In recent years Qatar’s Islamic financial services (IFS) sector has expanded rapidly, on the back of government support and growing interest among domestic corporates and individuals alike. While tightening liquidity has the potential to result in slightly curtailed growth across the country’s banking sector as a whole in 2016-17, sharia-compliant lenders are widely considered to be in a better position than their conventional counterparts to continue to grow during this slower period.
Recent figures reinforce this perception, with Qatar’s four national Islamic banks posting overall asset growth of 17.5% between January 2015 and January 2016, compared with 14.4% growth in the conventional banking segment during the same period, according to the most recent data from the Qatar Central Bank (QCB).
Though Qatar, like many of its neighbours in the GCC region, has seen a slight decline in sukuk (Islamic bond) issuance in recent years, the country remains one of the larger issuers in the world by gross value, accounting for 4% of all sukuk issued in 2014, as per data from the IMF. Moreover, according to global consultancy EY, in the same period the country was the third-largest takaful (Islamic insurance) market in the Gulf and was expected to continue to gain market share over its neighbours in this area.
“Islamic banking is well established in Qatar,” Gourang Hemani, CFO of Qatar Islamic Bank (QIB), the nation’s largest sharia-compliant lender, told OBG in late 2015. “And in recent years other Islamic financial tools have become increasingly standardised and well accepted, particularly among corporates and for government projects.”
Despite the industry’s recent performance, Islamic financial institutions in Qatar currently face a variety of challenges. The drop in the price of oil since mid-2014 – from more than $110 per barrel to around $45 per barrel in mid-2016 – has put pressure on the country’s budget. Indeed, the government expects to post a QR46.5bn ($12.8bn) deficit in 2016 – the first in 15 years. As such, during 2015 the state has been drawing down on long-standing bank deposits, which have historically accounted for a considerable percentage of the sector’s liquidity pool. “In previous years liquidity was indeed more abundant,” Hemani told OBG. “It has declined, but not yet to the point that it is a problem for us. We are keeping an eye on it.”
Other issues currently facing the sector include what is widely regarded as an overly complex regulatory framework, with a number of entities wielding authority over various components of the financial system. Policies overseen by QCB, the Qatar Financial Markets Authority (QFMA) and the Qatar Financial Centre Regulatory Authority (QFCRA) occasionally overlap. As of early 2016 the government was in the midst of implementing a series of reforms aimed at clarifying the governance structure.
Regional and global market volatility in recent years has also had an impact on investor appetite, which has resulted in slowing activity in Qatar’s capital market, including among Islamic players.
The modern IFS sector can be traced back to the 1950s, when experiments with Islamic finance began in East Asia and North Africa. In the early 1960s the Mit-Ghamr Islamic Savings Association in Egypt and the Pilgrims Fund Corporation in Malaysia managed the savings of Muslim investors and generated returns for them, operating according to new theoretical work by sharia scholars. In 1974 the world’s first commercial Islamic bank – Dubai Islamic Bank – opened its doors, setting the scene for the Gulf region to take a leading role in the nascent sharia-compliant finance industry. This was followed a year later, in 1975, by the establishment of the Islamic Development Bank (IDB), a Jeddah-based multilateral development bank that now boasts a membership of 56 states. Qatar is the sixth-largest shareholder of the IDB, with a capital subscription of just over 7% as of late 2015. Over the course of the 1970s the accumulation of hydrocarbons-related revenues among Gulf states resulted in rising demand for sharia-compliant products and institutions. During this period new Islamic banks opened in Iran, Kuwait, Pakistan, Sudan and elsewhere.
QIB, which was established in 1982 with paid-up capital of QR25m ($6.9m), was Qatar’s first Islamic financial institution. The bank opened its inaugural retail branch in mid-1983. As of the end of 2015 QIB was the largest Islamic bank in Qatar, boasting 41% of the nation’s sharia-compliant assets and 11% of total banking assets. The establishment of QIB was followed by the launch of Qatar International Islamic Bank (QIIB) in 1991, Masraf Al Rayan (MAR) in 2006 and, finally, Barwa Bank in 2009.
