based on the following verse of the Quran, it could be indicated that there is a clear distinction between trade and riba and there is no permission to charge interest on an outstanding amount held by the debtor.

“Those you devour riba will not stand except stands one whole the evil one by his touch hath driven to madness. That is because they say: ‘Trade is like riba,’ but Allah Hath permitted trade and forbidden riba” (Quran 2:275).

One of the implications of the prohibition of riba is the sale of debt, which refers to the selling of the exceeding amount on the basic principal. The exceeding amount is a liability on the gainer. The one who takes an amount from the sale of debt is the one who is liable to pay this unjustly exceeded debt. Lending money is another name to describe the sale of debt, which the Quran (2:279) characterizes as by the word zulm, which means oppression. The oppression (the sale of debt) is unfair as it creates a burden on the gainer and a relief for the lender, which is strictly prohibited under Shariah.

According to Islam and its Shariah law, lending of a monetary asset is unfair as it puts the entire burden on one party and gives the entire relief to the other one. According to Shariah, it is important that return and risks are equally shared, which is not possible under any financial lending terms.

It is the balance that Shariah creates by prohibiting money lending and divides return, and risks are justifiably distributed (Salem, 2013). Shariah states that individual inputs such as effort and risk-sharing are more important than finance itself to make a venture productive and successful. In this way, Shariah prohibits money lending and protects the rights of the partners in the venture on an equal and fair manner (Aziz, 2012).

According to Shariah assertions, a society gets divided when it offers people dealings in usury, which is a practice of lending money and charging high-interest rates. One major consequence of usury is that it makes add to the wealth of the rich and takes away from the poor in the society. In practice, usury makes the flow of money only in one direction, which is prohibited by Shariah. Usury exploits the balance in society and, therefore, it is considered illegal under Shariah law and other Islamic teachings (Salem, 2013).

Types of Islamic Bank Accounts

The following types of accounts are offered by Islamic banking Industry concerning Shariah.

Current accounts: The current account is a non-remunerative account for individuals who undertake transactions frequently (Ahmed, 2011). In the UAE, current accounts are mostly offered in US Dollars, UK pound, Euro, and UAE Dirham.

Basic banking Account: In Islamic banking, basic banking account is offered to people who make small depositories. Such an account is based on the concept of Qard, which implies a loan on demand. The main feature of this account is that it is interest-free (Aziz, 2012).

Savings Accounts: Savings account is offered to provide investment opportunities to depositors. Depositors can earn income on their deposits based on Halal returns, and there is a certain amount of flexibility in terms of withdrawing of funds when needed to do so (Ahmed, 2011).

Fixed Deposit Accounts: Fixed deposit account is also a savings account which gives depositors Halal returns on their savings. The fixed deposit accounts are made on the principles of Islamic Shariah as profits are distributed based on an agreed proportion (Ahamad & Pradhan, 2012).

Certificates of Investments: Islamic banking offers certificates of Islamic investments (COIs), which are Mudarabah based and they are used for people who want to build organizations for sole proprietorship or partnerships (Ahmed, 2011).


From a brief discussion of Islamic banking and different aspects of the Islamic laws governing its operations, it could be concluded that Islamic banking has proven to be a strong alternative to conventional banking. It has experienced high growth rates both in Islamic and western countries. The Islamic banking framework is based on the teachings of Islam and prohibits banks from charging interest. The scope of Islamic banks’ operations is wider than conventional banks.

The solid Islamic principles and laws have made it possible for Islamic banks to survive the recent financial crisis. However, there is a need for a central regulatory body that can ensure a single set of regulations and policies for all Islamic banks to follow. Moreover, banks need to increase their asset portfolio by considering risky assets, as well.


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