It was more challenging operating environment for the Islamic financial services (IFS) sector in 2016, as the continuing effects of low oil prices fed into the domestic economy, leading to a sizeable decline in government deposits and a tightening of liquidity. Nonetheless, asset growth continued, and as oil prices began to pick up towards the end of the year and into 2017, liquidity conditions improved. However, with the sharia-compliant market beginning to mature and the cost of borrowing remaining high, there is evidence of key players within IFS looking to domestic consolidation and overseas expansion as part of their future strategies for growth.
At the end of 2016, Islamic banks’ assets accounted for 26.2% of the sector total at QR322.9bn ($88.7bn). This figure represented growth of 5.9% over the year, down from 16.9% in 2015. Meanwhile, Qatar’s conventional banks expanded by17.2%. This deceleration represented a shift for Islamic lenders, which had previously enjoyed stronger asset growth than their conventional counterparts. The change was largely explained by much slower expansion in domestic credit in comparison to conventional banks, at 7.2% against 15.1%, with similar results in foreign assets, up 4.3% in Islamic banks against 27.4% in the conventional segment. Indeed, the more robust asset growth among conventional lenders reflected the two dominant trends in 2016: a reduction in government and government-related entity (GRE) deposits, and the consequent need for banks to look elsewhere for liquidity. Conventional banks had greater penetration in global financial markets and were therefore better placed to tap foreign financing to cover the shortfall, hence the substantial growth in foreign assets. Islamic banks were less able to do so, and as a result were more exposed to domestic trends.
As of September 2017, assets at Islamic banks accounted for 26.7% of the sector total at QR349bn ($95.8bn). Asset growth among Islamic lenders strengthened in the January-September 2017 period, reaching 8.1%, compared with 2.1% over the same period in 2016. Meanwhile, asset growth among conventional banks’ slowed to 5.7% from 8.4% in the first nine months of 2016. The rebound for Islamic lenders in 2017 could be partly attributed to domestic asset growth, which hit 13.5% for Islamic banks, compared with 11.4% for conventional lenders.
In August 2017 Moody’s Investors Service downgraded Qatari banks’ outlook from stable to negative amid weakening operating conditions and continued funding pressures facing lenders in the wake of the economic blockade. Moody’s also reported in October that weaker economic activity could lead to the deterioration of bank assets in 2017 and into 2018. Despite the ongoing stalemate, however, the top-four sharia-compliant banks recorded steady profits over the year and into the third quarter of 2017.
The first commercial Islamic bank opened in Dubai in 1974, and was followed in 1975 by the establishment in Saudi Arabia of the Islamic Development Bank (IDB), a 57-member multilateral institution that aims to foster economic development among its member states. At the end of 2016 Qatar was the sixth-largest contributor of capital to the IDB, constituting 7.2% of the total.
Islamic banking in Qatar began in 1982 with the inception of Qatar Islamic Bank (QIB), which remains the largest sharia-compliant financial institution in the country, possessing total assets of QR149.4bn ($41bn) at the end of the third quarter in 2017. QIB was followed by Qatar International Islamic Bank (QIIB) in 1990 and Masraf Al Rayan (MAR) in 2006. The fourth and most recent Islamic bank to enter the domestic market was Barwa Bank, founded in 2009.
Alongside these domestic commercial Islamic banks, there are also a number of sharia-compliant financial institutions operating from within the Qatar Financial Centre (QFC), an onshore platform that operates under a common law framework. QFC-registered institutions are not allowed to engage in retail operations within Qatar, unless for high net-worth individuals. Sharia-compliant institutions registered at the QFC include Qatar First Bank, which became the first QFC-registered company to list on the Qatar Stock Exchange (QSE) in 2016, and QI nvest, a 50%- held subsidiary of QIB engaged in investment banking.
In the nearly 50 years since the origins of the modern Islamic finance industry there has been much development in terms of products and services, not to mention standards and regulatory frameworks. The primary difference that marks out Islamic finance from its conventional equivalents is the prohibition against riba, generally translated as usury, though it is sometimes taken to include the conventional understanding of interest. In practice this means that fixed-return lending is prohibited, and instead lending is based on alternative principles, which includes the sharing of risk, participatory financing and equity-based financing.