Today these banks face competition from seven national conventional players, including sector heavyweights Qatar National Bank, the Commercial Bank of Qatar and Doha Bank, as well as an additional seven foreign banks, including the UK’s HSBC and Standard Chartered; France’s BNP Paribas and Dubai’s Mashreq Bank, among others. These foreign players, which tend to focus primarily on corporate services, are allowed to operate a limited number of branches in Qatar. An additional 20-plus financial institutions operate from within the Qatar Financial Centre (QFC) and, as such, under the regulatory umbrella of the QFCRA, including a handful of Islamic investment firms and takaful providers.
QI nvest, which was established in 2007, provides sharia-compliant investment banking services from the QFC, for example. A number of other non-bank Islamic financial companies – including Qatar Finance House, Al Jazeera Finance and First Finance, among others – are not licensed to take deposits; however, they can provide both loans and various investment services.
Islamic finance and financial instruments operate according to moral precepts laid out under sharia law, as interpreted by sharia scholars. In addition to a prohibition against investments in certain products and segments – drugs and alcohol, pork, gambling and speculation of all sorts, among others – Islamic financial structures are generally designed to avoid excessive risk-taking and uncertainty. In general, Islamic financial products are constructed to reflect real value or productive activity and, as such, are often linked to real estate, infrastructure or other types of concrete economic activity.
A variety of sharia-compliant financial structures have gained popularity over the years. Under a musharaka deal, for instance, two or more partners provide capital to finance a project, jointly assuming both the risk and the potential reward. A mudaraba contract, meanwhile, entails one partner supplying capital while another provides management expertise or other skilled labour. Under an ijara contract, an Islamic lender will effectively buy a product or service outright, and then lease it to a client until it is paid off. In general, most commercial Islamic institutions provide sharia-compliant products that have been designed to mimic conventional products.
In Qatar, determining whether or not a given product or service complies with sharia law is the job of a board of sharia scholars retained in-house at each of the country’s Islamic banks and other sharia-compliant institutions. As in many other countries with large Islamic financial sectors, the small number of qualified sharia scholars in Qatar means that many institutions share board members.
This model differs from Islamic financial regulations in some other countries. The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Malaysia-based Islamic Financial Services Board (IFSB), for example, have worked to set international standards for ensuring sharia compliance in recent years in an effort to improve consistency across a wide range of markets and countries. In October 2015 Tariqullah Khan, a professor of Islamic finance at Qatar’s Hamad bin Khalifa University and a former researcher at the IDB, endorsed these efforts, calling for the creation of an apex regulatory body, potentially a joint effort of the AAOIFI and the IFSB, with a remit to implement global standards for the industry. “The implementation of IFSB and AAOIFI standards, and the bringing together of disputing parties is critical to remove structural risk,” he told local media.
In addition to ensuring that their operations proceed according to Islamic principles, Qatar’s sharia-compliant financial institutions are also required to abide by the same financial rules and regulations as their conventional counterparts. In this context, the country’s Islamic banks and takaful firms are regulated by the QCB, while the IFS investment segment is overseen by the QFMA. From 2005 through to 2012 the QCB allowed Qatar’s conventional financial institutions to carry out sharia-compliant business via a window, either directly or through a wholly owned Islamic subsidiary. During this period the sharia-compliant segment grew considerably in Qatar, as most of the country’s conventional lenders set up sharia-compliant windows. In 2012, however, the QCB cancelled the policy and forced all such windows to close. This decision, which altered the make-up of the sector dramatically, was widely viewed as a positive development for the nation’s four fully Islamic institutions, which have since worked to consolidate their business.
Given their reliance on real economy-linked products and aversion to risk, Islamic banks must manage their assets and liquidity using fewer tools than their conventional counterparts. “Short- and medium-term liquidity management diversification options are limited as compared to non-Islamic institutions,” QIB’s Hemani told OBG. “We primarily use sukuk and Treasury bills, and almost entirely government-issued sukuk, as the corporate sukuk market has yet to gain real depth here.”
The challenge of managing liquidity was addressed in a late-2014 IFSB publication, which offered guidance for Islamic institutions implementing new liquidity coverage ratios (LCRs), as suggested by the Basel III accord and required by the QCB. Basel III, which was drawn up by the Basel Committee on Banking Supervision in the wake of the 2008-09 global financial crisis, lays out new capital adequacy requirements, LCRs and leverage ratios, which are intended to strengthen the global financial sector. Sharia-compliant institutions, as the IFSB directive notes, stand to benefit from implementation of the new LCRs in particular, as these have the potential to lead to new short-term liquidity management opportunities and instruments. In Qatar, the QCB has laid out a multi-year timeline for the implementation of Basel III across the banking sector that will see the new standards fully implemented by the end of 2018.
