The Islamic finance services (IFS) sector in Qatar is one of the most vibrant in the region and incorporates a rapidly expanding sharia-compliant banking segment, an array of financing companies, an insurance market that is well positioned to capitalise on the potential of an underserved market, and an increasingly deep Islamic investment component. Recent regulatory changes suggest that the government’s ambition to establish the nation as a centre for Islamic finance remains undimmed and, as the country gears up for the project pipeline associated with Qatar National Vision 2030 and the 2022 FIFA World Cup, sharia-compliant finance players are expected to reap the rewards of this support.
Market Structure
Qatar was one of the first countries in the world to recognise the significance of Islamic banking and established its first sharia-compliant bank in the early 1980s. As of 2014 a total of four Islamic banks operate in the country: Qatar Islamic Bank (QIB), Qatar International Islamic Bank (QIIB), Masraf Al Rayan and Barwa Bank. According to the Qatar Central Bank (QCB), Islamic assets stood at QR219bn ($60bn) at the end of 2013, equivalent to 23.9% of total banking assets.
The domestic market within which the bulk of their operations are concentrated is a competitive one, made up of 18 banks, including seven domestic conventional banks (one of which is a specialised lending institution focused on small and medium-sized enterprises, SMEs) and seven traditional foreign banks. Moreover, a further 23 licensed banks operate from within the distinct regulatory environment of the Qatar Financial Centre (QFC), although these are largely representative.
Qatar’s Islamic players therefore vie for business with local market leaders, such as Qatar National Bank (QNB); regional operators, such as Iran’s Bank Saderat; and global giants such as BNP Paribas, Standard Chartered and HSBC. The Islamic market also includes three sharia-compliant financial services companies: First Finance, Al Jazeera Finance (AJF) and Qatar Finance House (QFH). Although these institutions do not possess banking licenses, they are in competition with Islamic banks in the retail segment by providing finance for car purchases and other small-ticket deals. “On the retail side, it is better for individuals to go to a bank. However, in the past year and going forward we have seen more corporates and SMEs coming to finance houses,” Jaber bin Ali Al Hedfa, CEO of QFH, told OBG. “The main source of financing will be for contractors, subcontractors and SMEs given the country’s infrastructure drive.”
Indeed, “All of the banks are competing head to head, whether they are sharia compliant or not,”
Steve Troop, CEO of Barwa Bank, told OBG. “Banking services are based on supply and demand, and currently there is significant capital available in the Qatari banking system, which means at this time more supply than demand. We are expecting significant activity in the market though very soon.”
Regulation
Qatar’s Islamic banks are subject to the same regulatory regime as their conventional counterparts (see Banking chapter), and are governed by the QCB. The QCB does not operate a centralised sharia advisory board, although it does have the capacity to appoint sharia scholars on an as-needed basis should a regulatory problem arise.
Where clarification regarding the application of sharia is needed, Qatar’s Islamic banks have recourse to the Supreme Sharia Council that is attached to the Ministry of Endowments and Islamic Affairs, however, the nation’s Islamic lenders are self-regulated in terms of sharia-compliance through their own sharia boards, which are usually made up of five scholars of international repute.
The consistency of sharia rulings is further aided by the fact that these institutions’ sharia advisors frequently sit on more than one of the banks’ proprietary boards, as well the fact that Qatar – like most jurisdictions in the region – closely follows the accounting, auditing, governance and ethical principles established by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), based in nearby Bahrain.
Changing Market
While the Islamic finance segment does not operate under a distinct regulatory body, in its governance of the wider banking sector the QCB has in the past significantly influenced its development. The QCB’s decision in 2005 to allow conventional banks to operate Islamic windows led to a new era of intense competition for the four fully sharia-compliant banks operating in the country.
A number of local conventional players were quick to move into the sector: QNB, through QNB Al Islamic; Commercial Bank of Qatar, through Commercial Bank Islamic; International Bank of Qatar, through Al Yusur Islamic Banking; Al Ahli Bank, through Al Hilal Islamic Banking; and Doha bank, through Doha Islamic. Some foreign banks also opened Islamic subsidiaries in the country, most notably HSBC, which opened the first HSBC Amanah branch to be located outside of Saudi Arabia in 2010.