Islamic finance has developed its own portfolio of sharia-compliant products. These include murabaha contracts, a form of sharia-compliant loan, whereby the bank purchases a product on behalf of a client and sells it back to them at a fixed mark-up; ijarah contracts, whereby a client in effect buys the right to the use benefit of an asset for a fixed period, with the bank having first purchased the usufruct (rights) of the asset; and either constant or diminishing musharaka contracts, a financing arrangement which entails a shared contribution of capital in cash or kind, and shared participation in risk and reward.
Beyond specific products, there are also broader requirements for financial institutions that wish to be sharia-compliant. These include not investing in equities related to drugs and alcohol, pork, gambling or other kinds of speculation. The principle of sharia compliance also extends to other areas of finance, for instance sukuk (Islamic bonds) must follow permitted contractual principles and therefore typically involve the assignment of a special-purpose vehicle to provide some sort of asset backing. By the same measure, takaful (sharia-compliant insurance), requires pooled liability, and the ownership of funds and operations by policyholders rather than shareholders.
Owing to its unique requirements, the Islamic finance sector follows a slightly different regulatory model to conventional banking. In Qatar Islamic financial institutions fall under the general oversight of the Qatar Central Bank (QCB), which assumed overall responsibility for the financial sector under Law No. 13 of 2012. As it stands, the QCB is at the top of the regulatory umbrella, which also includes the Qatar Financial Markets Authority (QFMA), which covers capital markets, and the Qatar Financial Centre Regulatory Authority, which oversees institutions operating within the QFC.
As such, there is no specific or separate regulatory body purely governing IFS within Qatar. Rather, the Qatari authorities follow the model of making separate references to Islamic finance where necessary, drawing from a single framework. Over the years Qatar has emerged as one of the leading jurisdictions in incorporating emerging international best practice within its domestic Islamic finance framework. It is one of the few states to have made Accounting and Auditing Organisation for Islamic Financial Institutions standards a regulatory requirement among its Islamic banks, and the QCB is a member of the international Islamic Financial Services Board.
Profit & Assets
Qatar’s largest Islamic bank was also its best-performing in 2016. QIB reported annual net profit of QR2.15bn ($590.5m), representing growth of a 10.3%, while total assets grew by 10% to QR139.8bn ($38.4bn). In light of these results, the bank’s board proposed a profit distribution to shareholders of 47.5% of the nominal share value, QR4.75 ($1.30) per share, subject to approval by the QCB and the bank’s general assembly.
Net profit for the first nine months of 2017 hit QR1.76bn ($483.3m), QR200m ($54.9m) higher than the figure recorded of the same period of 2016, while total assets stood at QR149.4bn ($41bn), compared with QR134.7bn ($37bn) the previous September.
MAR recorded a net profit of QR2.075bn ($569.9m) in 2016, showing little change from QR2.073bn ($569.3m) in 2015, despite total assets growing by 9.8% to hit QR91.5bn ($25.1bn). Even so, MAR was able to raise its dividend to QR2 ($0.55) per share in 2016, from QR1.75 ($0.48) the previous year.
The end of September 2017 saw total assets at QR98.6bn ($27.1bn), with profit for the first nine months of 2017 totalling QR1.57bn ($431.2m), a slight increase on the QR1.56bn ($428.4m) recorded over the same period in 2016.
In 2016 Barwa bank ended the year with total assets up 2% y-o-y to QR45bn ($12.4bn), and recorded a modest growth in net profit of 1.3% to reach QR738.8m ($202.9m). The board recommended an increased dividend of 13.5% per share, up from 10% in 2015. For the six-month period leading up to June 2017, Barwa’s net profit amounted to QR388.8m ($106.8m), a y-o-y increase of QR15m ($4.1m). Meanwhile total assets stood at QR46.2bn ($12.7bn), QR1.2bn ($329.6m) more than the same point in 2016.