As of the end of 2015 Qatar’s commercial banking sector boasted assets of QR1.12trn ($307.6bn), of which Islamic banks accounted for QR304.85bn ($83.7bn), or more than 28% of the total, according to QCB data. This figure is up from 25.8% at the end of 2014 as recorded by EY. QIB, Qatar’s largest Islamic bank and the nation’s third-largest commercial bank overall, boasted total assets of QR127bn ($34.9bn) as of the end of 2015, which was equal to 41% of Islamic segment assets and 11% of total banking sector assets, according to data from the bank. QIB’s assets were up 32% on 2014, when the bank had year-end assets of QR96.12bn ($26.4bn). In turn, in 2014 QIB’s assets grew by 24% on the previous year. The bank reported 2015 profits of QR1.95bn ($535.1m), up 22% year-on-year. The increase was due to financing and investing revenues, and rising fee- and commission-generating activities.
QIB, which is one of Qatar’s most recognisable brands, is publicly listed on the Qatar Stock Exchange (QSE). Major shareholders include the nation’s sovereign wealth fund, the Qatar Investment Authority, and a handful of other major state and private sector entities. As of early 2016 the bank operated 31 branches and over 165 ATMs and cash deposit machines. In addition to its more than 240,000 retail and 12,400 corporate banking clients, QIB has a stake in a variety of other sharia-compliant companies, including the QFCRA-licensed investment bank QI nvest, the non-bank financing firm Al Jazeera Finance and a series of other companies, including Aqar Real Estate, Damaan Islamic Insurance Company and the construction contractor Durat Al Doha. Additionally, QIB has invested abroad a handful of times over the years and currently has holdings in London (QIB-UK), Lebanon (Arab Finance House), Malaysia (Asian Finance Bank) and Sudan (QIB-Sudan).
MAR is Qatar’s second-largest Islamic bank and recorded total assets of QR83.03bn ($22.8bn) at the end of 2015, up 3.7% from QR80.09bn ($22bn) a year earlier, with a net profit of QR2.07bn ($568m) over the course of the year. According to the bank, revenue expansion in 2015 was due to 7.5% growth in financing activities and a 2% increase in investment activities. Nonetheless, MAR saw a decline in customer deposits over the course of 2015, from QR62.57bn ($17.2bn) at the end of 2014 to QR55.62bn ($15.3bn) one year later. The institution’s non-performing loan ratio, at 0.09%, was one of the lowest in the country’s banking industry. MAR has 11 branches and 52 ATMs in Qatar. Some 55% of the bank is listed on the QSE, with the remainder is held by a handful of state-owned investment funds and private firms.
MAR has acquired a number of subsidiaries since it was launched in October 2006. In 2008 it founded Al Rayan Investment, a wholly owned Islamic investment and asset management firm. In 2011 the Al Rayan Brokerage Company was established with a licence from the QFMA to provide brokerage services on the QSE. MAR’s other domestic subsidiaries and associates include Al Rayan Partners, a real estate project management firm; CI San Trading; Lusail Real Estate Development; and Daman Insurance, among others.
The bank also owns shares in a handful of foreign entities, including Kirnaf Finance in Saudi Arabia and Oman National Mass Housing. In January 2014 MAR announced it had acquired a controlling stake in the Islamic Bank of Britain (IBB), the UK’s sole sharia-compliant bank, which was established in 2004. Prior to MAR’s acquisition, IBB was majority-owned by QIIB. Upon completing the deal, MAR announced it would invest £100m in IBB with the aim of attracting new customers in the UK.
In 2015 Barwa Bank, Qatar’s newest sharia-compliant lender, surpassed QIIB to become the third-largest Islamic bank in the country by assets. Barwa Bank reported asset growth of 18.3% to reach QR45bn ($12.4bn) in total, on net profits of QR729.7m ($200.2m), for the period. The bank attributed the growth to a major push on non-performing loans, a concerted cost-cutting effort and rising revenues on project finance.
