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Abu Dhabi Islamic Bank (ADIB) was formed as a public joint stock on May 20, 1997.The business entity conducts its activities according to Sharias law and principles set by the Central Bank of the United Arabs Emirates. Abu Dhabi Islamic Bank began its operation with a paid-up capital of one billion dirhams with a value of each share being ten dirhams. Some worlds leading banks leave the United Arabs Emirates due to high competition risks. For instance, according to Trenwith (2015), the last global financial crisis forced many multinational banks to leave many UAE markets where their subsidiaries had not gained them enough profit. Banks such as Lloyds Banking Group sold their onshore presence to HSBC, a bank in the Middle East. According to Fayed (2013), in 2013, Barclays, a Britains second largest banking company, decided to sell its retails arm due to controversies in the recapitalization deal acquired from Abu Dhabi investors and Qatar (p. 1). In 2015, Trenwith stated that eventually, Barclays sold all its 110,000 clients and local components to Abu Dhabi Islamic Bank at a total cost of $ 177 million. The increase in marketing risk provided by domestic banks in the UAE poses threats to Abu Dhabi Islamic Bank. This paper addresses the threats facing Abu Dhabi Islamic Bank, how the institution deals with the risks, the laws the business complies with and new threats present in the banking field of the UAE.
The Threats Faced by Abu Dhabi Islamic Bank
Abu Dhabi Islamic Bank faces credit risk. The counterparties and borrowers of the institution fail to meet the obligations in accord with the terms of their loan agreements. According to the annual report 2015 of ADIB (ADIB, 2016) (in AED000), financial assets subject to credit were 96,96, claims on corporates amounted to 31,251,110, claims secured by commercial real estate equaled 12,771,754, claims on sovereigns were 649,0002, past due loans included 2,752,731 and the total weighted risk summed to 87,712,761 (p. 136). The credit risk arises from interbank transactions, foreign exchange transactions, bonds, loans, equities acceptances, extensions of commitments and guarantees, financial futures and trade financing.
Abu Dhabi Islamic Bank faces market risk. It arises when the bank suffers losses due to trading as a result of changes in credit spread, interest rates, equity prices, commodity prices and foreign exchange rates. According to ADIB (2016), Abu Dhabi Islamic Bank faces operational risk due to errors and misstatement (p. 63). It occurs due to the failure of the system, internal processes and employees. Human risks arise when potential losses occur due to human errors (Rahman, Kighir, Oyefeso & Salam, 2013, p. 155). Information technology or system risk occurs due to programming or system failure. Processing risk is caused by losses that arise from hacking, leaking and incorrect information due to the inaccuracies in data management and processing.
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Risk Management Solutions Put in Place by Abu Dhabi Islamic Bank
Abu Dhabi Islamic Bank minimizes credit risk through increasing interest rates on loans and trade financing if the discussed risk grows. The bank checks the factors that may result in credit risks such as unsteady income, collateral assets, low credit score and type of employment before giving credits. For instance, according to Kassem (2015), a number of rejected loans increased by ten percent to prevent customers from overstretching themselves when borrowing from banks. According to Miniaoui and Gohou (2013), Abu Dhabi Islamic Bank ensures, when inter-banking transactions take place, the money get paid on the exchange rate on the agreed dates to prevent losses that occur due to rise or drop in currency exchange rates.
Abu Dhabi Islamic Bank reduces operation risk through ensuring that only authorized individuals can access banks information and process it. According to ADIB (2016), operations and technology groups work under the guidance of the set principles, sensibility and are client-centered. Abu Dhabi Islamic Bank educates its personnel on IT security practices and reconfiguring computer network firewall to reduce the risk caused by computer hacking. The employees access the portals with unique keys and logins that prevent unauthorized individuals from stealing the banks information. According to ADIB (2016), the bank treasury supports customers with sound profit rate exposure management to reduce market risk (p. 29). Moreover, the bank has installed firewall programs that prevent pushing emails and identifies programs that access bank information and transmit it using Internet connection.
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New Threats Present in the United Arabs Emirates and how Abu Dhabi Islamic Bank Will Manage Them
Assuming that Abu Dhabi Islamic Bank is a new business that wants to enter the banking business in the UAE, the risks the entity will face include liquidity, reputation and systemic risks. According to Arif and Nauman (2012), liquidity risk prevents new banks from competing in the market due to challenges in conducting daily cash transactions (p. 182). Reputation risk occurs when bank loses its reputation capital due to poor services, rumors, data manipulation and non-compliance with regulations (Jamal & Naser, 2002, p. 145). Mitigating these two risks involves managing operation risk. According to Nasser Barakat (2014), first, the business should reinforce banking service ethics and employ the right people to manage fields in which they are specialized. Monitoring individuals and evaluating their performance help to determine their level of focus to prevent rumors or poor customer service.
United Arab Emirates Laws that Apply to Abu Dhabi Islamic Bank
The Central Bank Board of Directors with resolution number of 58/3/96 and resolution number 165/06/2004 control business activities and financial institutions according to Islamic Sharias principles followed in the United Arabs Emirates (Wilson, 2012, p. 146). Financial institutions finance trade, open credits, subscribe to the capital of projects, issue guarantees in favor of their customers, offer loans and extend advances. According to Kamal (2012), the federal law number 8 from 1984 requires the contribution of financial institutions when financing projects, issuing stock, offering certificates of deposit or bonds not to exceed 7% of the personal capital (p. 4). Moreover, the paid-up capital of the UAEs financial institutions should not be lower than 35 million AED . Additionally, the total national shareholding percentage should not be less than 60 percent of the financial institutions paid-up capital.
According to article 9 about license canceling, alternation or restriction, the Central Bank board may conduct any of the three procedures to Abu Dhabi Islamic Bank under the following circumstances: First, if the bank becomes bankrupt or a statement to declare bankruptcy against Abu Dhabi Islamic Bank gets issued. Second, when the license provided to Abu Dhabi Islamic Bank ceases for three months. Third, according to Karim and Archer (2013), if the central bank determines to use its procedures to evaluate whether the assets owned by Abu Dhabi Islamic Bank are less when compared to the liabilities. Fourth, when a judicial authority provides an order to liquidate the business, the business license may get canceled. Finally, when the clients or potential investors of Abu Dhabi Islamic Bank become in danger due to the banks operations, the license may get canceled.
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Abu Dhabi Islamic Bank must comply with the regulation of article 10 under continuous commitment. First, ADIB is prohibited to take part in money changing business with other financial institutions and unlicensed business. The entity should not provide advances or extend loans to related organizations or board members. Second, Abu Dhabi Islamic Banks capital adequacy should not go below 15 percent. Third, the bank should not possess property in the UAE that is not permitted by the Central Bank Board. Fourth, Abu Dhabi Islamic Bank should not form a partnership or merge with any business entity without providing prior information to the Central Bank Board. Finally, the bank should issue all transaction and correspondence documents in the institution’s name that get duly signed by authorized personnel.
To conclude, the risk factors affecting Abu Dhabi Islamic Bank include credit, operation, and marketing risks. However, the institution has put in place several risk management strategies to reduce the risks. The bank increases interest rates on loans and financing trade to minimize credit risk. Moreover, ADIB evaluates credit risk using such indexes as low credit score, unsteady income and employment type to reduce the errors that occur due to customers overstretching when taking loans. The bank activities align with banking regulations in the UAE.