However, by that year, the QCB was signalling its intention to reverse its decision to open up the sharia-compliant financing segment by restricting conventional banks to utilising up to 10% of their issued capital in their windows. Finally, in February 2011, and with immediate effect, the regulator instructed conventional banks to cease writing sharia-compliant assets through Islamic windows. While these were still able to run off existing portfolios, no new asset business was permitted. Sharia-compliant deposits, meanwhile, were allowed until the end of December 2011. At the start of 2012, Islamic banking in Qatar was the exclusive preserve of the four sharia-compliant lenders, which stood to gain from the move in terms of customer numbers, assets and physical infrastructure.
The shift in the customer base of conventional and Islamic banks has been a key development over the past year. In some cases Islamic banks acquired entire sharia-compliant portfolios from conventional lenders – such was the sale of International Bank of Qatar’s retail portfolio to Barwa Bank and its corporate portfolio to Qatar Islamic Bank. Other Islamic banks, such as International Islamic Bank, opted to capitalise on the regulatory move by launching marketing campaigns directing attention to their sharia-compliant offerings. “We evaluated the portfolios, and then we realised the pricing they were asking for was not favourable,” Edward Wong, the CFO at the International Islamic Bank, told OBG. “So what we embarked on was actually developing our own internal sales incentive and sales programme, endeavouring to pick up customers that way.”
Limiting Profits
The QCB’s 2011 decision to place limits on conventional retail lending interest (see Banking chapter), which for Islamic banks limited the profit rate from fees applied to loans, has also adversely affected the profitability of the non-bank sharia-compliant finance companies. The majority of these companies’ business takes place in the retail segment, and, as they do not take deposits, their ability to access cheap funds is less than that of the licensed Islamic banks. The new regulation has therefore significantly reduced their profit margins, and, while they have requested permission to be exempted from the restrictions, it has impelled them to alter their business models. At the same time that companies have faced challenges from the QCB capping the pricing for personal financing, the SME segment has not faced such regulations, which has meant that sector players are changing their strategy to focus more on SMEs.
Other banks are following suit. “The restrictions have encouraged us to move towards SMEs, where the return is acceptable, if we work with the Al Dhameen programme [a government initiative which guarantees 85% of the debt of qualifying companies]. If the retail restriction continues, we will move to majority SME business,” Mohamed Ezzeldin, CFO at AJF, told OBG. First Finance, QFH and AJF have all joined the Al Dhameen scheme, which seeks to boost financing for SMEs as part of the government’s plan to diversify the economy away from oil and gas.
The Players
Qatar’s four Islamic banks offer a diverse range of sharia-compliant services, extending across the sub-sectors of retail, corporate and commercial banking, business banking, private banking, real estate finance, structured finance, investment and asset management.
QIB became the first sharia-compliant lender in the country when it opened its doors for business in 1982. With total assets of around QR74bn ($20.3bn) as of June 2013, the bank is the largest Islamic operator in the market and has built up a network of some 31 branches. According to the bank’s annual report for 2012, the institution claims a 36% share of the nation’s Islamic banking assets and a 9% share of the banking sector overall.
Beyond its domestic operations, QIB’s international footprint has also grown to include holdings in the UK (QIB UK), Lebanon (Arab Finance House) and Malaysia (Asian Finance House).
The next largest competitor in the segment, Masraf Al Rayan, entered the market in 2006 and quickly established itself as the second-largest Islamic bank. As of June 2013 the bank held total assets of around QR64.3bn ($17.6bn), which, according to an OBG analysis of Islamic banks’ financial statements, granted it 37.3% of the total asset base of the sharia-compliant sector. As of September 2013, the bank had a domestic branch network numbering 13 units and was looking overseas: in February 2013 it held an extraordinary general assembly meeting at which permission was granted for acquisition of a strategic share in a commercial bank in Libya, subject to approval of the regulatory authorities of both countries and the completion of a due diligence process.