QIIB was more or less stable in 2016 with net profit of QR785m ($215.6m), up very marginally from QR784 ($215.3m) in 2015, and total assets growing 5% to QR42.6bn ($11.7bn). An unchanged dividend of QR4 ($1.10) per share was recommended. The first nine months of 2017 saw net profits of QR700.1m ($192.3m), with total assets of QR50.6bn ($13.9bn).
When viewed from the perspective of earnings per share (EPS), QIB was again the top performer in the first nine months of 2017. Its EPS rose 14.1% y-o-y to QR7.51 ($2.06), placing the bank some way ahead of its competitors: MAR’s rose by 0.14% to QR2.08 ($0.57) and QIIB’s EPS increased 5.2% to QR4.63 ($1.27). In the first half of 2017 Barwa’s EPS were up 4% to QR1.31 ($0.36).
In terms of stability in 2016, all of Qatar’s listed Islamic banks maintained robust capital adequacy ratios (CARs) in excess of Basel III requirements. In December 2016 QIIB held the largest buffer, with a CAR of 19.47%, up from 16.7% at the end of 2015. It was followed by MAR with 18.85% and QIB with 16.7%. Barwa Bank, which is not listed on the exchange, did not makes its CAR available.
Regarding future risk, exposure to non-performing loans (NPLs) varied among the IFS banks at end-2016: MAR had a very low ratio of NPLs at only 0.16%, followed by QIB at 1%, and Barwa at 1.5%, a marginal increase on its 2015 rate of 1.4%. QIIB did not disclose NPL figures in its end of year statement, however, in its interim consolidated financial statement for September 2016 its total non-performing financing assets were 2.22% of gross financing assets, up from 1.7% in December 2015, perhaps explaining the increase in the bank’s capital buffer.
In general, rising rates of NPLs are broadly seen as a downside risk across the sector, with Standard & Poor’s (S&P) announcing in mid-2016 that it expected to see an increase in NPLs through to 2018, and as a result downgraded its outlook on QIB from stable to negative. The QCB responded in October 2016 by claiming that Qatar’s banks remain “healthy”, with 80% of NPLs being provisioned.
With results showing profits among banks to be mostly slowing down and a general consensus in the industry that the retail segment has largely reached a high saturation point, the market appears to be looking towards potential consolidation through internal downsizing to reduce the number of branches and ATMs and the merging together of banks with complementary profiles.
Regarding the latter effort, a memorandum of understanding was signed in December 2016 for the potential merger of MAR, Barwa and the conventional International Bank of Qatar (IBQ), which would create the largest Islamic bank in Qatar, with over QR160bn ($43.9bn) in assets (see Banking chapter).
The merger would require IBQ to convert to sharia-compliant operations, a relatively simple prospect for the majority of its services, but with a potentially more difficult restructuring of fixed-income assets necessary. Should the merger go ahead, the bank is likely to receive a two-to-three-year window to convert these existing conventional products.
From a business perspective the potential merger makes a great deal of sense, as each of the banks have complementary profiles: MAR has a substantial presence in government and GRE-related financing, Barwa focuses on small and medium-sized enterprises, and IBQ specialises in high net-worth individuals. The merger stands to produce a bank with a consolidated structure, with Barwa and IBQ gaining the additional benefit of greater access to liquidity since the two are currently unlisted.
Markets reacted favourably to the announcement, with MAR’s shares jumping 4% in early trading. To go ahead, the merger will require the approval of shareholders and various regulatory bodies, including the QCB, the QFMA and the Ministry of Economy and Commerce. In June 2017 Reuters reported that executives at all three banks were working on the merger, with the deal forecast to be finished by end-2017.
Alongside domestic consolidation, Qatar’s Islamic banks continue to look abroad for additional growth opportunities. QIB has the longest established overseas presence, having first expanded into Lebanon in 2003 with its 99%- owned subsidiary Arab Finance House. Since then QIB has also expanded to the UK in 2008, and most recently opened in Sudan in 2013. MAR has followed a similar strategy to QIB, also expanding into the UK through its subsidiary Al Rayan Bank UK, which in 2014 acquired the Islamic Bank of Britain, adding 50,000 customers to its overall roster. Al Rayan UK now has over 100,000 customers and the bank is considering plans to enter three other overseas markets. In August 2016 Adel Mustafawi, group CEO of MAR, told international media that the bank was examining opportunities in the GCC region, North Africa and South-east Asia.
