Sphere of influence: Qatar’s reputation as a centre for Islamic finance is growing

The maturation of Qatar’s Islamic financial services (IFS) industry over the past decade and a half has led the country’s sharia-compliant institutions to take a two-tiered approach to growing their business. First, the nation’s Islamic financial institutions have focused on serving domestic demand. Second, as in the conventional segment, many of the country’s Islamic institutions have looked outside Qatar for further growth opportunities. For example, as of early 2016 Qatar Islamic Bank (QIB), the nation’s largest sharia-compliant lender, operated offices or owned subsidiaries in the UK, Lebanon, Malaysia and Sudan.

Masraf Al Rayan (MAR), meanwhile, had 10 subsidiaries across the Gulf region – notably in Saudi Arabia and Oman – plus Al Rayan Bank in the UK, which bills itself as the first British bank operating according to Islamic principles. Lastly, both Qatar International Islamic Bank (QIIB) and Barwa Bank have led debt issuance programmes or carried out other operations in foreign markets, including Ireland, Morocco, the UK and throughout the Middle East.

Working Together 

More recently, several of Qatar’s sharia-compliant institutions have partnered with foreign banks and other entities to assist in setting up new Islamic financial products and services in foreign markets. For instance, in 2015 QIIB announced that it had signed a memorandum of understanding (MoU) with Southwest Securities, a Chinese brokerage, to set up an Islamic finance company in China. The deal, which also involves the investment banking arm of Qatar National Bank (QNB), Qatar’s largest conventional player, is part of a recent push by China to develop a domestic sharia-compliant financial industry. As part of this initiative, the Industrial and Commercial Bank of China (ICBC), the world’s largest bank by assets, recently partnered with the Islamic Corporation for the Development of the Private Sector (ICDPS), which falls under the umbrella of the Jeddah-based multinational development finance institution, the Islamic Development Bank (IDB). Qatar, which is a member and shareholder of the IDB, is active in ICDPS’s activities. In addition to China, in mid-2015 Qatar’s Ministry of Finance signed an MoU with Kenya’s government, under which Qatar will serve in an advisory capacity as Kenya works to develop sharia-compliant financing mechanisms, including sukuk (Islamic bond) issues.

Shift To Centre 

These recent deals signal a key shift in Qatar’s IFS landscape. As sharia-compliant finance has matured around the world over the past decade, Qatar has become an important resource for governments and companies looking to introduce Islamic products and services in new markets. Home to some of the largest sharia-compliant institutions in the world, Qatar is well positioned to fill this new role. By partnering with Qatar, foreign firms like China’s Southwest Securities gain access not only to the country’s expertise, but also to Qatari investors. Qatar, for its part, gains exposure to new markets and, in some instances, new sources of capital.

A Broad Appeal

It is easy to see why China, Kenya and other overseas markets have turned to IFS in recent years. The sharia-compliant economy has grown rapidly, outpacing conventional banks and other non-Islamic financial entities. By 2016, there were more than 400 Islamic banking institutions in operation worldwide, the majority of which were established in the 1980s and 1990s.

As of late 2015 nine markets – namely Qatar, Indonesia, Saudi Arabia, Malaysia, the UAE, Turkey, Kuwait, Bahrain and Pakistan – accounted for some 93% of the industry’s total assets of around $989bn. The first six markets alone made up 80% of this total, according to a 2016 EY report. Islamic banks operating in the GCC grew at compound annual growth rate (CAGR) of around 15% between 2008 and 2014, according to Standard & Poor’s (S&P), while conventional banks posted a CAGR of around 8.8% over the same period.

More broadly, Islamic finance as a whole was estimated by S&P to be worth some $2trn as of late 2015. Despite a slight slowdown in the pace of expected growth in some countries in 2016-17, this figure is forecast to jump to $3trn over the next few years. Similarly, according to EY, Islamic banking assets in the top nine Islamic finance countries are forecast to grow rapidly in the coming years, from around $920bn in late 2015 to $1.6trn by 2020. Much of this growth is expected to take place in a handful of Gulf markets, including Kuwait, Qatar, Saudi Arabia and the UAE, all of which are major IFS players.

