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While the United Arab Emirates operates on two financial systems, that is, global and Islamic, the Islamic system is of interest owing to the religious stance of the country. As a result of these two systems and sound governance, the middle east nation has moved from a struggling economy to global economic stature. As a leader of the UAE, I can confirm that, amidst these developments, there are inherent weaknesses and flaws posed by the Islamic financial framework, an issue that may threaten the country’s economic sustainability in the end. These are discussed as follows:

The lack of a suitable and comprehensive regulatory regime. Presently, there are no uniform regulatory principles for Sharia compliant institutions save for theAccounting and Auditing Organization for Islamic Financial Institutions (AAOIF) published standards[1]. A complexity emerges here since these standards act as mere guidelines other than enforceable regulations coupled with a limited number of special resolutions instigated at the country quarters.

Existence of Disparate Structures. Currently, several models and structures are in place, which negatively impact the progressive growth of the domain. Particularly, this problem affects the takaful or Islamic insurance as wellas banking sectors[2]. As a result, end users find it intricate to comprehend the legitimacy of these frameworks and so, their overall significance in Sharia.

Exposure to undefined risks. UAE’s Islamic industry is yet to devise effective regulatory and risk policies with the requisite support to guarantee maximum prowess and transparency. Considering the structural and financial challenges of the sector, these elements are critical for the consistency in productivity of the Islamic economy in addition to bolstering steady growth. Devoid of these essential elements, the sector appears volatile that it scares potential investors who remain uncertain on the fate of their ventures.

Lack of HR compliance. The biggest challenge facing the Sharia compliant institutions in the UAE has been the lack of human resource compliance and resources. Consequently, the institutions struggle in their search for qualified staff and advisorypersonnel with the ability to back thegrowth and development of novel ideas[3]. In the absence of these, mainstream institutions find it difficult to compete with conventional entities in a bid to net a wider pool of consumers and end users. In this mix-up, those not necessarily or exclusively in the Muslim fraternity are affected.

On a different account, assets and liabilities of the Islamic banking system are different from those of conventional institutions, a fact which conveys serious implications for the country. While the core responsibility of the regulator is to protect depositors, there are limited protections when it comes to the Islamic banks[4]. Given that a majority of the liabilities comprises deposits tagged on a profit-sharing formulation, this arrangement reduces the banking risk compared to deposits involving interest remuneration. Ideally, this contradiction raises a number of problems as discussed below.

Problems in Monitoring Islamic Bank Assets. The composition of Islamic banks troubles regulators who are often accustomed to transacting with the conventional banking system. Islamic banks in the UAE cannot hold bonds, treasury bonds, and other interest accruing securities. With the inability to apply conventional liquidity control measures to these banks, it denies regulators an important element that defines their role as custodians of depositors. Again, Islamic banks tend to accrue larger cash reserves compared to the traditional banks, leading to fairly liquid assets. Yet, these non-tradable instruments cannot be translated to payment by importers. The problem emerging here is the lack of a secondary market and so, impeding both liquidity management and evaluation.

Islamic Windows in Traditional Banks. In cases where conventional banks incorporate counters for Islamic banking services, a common practice in the UAE, there are inherent regulatory problems. It prompts the matching of Islamic deposits by assets that are admissible under the Sharia law. Following this requirement, changes in the assets structure of the banks may occur[5]. Worse still, it is often discriminatory should each section of depositors be subjected to the varying standards. In an environment where a number of banking institutions are largely conventional, it is always tempting for regulators to mull conventional liquidity measures. In many instances, there is often a risk of undervaluing the banks’ business in a way that they fail to account for the Islamic transactions.

Contradiction Between Regulation and Facilitation. In the country’s discourses on the role of regulators, there is usually less emphasis on facilitating the efficient operation of the banking systems. A problem results especially in the deregulated sectors where private modes of financing are regarded as a norm. As much as these liberalized frameworks support the Islamic economy, the behavior of the market players, such as intermediaries, might at times contravene Shariah law. UAE citizens question the degree of autonomy of regulatory bodies coupled with the role of the government in framing money policies.

Conclusively, UAE has made tremendous strides in the financial sector founded on sound Islamic and conventional banking principles. Whereas this system seems to work for the middle east nation, the system is laden with complexities emanating from regulatory disparities. Harmonizing these tenets would be beneficial for UAE as it moves into the financial future.

Bibliography

Al-Tamimi, Hussein A. Hassan, Adel ShehadahLafi, and Md Hamid Uddin. “Bank image in the UAE: Comparing Islamic and conventional banks.” In Islamic Finance, pp. 46-65. Palgrave Macmillan, Cham, 2016.

Tlemsani, Issam, and Huda Al Suwaidi. “Comparative analysis of Islamic and Conventional Banks in the UAE during the financial crisis.” Asian Economic and Financial Review 6, no. 6 (2016): 298.

Warsame, Mohammed Hersi, and Edward MugambiIreri. “Moderation effect on Islamic banking preferences in UAE.” International Journal of Bank Marketing 36, no. 1 (2018): 41-67.

[1]Warsame, Mohammed Hersi, and Edward MugambiIreri. “Moderation effect on Islamic banking preferences in UAE.” International Journal of Bank Marketing 36, no. 1 (2018): 41-67.

[2]Tlemsani, Issam, and Huda Al Suwaidi. “Comparative analysis of Islamic and Conventional Banks in the UAE during the financial crisis.” Asian Economic and Financial Review 6, no. 6 (2016): 298.

 

[3]Al-Tamimi, Hussein A. Hassan, Adel ShehadahLafi, and Md Hamid Uddin. “Bank image in the UAE: Comparing Islamic and conventional banks.” In Islamic Finance, pp. 46-65. Palgrave Macmillan, Cham, 2016.

 

[4]Warsame, Mohammed Hersi, and Edward MugambiIreri. “Moderation effect on Islamic banking preferences in UAE.” International Journal of Bank Marketing 36, no. 1 (2018): 41-67.

 

[5]Warsame, Mohammed Hersi, and Edward MugambiIreri. “Moderation effect on Islamic banking preferences in UAE.” International Journal of Bank Marketing 36, no. 1 (2018): 41-67.

 

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