As for QIIB, in 2015 it reported asset growth of 5.8%, with the bank’s total assets rising from QR38.4bn ($10.5bn) at the end of 2014 to QR40.6bn ($11.1bn). The bank posted net profits of QR784.2m ($215.2m) during the year, which is down from QR825.8m ($226.6m) in 2014. Customer deposits, meanwhile, grew only slightly – by 0.1% – over the course of the year. In addition to operating a network of domestic branches, in 2015 QIIB signed joint-venture agreements with financial institutions in Morocco and China, which could see the Qatari lender carry out business in those markets in the coming years (see analysis).
Banking is not the only sector that has turned toward Islamic principles in recent years in Qatar. In 2013 the QSE, in conjunction with MAR’s subsidiary Al Rayan Investment, launched the Al Rayan Islamic Index (QSERI), which tracks listed sharia-compliant equities on the stock exchange on a total return basis. As of May 2016 the index – the first of its kind in the GCC – was composed of 18 equities from a variety of sectors. As of this date, the largest contributor by assets was Ezdan Holding, which is active in real estate development, finance, hospitality, retail, media and health, among other sectors.
Other large companies listed on the QSERI include Industries Qatar, MAR, Barwa Real Estate, QIB, QIIB, the United Development Company and Vodafone Qatar. In 2015 the QSERI lost around 6% of its value; however, this made it the country’s top-performing headline index at the exchange for the year, as both the QSE Total Return Index and the QSE All Share Index both lost around 12% of their value over the same period.
Since December 2011 the government has been making an effort to stimulate Qatar’s debt markets by issuing sovereign bonds – many of them sukuk – and Treasury bills on a regular basis. Pending approval from the QFMA, the QSE will facilitate corporate bond listings before the end of 2016 (see Capital Markets chapter). This bodes well for the GCC’s sharia-compliant debt market, which saw a drop in issuance of more than 60% between early 2014 and mid-2015 alongside declining oil prices and more modest regional spending. Since then, however, a number of Qatari corporates have moved to issue sukuk in independent listings. In the latter half of 2015, for instance, QIB carried out a handful of sharia-compliant debt issuances, including a QR2bn ($548.8m) listing in late June and a $750m five-year listing in October that was 2.33 times oversubscribed. In February 2016 QIB announced plans to extend the Qatari riyal-denominated listing to QR3bn ($832.2m).
Barwa Bank, meanwhile, established a $2bn sukuk programme on the Irish Stock Exchange in December 2015, though it did not set a time-frame for listings. Lastly, both QIIB and MAR have announced plans to tap fixed-income markets in the coming years, primarily in order to continue to finance the government’s numerous development projects. The state is also in the early stages of planning a sovereign debt listing of its own, which could be launched sometime in 2016.
Takaful is an important component of Qatar’s expanding insurance sector. According to data from Alpen Capital, a Dubai-based investment bank, from 2010 through to 2014 the segment posted a compound annual growth rate (CAGR) of 22.4%, and accounted for around 10% of GCC-wide premiums as of the end of 2014. The nation’s five largest underwriters together accounted for around 60% of gross written premiums in 2014. Two of these – namely, the Qatar Islamic Insurance Company and Al Khaleej Takaful Group – operate according to Islamic principles. Despite an overall insurance penetration rate of 1% as of late 2015, the nation’s Islamic underwriters expect to see rapid growth in the coming years. Indeed, insurance sector growth throughout the GCC is widely understood to track macroeconomic expansion more generally and construction sector activity in particular, which is set to continue at a rapid pace for the foreseeable future (see Insurance chapter).
Despite a handful of challenges, the most recent forecasts point toward continued growth for Qatar’s sharia-compliant banks, listed companies, insurance underwriters and other players. Indeed, as of late 2015 Qatar’s sharia-compliant banks made up more than a quarter of the nation’s total banking sector assets, after posting one of the highest CAGRs in the global IFS industry between 2010 and 2014.
Furthermore, the government has proven itself to be a key supporter of the sharia-compliant segment in recent years. In this favourable context, Qatar’s reputation as a centre for high-quality, well-run sharia-compliant financial services has grown rapidly. In late 2015, for example, Qatari banks won three of the top four spots on the World Islamic Banking Conference’s ranking of sharia-compliant banks by cost-to-income ratio.
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