The majority of full-fledged Islamic banks in the UAE, standing at 83%, have earmarked dedicated sustainability funds for their medium-term plans, the Central Bank of the UAE (CBUAE) announced in its UAE Islamic Finance Report 2023.
The findings from the report, published in late December 2023, were the results of a survey conducted by the authority on the Islamic banking sector. The survey, conducted in the third quarter of 2023, collected responses from 19 Islamic banking institutions, six Islamic banks, 13 conventional banks with Islamic windows and five Islamic finance companies.
“The results illustrate that all Islamic banks in the UAE have sustainability strategies in place: a key foundation to support the transformation required by the Islamic finance industry to support a more sustainable future,” Khaled Mohamed Balama, the governor of the CBUAE, commented.
Notably, the study, which homed in specifically on the sustainability aspects of the Islamic banking sector, found that fully-fledged Islamic banks in the UAE fared better than the broader Islamic banking sector with regard to sustainability metrics and targets.
For instance, 53% of Islamic banks and Islamic windows apportioned a defined share of their assets for sustainability purposes. In contrast, 83% of fully-fledged Islamic banks made such allocations.
Most banks with Islamic products (89%) consider sustainability considerations in their financing activities while it is 100% among fully-fledged Islamic banks.
According to the findings of the survey, regulatory requirements, risk management efforts as well as consumer demand and market growth are the top three factors driving the adoption of the sustainability agenda in the UAE Islamic banking sector.
Islamic banks also seem to be performing better in terms of sustainability compared to their conventional counterparts. Only 63% of conventional banking institutions take into consideration the SDGs while 83% of Islamic banks in the UAE take the SDGs into consideration in their sustainability frameworks.
While Islamic banks are arguably leading in the sustainability space, there is ample room for improvement. Only 53% of the Islamic banking sector discloses ESG portfolio metrics. More alarmingly, a mere 37% of the UAE Islamic banking sector uses ESG impact-measured metrics for the product offerings.
According to the findings of the survey, the main challenge in implementing sustainability in the UAE Islamic banking sector are the lack of ESG data, the lack of literacy on sustainability in the wider society and a lack of common standards. Notably, some surveyed banks also cited conflicting internal policies as one of the challenges it faces in implementing sustainability.
“We will continue our efforts to support the development of the Islamic and sustainable finance sectors in the UAE to enhance their stature and participation within the wider industry,” Khaled assured.