Home / Knowledge Hub / News

The Islamic Economy Problems & Potential

Although, the UAE’s Islamic Economy has been growing, there are outstanding issueswhich have slowed development. Rima Mrad of BSA Ahmad Bin Hezeem & Associates LLP explains the problems and changes being taken to tackle them.

Over the past four years, there has been considerable growth in the Islamic economy in the UAE, which as a result is now emerging as a strong alternative model for the Emirates’ financial industry.


The basics of the Islamic financial system are as follows:
  1. Prohibition of Interest or Riba: Although this is generally known as being the basis of Sharia compliant transactions or products it is not the exclusive basis of an Islamic financial system. Riba is a term which is defined in the context of the general aspects and requirements which are found in Islam on avoiding speculation and unjust increases or decreases of capital through different ways of investing. Literally, the word Riba means guaranteed excess on capital exclusively on the basis of a specific term limit.
  2. Risk Sharing: As interest is prohibited in the Islamic Financial System, the concept of the creditor is no longer applicable in this financial system. As a result parties involved in transactions are considered instead to be joint investors, partners or suppliers on the basis that they each share the risks associated with their respective investment in accordance with their contribution or commitment to the project.
  3. Prohibition of Speculation or Gharar: Islam prohibits gambling in all its forms and prohibits uncertain investments. This does not mean, however, that all types of risk and speculation are prohibited in Islam as this would obviously put an end to any viable commercial venture. However, Islam does restrict the taking of such risks to the normal and standard ones which come from the investment or transaction itself.
  4. Protection of Estate and Property Rights: In most of the chapters of the Holy Quran, there is a reference to the importance of property rights and the different ways which can be used to minimise risk exposure involving unfairness in commercial dealings.


Although, both the UAE and Dubai Government have taken steps to help support the development of the Islamic Economy and growth in this sector has definitely been seen, there are still issues, those working in this area are having to face.
  1. The lack of an appropriate and comprehensive regulatory regime: At present, there is no unified regulatory code for Sharia compliant institutions except for the standards which are published by AAOIFI (which are actually more like guidelines than enforceable regulations) and there have also been a limited number of specialised resolutions issued at a country level.
  2. Existence of different structures: There are currently a number of different structures and models being used in the market and this has been negatively impacting the progressive evolution of the sector. It also affects transparency as to the rights and risks which are associated with these different structures. This problem has a particular impact on the Takaful (Islamic insurance) and banking sectors and can mean end users find it difficult to understand the legitimacy of these structures and their overall compliance with Sharia.
  3. Exposure to undefined risks: The Islamic industry has yet to develop effective governance and risk policies which are able to provide the required support in securing maximum transparency and strength, when considering the financial and structural challenges which the overall sector is exposed to. These aspects are essential to ensuring consistency in the performance of the Islamic economy and in enabling steady growth in the sector.
  4. Lack of HR competence and qualified resources: This hasb een one of the biggest challenges impacting the growth of Sharia compliant institutions, that they are struggling to find qualified staff and advisers who can help support their growth and develop new ideas which will enable them to both compete with conventional institutions and reach a wider group of consumers and end users including those not necessarily or exclusively within the Muslim community.


However, despite these issues, authorities in the UAE have already started to take steps to tackle these issues.

The Islamic Economy in the UAE started to evolve towards the end of 2013 when HH Sheikh Mohammed bin Rashid Al Maktoum, the Ruler of Dubai issued a ground breaking law which set up the Dubai Islamic Economy Development Centre (DIEDC).

This Centre was established as part of Dubai’s overall initiative to create a global hub for the Islamic economy within the Emirate and help focus on finance, the ‘halal’ industry, tourism, digital infra-structure, art, knowledge and Islamic standards.

After its creation, DIEDC was given a leading role in the establishment of a sound infrastructure and a comprehensive framework for this sector and was tasked with overseeing the implementation of initiatives which would help achieve the required tenets to enable the Islamic Economy.

Since then DIEDC has been playing in the past years and continues to play a valuable role in supporting others who are involved in the Islamic Economy, and has worked with the various government bodies and private corporations who have and continue to help promote this sector.


The UAE Government has taken a decision to create a national Sharia Board.

This will ensure there is one regulatory body supervising the activities of the sector and enhancing compliance culture among relevant parties.

It is being expected to harmonise the principles and views of Sharia scholars on controversial structures.

The board will also support the activities of different Islamic finance institutions as they will be able to reach out to one main and synchanised reference.

This will ultimately help reinforce the wider public’s confidence in the sector and will apply a minimum level of regulation and supervision over the industry.


Despite all this activity, over the past year, it has been noted that the performance of the Islamic economy in general (with the exception of some Islamic banks which are performing relatively well) is still below expectations. This is anticipated to change once oil prices begin to recover and steps are taken to increase the regulation of the Islamic sector in the UAE, which should also help build confidence in it. In order to ensure continued growth in the sector and to further support sustainability, we believe it would be good if there were material new resolutions issued addressing especially the following points.
  1. Widening the role and empowering the national Sharia board: It is important that this board starts its work to harmonise the principles and views of Sharia scholars on controversial structures on a strong footing. It should also be able to impose itself and be the main regulatory body overseeing Sharia compliance and helping to develop the compliance culture among those involved in this sector.
  2. The creation of training centres for industry experts: More qualified experts in the field of Islamic finance are needed and this should be supported by the creation of new education and training centres.
  3. Introduction of policies to control monopoly: At present within this sector larger organisations have tended to dominate. Steps need to be taken to fight this and will give support to other smaller players who may also help introduce new and diversified products. Ensuring this happens will be key to the future growth and sustainability of the sector.
  4. Enhancing the level of Interaction with Industry players: One area which may help develop the Islamic financial system would be the issue of guidelines and papers on the main risks faced by this industry. Initiatives of this type would help increase the level of interaction between the main players in the markets and make it easier for the challenges they face to be understood by the Government and regulators. More interaction of this type may also help address the issue of competition with conventional institutions.
Published: January 2017
Practice: Corporate and M&A
Publication: Emirates Law Business & Prectice Vol 5
Authors: Rima Mrad
Related Insights
Got a question or enquiry? Contact us