Also looking to expand into North Africa is QIIB, which has advanced the most in this regard, having recently received approval from the QCB to establish a joint venture with CIH Bank to enter the Moroccan market. Sheikh Khalid bin Thani bin Abdullah Al Thani, chairman and managing director of QIIB, told press that Morocco held sizeable promise as it was “relatively new to Islamic banking and the country’s citizens are keen to make banking transactions based on sharia.” A successful entry into Morocco may see the bank expand further into West Africa.
Looking beyond banking, sharia-compliant products are also beginning to emerge in Qatar’s capital markets.
Since early 2013, the MAR subsidiary Al Rayan Investment has provided a tracker index of sharia-compliant equities listed on the QSE. At its inception the Al Rayan Islamic Index was composed of 18 equities, with compliance determined by Al Rayan’s sharia supervisory board. In September 2016, Zad Holding and Qatar Islamic Insurance were removed from the index, while Widam was added. The index essentially traded sideways for the first five months of 2017, having started the year at 3900 points and reaching a high-point of 4200 in February.
However, June saw the beginning of a downward trend which continued into the second half of the year, ending the third quarter with 3360. The initial purpose of the index was to prepare the way for the emergence of a sharia-compliant exchange-traded fund (ETF). In October 2016 it was announced that a conventional ETF and a sharia-compliant ETF would be launched by the end of the year, however, due to delays the funds had not been launched at the time of writing. It is hoped that the presence of a sharia-compliant ETF on the exchange will help boost liquidity in the market, which has historically been fairly low.
Besides equities, sharia-compliant fixed-income products are also becoming increasingly important in the local market. While 2016 saw the Qatari government largely limit itself to the issuance of conventional bonds, a number of private sukuk placements took place in the local market in the second half of the year to roll over existing debt.
Sharia-compliant underwriting continues to maintain a strong presence within the Qatari insurance sector, with two of the top five insurers, Qatar Islamic Insurance Company (QIIC) and Al Khaleej Takaful Group (KTG), operating under the takaful framework. In February of 2017 QIIC’s financial strength rating of “B++” was confirmed by A.M. Best, and was given a stable outlook, while in early 2017 S&P upgraded the long-term credit rating of KTG from “BBB” to “BBB+” with a stable outlook.
Alongside QIIC and KTG, a number of other companies also offer sharia-compliant insurance, such as General Takaful, while recent reports in the local press suggest that Doha Insurance, a conventional provider, has made plans to convert its “Doha Takaful” sharia-compliant branch into a full-scale company as part of its regional expansion plans. Furthermore, Qatar also maintains a footprint in overseas markets with Pak-Qatar Takaful Group, founded in 2006, as the third-largest insurer in the Pakistani market. In November 2016 the chairman of Pak-Qatar Takaful, Sheikh Ali bin Abdullah Al Thani, met with the then-prime minister of Pakistan, Muhammed Nawaz Sherif, in Islamabad, where he announced that the company had expanded its operations in recent years to 45 branches and 1000 representative offices.
Looking ahead Qatar’s sharia-compliant banks will simultaneously face an increasingly saturated domestic market and rising borrowing costs. Meeting these challenges will likely entail domestic consolidation, the increasing use of technological solutions, the downsizing of branch and ATM footprints, and overseas expansion to markets with greater potential for growth.
In the short term, increasing oil prices alongside the repatriation of some government and GRE deposits are likely to ease liquidity pressures among Islamic banks in the country, which have been more exposed to domestic liquidity challenges.
The potential effect that the proposed merger of MAR, Barwa and IBQ will have on the market is uncertain, as is the question of whether or not it will promote further cross-consolidation from the conventional market to the sharia-compliant market.
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