DIB sweetens Islamic loan market

Upfront cash is backed by sugar futures contract because of its price stability.

Dubai Islamic Bank (DIB) thinks it has a sweet deal for its customers - personal loans backed by sugar. The country's oldest Islamic institution is offering the first Sharia-compliant personal loan in the Arab world. Under Sharia, or Islamic law, a bank can offer financing only if real goods change hands. DIB's new product, Al Islami Salam Finance, is based on a centuries-old Islamic custom that gives farmers cash for a later delivery of dates. It is said the Prophet Mohammed noticed this practice when he first arrived in Medina in the eighth century.

Instead of using dates as the underlying commodity these days, DIB's financing will be based on a sugar futures contract. DIB says it chose sugar because it considered it a "safe" commodity with the smallest price fluctuations. The product launch coincides with a period of introspection in the Islamic finance industry. A series of defaults among Islamic issuers has sparked a debate in how far the industry should grow by mimicking conventional banking products to compete for investors.

"This is not a speculative transaction," said Hussain Hamed Hassan, a Sharia scholar who heads the bank's Sharia board. DIB's Salam Finance allows customers to take out a minimum of Dh25,000 (US$6,800) and up to Dh1 million based on the usual eligibility criteria, said Adnan Chilwan, the bank's head of retail and business banking. "This is upfront cash." When taking out Dh100,000 of Salam financing from DIB, a customer simultaneously enters a forward agreement with a sugar wholesaler for, say, Dh110,000 of sugar.

The supplier in DIB's case, Al Khaleej Sugar, is then committed to deliver the sugar to the bank at the end of the loan, which can run up to seven years. "The customer does not actually have to carry bags of sugar to the bank. Typically, there is no physical delivery involved," said Mr Chilwan. In the meantime, the customer pays monthly instalments to the sugar supplier. The bank and the sugar supplier carry the risk of changes in the price of sugar.

The bank said the new product came in response to customers asking for cash. "Customers have trouble to find cash on the table," said Abdulla al Hamli, the bank's chief executive. The bank had set aside Dh1 billion for the programme, which will have "low salary requirements", he said, but did not elaborate. The new product would boost the bank's profit and revenue, he said. DIB had the highest rate of non-performing loans, 8.7 per cent, among UAE banks last year. As a result, the bank, which is heavily exposed to property, has stopped lending for the sector.

Its loans and deposits have also grown only sluggishly in recent quarters. It took more than a year to design the new product and receive approval from the Sharia board, DIB said. [e-mail]