QIIB is the third-largest sharia-compliant operator in the country, with total assets of approximately QR31.4bn ($8.6bn) as of June 2013 – or roughly 18.4% of the Islamic financial sector as a whole. The bank had established 15 branches in its home market as of 2013, and in addition has established an international footprint by becoming one of the founders of the Islamic Bank of Britain and the Syria International Islamic Bank. The Islamic Bank of Britain was sold to Masraf in January 2014.
The most recent entry to the Islamic segment is Barwa Bank, which began its operations in 2009, having been established as a real-estate lending subsidiary of Barwa Real Estate Company (BREC) in 2007, with an investment capital of QR1bn ($273.9m) and paid-up capital of QR500m ($136.9m). The bank, which remains, began its new life as a full service bank with a starting paid-up capital of around QR2.5bn ($684.8m). The institution has since expanded on its real estate base with the establishment of four branches and its acquisition of The First Investor, the largest closed shareholding investment banking firm in the country. In 2010 it went on to acquire the First Finance and First Leasing companies, consolidating all three into the Barwa Bank Group. (BREC announced in January 2014 it intended to sell its share of Barwa Bank to Qatari Diar, however.) As of June 2013, the bank held total assets of around QR27.8bn ($7.6bn), which accounted for around 16.3% of total assets in the Islamic segment.
Performance
The past year has been a challenging one for some Qatari banks. The mega-projects that have been anticipated since the announcement of the nation’s successful bid to host the FIFA World Cup in 2022 did not emerge in 2012 or the first half of 2013, and lenders therefore looked to their existing operations in the search of profits, in what became an increasingly competitive market.
Despite this, Qatar has consistently demonstrated a robust growth rate, based on successful exploitation of its hydrocarbon resources, and the governor of the QCB has estimated that actual economic growth for 2013 hit 5.5%. In this positive operating environment, all four Islamic banks in Qatar succeeded in growing their assets in the six months ending June 30, 2013, with QIIB leading the segment with a rise from QR23.7bn ($6.5bn) to QR31.4bn ($8.6bn) – a jump of 32.5%. Three of the four banks saw an increase in income from financing activities, with Barwa Bank’s 30.6% jump to QR449m ($123m) representing the most significant gain. Barwa Bank also achieved the largest rise in fee and commission income, registering a year-on-year rise of 24.4%.
Three of the four banks posted gains in their total net profits for the period, with the highest gains being made by Barwa Bank Group, with 86.7%; followed by Masraf Al Rayan, with 15.8%; and QIIB, with 7.5%. Over the same year, however, QIB saw a 15.7% decline in net profit, which it attributed to elevated provisioning levels for the period.
Takaful
Just as Qatar’s Islamic banks are playing an increasingly prominent role in the banking sector, the nation’s Islamic insurance, or takaful, operators are growing their presence within Qatar’s already competitive insurance arena. As of 2013 a total of 22 insurance companies were licensed to operate in the country. Much of the nation’s insurance business, however, is accounted for by a relatively small number of institutions, and of Qatar’s “big five” insurers two are full-fledged takaful operators.
The largest of these, Qatar Islamic Insurance Company (QIIC), was founded in 1995 and for 15 years had the sharia-compliant insurance market to itself. Nevertheless, during this time takaful premiums grew exponentially, with Ernst & Young reporting that gross takaful contributions in Qatar expanded between 2005 and 2009 at a compound annual growth rate (CAGR) of 41%.
In 2010, Al Khaleej Takaful became the second market entrant, after previously operating as the Al Khaleej Insurance and Reinsurance Company. These two players remain dominant in the domestic takaful market, while the remainder of the nation’s Islamic insurance business is largely accounted for by a further three companies, all of which operate under the standard regulatory jurisdiction in Qatar: Doha Solidarity (a partnership between the Doha Insurance Company and Bahrain’s Solidarity), Daman Islamic Insurance Company (Beema) and General Takaful (a subsidiary of Qatar General Insurance and Reinsurance). Qatar has also met with success in the global takaful arena, most notably in the case of Pak-Qatar Family and General Takaful, which offers Islamic insurance products in Pakistan. The company is backed by some of Qatar’s most prominent financial institutions, including QIIC, QIIB and QNB.