Looking East

It is with these projected growth rates in mind that China has begun to move into Islamic finance in recent years. The new focus is partly a result of China’s One Belt, One Road development strategy, which was launched by President Xi Jinping in late 2013 and under which the country is working to connect countries across Europe and Asia in a modern reformulation of ancient land and maritime Silk Road trade routes. The Middle East, and particularly Gulf countries, has been identified as a key region for potential partnerships in this effort. Various overarching deals are currently in the works in this regard. The ICBC-ICDPS partnership will identify and develop syndicated financing opportunities in the IDB’s 52 member states. In April 2015 Qatar also became the first country in the Middle East to open a renminbi clearing and settlement house, increasing financial and commercial connectivity between China, Qatar and the region. Additionally, in late 2015 the Asian Infrastructure Investment Bank (AIIB), a new multilateral lender with 30 member states that was launched in 2014 and opened for business in January 2016, announced that it might partner with the IDB on projects involving Islamic finance. The Beijing-based AIIB, which has set itself up as a competitor to the World Bank and the Asian Development Bank, has 20 member countries in common with the IDB and, as such, is widely considered to be well equipped to carry out IFS financing projects on a large scale in the future.

China has invested in Islamic finance both at home and in a number of Gulf countries in recent years. As of late 2015 several major Chinese entities were considering sharia-compliant financing opportunities, including the conglomerate HNA Group, which could raise $150m to purchase ships via an Islamic instrument; and Shandong province, which may issue sukuk to finance the construction of a high-speed rail link. The latter may cost as much as $4.7bn, which, assuming the sukuk was successful, would be one of the largest Islamic bonds ever issued in the world.

In the Gulf, meanwhile, two state-owned Chinese banks – the ICBC and the Agricultural Bank of China – listed conventional bonds on the Dubai Financial Market’s international exchange, NASDAQ Dubai, in 2015. Finally, the QIIB-Southwest Securities deal, under which the former will assist the latter firm in setting up sharia-compliant investment opportunities in China, signals increased cooperation between Qatar and China at the corporate level.

Rising Potential

The announcement in April 2015 that Kenya would partner with Qatar to develop the African nation’s nascent sharia-compliant finance segment points to considerable potential for similar deals around the world in the coming years. The deal was made public during the launch of a new Islamic unit by Kenya Commercial Bank. This followed the appointment of three Islamic scholars to a newly formed sharia advisory committee in late 2014. More broadly, the Qatar partnership is expected to play a major role in the development of Islamic products under the soon-to-be launched Nairobi Financial Centre Authority, which was initiated by Kenya’s government in 2014 in an effort to turn the capital city into a major financial centre in the future.

“We want to establish an enabling environment that supports the development of sharia-compliant products and services,” Henry Rotich, Kenya’s Cabinet secretary for the national Treasury, told local media in 2015. “This will be achieved through cooperation among industry stakeholders in order to address the identified challenges in Islamic financing.”

The establishment of new Islamic financial products and markets in non-Muslim-majority countries has been widely interpreted as a reflection of the inherent strength of sharia-compliant financing models, which tend to eschew risk. As noted by the IMF in a June 2015 report on the sector, “Islamic finance is resilient to shocks because of its emphasis on risk sharing, limits on excessive risk taking and strong link to real activities.” These traits have long been heralded by Islamic banks and other financial institutions in countries with well-developed Islamic segments in the GCC and elsewhere. In Qatar a number of sharia-compliant lenders have also noted that while Islamic retail banking growth may be driven by religious sentiment, on the corporate side it is the solid financial performance of Islamic products themselves that has generated rising interest in recent years.