Economic Update

With the assets of the world’s growing number of Islamic banks now standing at around $1.8 trillion, Qatar’s sharia-compliant lenders have rapidly become key players in a major global industry.

Globally, the sector has fast grown to become responsible for a wide range of products and investments, financing everything from shopping malls in Birmingham to sukuk in Istanbul and new cars in Malaysia.

However, defining what constitutes sharia-compliant can be tricky, with no uniform set of guidelines. As a result, for some time the industry has been searching for ways to standardise practices via a single, global regulatory and monitoring authority.

This is a cause championed by Qatar, which is seeking to leverage the strength of its own Islamic finance sector to become a driver for standardised regulation in the global market.

Rapid Growth

Back in 1982, Qatar Islamic Bank (QIB) became the first Islamic finance house to open in the state. Since then, three more have been established – Qatar International Islamic Bank (QIIB), Masraf Al Rayan (MAR), and the newest, Barwa Bank.

Growth has been exponential in recent years, with relatively low-level activity in the 1980s and 1990s, followed by rapid expansion in the new millennium. The sector currently has a share of around 25% of Qatar’s banking sector, with the IMF recording CAGR of around twice that of the conventional sector between 2009-2013.

Popularity amongst customers is a major driver behind this growth, as is government support, with a series of measures helping the sector secure its position. In 2011, for example, Islamic windows at conventional banks were ordered to be closed, answering concerns over the cross-contamination of sharia compliant products, while also giving the purely Islamic banks a monopoly on such facilities.

The regulations governing finance houses have also been gradually brought into line with the conventional banks. A move back in December 2014, for example, saw rules on real estate operations equalised, opening more fully this particularly lucrative sector to the Islamic banks. This is likely to be welcome in a sector that saw real estate prices up 35% year on year in December 2014.

Real estate was, however, one of the main areas in which Islamic banks across the world took a hit after the 2008 global financial crisis.

Thus, when Abdullah bin Sauod Al Thani, the governor of the Qatar Central Bank (QCB), addressed the Institute of International Finance (IIF) conference in Doha back in March, he identified real estate, along with consumer lending to certain categories, as a ‘high risk’ area.

Identifying and quantifying the exact risks though, requires the collection of accurate data on Islamic financial institutions, the governor went on to say, further underscoring the overarching need for a single system of internationally recognised checks and balances for sharia-compliant finance.

“We need a regulatory and monitoring authority for the growing, world Islamic banking and financial industry,” he remarked.

This will be by no means an easy task, however. Currently, there is some significant deviation between the sharia interpretations behind the Islamic banking codes of different nations – a difference that has often been broadly characterized as between Gulf nations on the one hand and those of that other global Islamic finance hub, Southeast Asia – and Malaysia in particular – on the other.

This difference of interpretation has affected the range of Islamic products available on the market, with what qualifies as sharia-complaint in one place not necessarily qualifying in another.

At the same time, while some countries, such as Qatar, have a single regulatory authority for both Islamic and conventional banking – the QCB – others, such as Bahrain and Kuwait, have two independent regulators. Other countries have mixed systems, or specific provisions for Islamic banking within a single code. Some countries require a sharia compliance board to sign off on financial statements, while others, such as the UK and Turkey, do not. Deposit protection schemes often vary between countries and between conventional and Islamic banks within those countries too.

All these variables would be difficult to bring into a single code. Yet such a regulatory framework could still be workable, particularly if it addressed a core number of issues, while allowing flexibility beyond these.

—This original article from OBG originally appeared in Qatar’s The Edge magazine, July 2015 issue.