As with other GCC markets, the bulk of takaful business in Qatar is derived from family takaful, with other key business lines including motor, property and accident, and marine and aviation. From these segments both QIIC and Al Khaleej achieved a surplus from takaful operations in 2012 of QR16m ($4.4m) and QR32.8m ($8.9m), respectively, despite a modest decrease in their gross contributions over the course of the year. QIIC grew its comprehensive income over the same period by some 21.6%, to reach $56m, while Al Khaleej, although posting a decline of around 64%, nevertheless attained a comprehensive income level of QR18.3m ($5.01m).
A Deepening Sector
As Qatar’s Islamic banks move beyond the basic financing products with which they began their operations, the domestic IFS market grows in both size and complexity. This is also apparent in the development of sharia-compliant investment activity in recent years. Until recently, Islamic investment banking in Qatar was characterised by boutique and niche operators that lacked the weight of capital to generate much interest in the region. The arrival of QI nvest to the QFC in 2007, however, marked the emergence of a more prominent Islamic investment segment, and enhanced domestic capacity in areas such as investment banking and advisory, principal investment, private client advisory and brokerage. Since then, it has ticked off numerous industry firsts, such as its creation of a sharia-compliant mezzanine fund in partnership with Fortis Bank Nederland, and applied its advisory capability to a range of high-profile deals. In 2009 it was joined in the QFC by Qatar First Bank, a new investment institution focusing on private equity in the Middle East and North Africa region and Turkey.
The government of Qatar is also playing a leading role in developing the IFS sector across the region through a partnership with the Jeddah-based Islamic Development Bank and the Saudi conglomerate Dallah Al Baraka group, announced in 2013. According to the agreement, the three parties will establish a new Islamic “mega bank”, to be based in Qatar, that will facilitate the development of an inter-bank market for sharia-compliant lenders. The move would be an important step in addressing the challenge of short-end liquidity currently faced by Islamic banks, which cannot partake in the same interest-based borrowing their conventional peers can, due to the prohibition of usury in Islamic law (see analysis). In the absence of an interbank market, sukuk, or Islamic bonds, are the principal answer to the longer liquidity challenge. Their availability in the global market has been increasing steadily over recent years: in 2011 a total of $84.4bn worth of sukuk was issued worldwide, 62% more than in 2010, and, according to Zawya, global sukuk issuance in the second quarter of 2013 reached $28bn – an increase of 14.6% over the second quarter of 2012. Qatar, for its part, has played a role in this phenomenon, issuing approximately 11% of the global sukuk total in 2011, and in the second half of 2013 Qatari corporate entities raised $3.1bn through 11 issuances, according to Markaz Research, establishing the country as the third-most-active GCC issuer behind the UAE and Saudi Arabia. The Qatar government has also demonstrated a renewed interest in establishing a sovereign Islamic debt programme, ending a nine-year hiatus in sovereign dollar-sukuk issuances with the launch in 2012 of a $4bn dual-tranche sukuk with terms of five and 10 years.
Outlook
The decision to close the Islamic windows and subsidiaries of both local and foreign conventional banks in Qatar has been widely interpreted as a demonstration of the government’s commitment to establish the country as an Islamic banking hub. Given the central role played by the government in the economic development of the nation, this factor alone underpins much of the optimism that surrounds Islamic finance in Qatar.
Islamic assets stood at QR219bn ($60bn) at the end of 2013, equivalent to 23.9% of total banking assets, up from 13% in 2006, and most observers expect them to continue to claim more market share in the years to come. Also, Qatar’s high disposable income average and a low penetration rate of just 0.7%, according to Ernst & Young, imbues the country with strong potential in family takaful, as well as in the more traditional lines of engineering and transport takaful. The segment’s prospects are further enhanced by the relatively low capital requirement imposed on Islamic insurers by the Qatar authorities, which stands at $10m compared to $28.32m in the UAE, $26.64m in Saudi Arabia and $13.2m in Bahrain, further establishing Qatar as an attractive proposition for potential new entrants.
