Islamic financial services expand in Qatar with government support

Qatar is home to some of the region’s most prominent sharia-compliant institutions. Despite operating in a crowded and competitive arena, over recent decades the country has claimed a significant share of the banking, insurance and investment segments. More recently Qatar faced the challenges of a sustained dip in oil prices and a regional economic blockade. However, due to a prudent regulatory structure and the government’s ability to support its most important Islamic institutions, the sector remains largely unaffected by economic turbulence, and is well positioned to take advantage of the opportunities emerging from the Qatar National Vision 2030 strategy and preparations for the 2022 FIFA World Cup.

Market Structure

The Islamic finance industry has been an important component of the nation’s financial system since the early 1980s, when the first sharia-compliant bank opened its doors for business. Islamic financial services (IFS) have been growing at a strong pace over recent years, with sharia-compliant assets expanding at a compound annual growth rate (CAGR) of 11% between 2012 and 2017, outpacing their conventional counterparts.

As of January 2019 a total of four Islamic banks were licensed by the Qatar Central Bank (QCB), between them accounting for around 25% of Qatar’s banking sector assets, according to the Ministry of Finance. They have driven the development of the IFS industry and hold the largest share of its assets, worth around QR348bn ($95.6bn) as of September 2018. Takaful (Islamic insurance) and non-bank financial institutions accounted for around 1.3% of total IFS assets in 2017. A total of five takaful and re-takaful companies are licensed by the QCB, and their activities have established the country as the second-largest sharia-compliant insurance sector in the GCC, behind the UAE (and excluding Saudi Arabia, which has adopted a cooperative model rather than takaful). Sukuk (Islamic bonds) accounted for around 18% of total IFS assets in 2017, thanks in large part to the government’s issuance of sovereign sukuk, which dominate the market with just over 71% of total issuances. The sharia-compliant asset management segment, in which sukuk play a vital role, is where IFS has made the greatest proportional advance, with sharia-compliant funds accounting for $224m by the end-2017, or over 50% of the Qatari asset management segment, according to the Qatar Financial Centre (QFC). Together, Qatar’s IFS institutions establish the country as one of the most vibrant sharia-compliant markets in the region. With 100% foreign ownership laws in place, an attractive tax environment and ease of business start-up, the nation is also a competitive hub for IFS firms looking to conduct business in untapped global markets.

Banking

Qatar’s Islamic banks operate in a highly competitive domestic market in which they compete with seven conventional national players, licensed by the QCB. These include the QNB, a regional giant that dominates the domestic banking sector and operates subsidiaries and associates across 31 countries. More competition comes in the form of seven foreign banks, which have played an important part in Qatar’s economic life for over half a century. These include multinational giants, such as Standard Chartered Bank, BNP Paribas, and regional players such as Mashreq Bank and Bank Saderat Iran.

As well as the institutions licensed by the QCB, a number of banks operate from within the distinct regulatory environment of the QFC, although their activity is generally conducted through relatively small representative offices. In 2011 the QCB instructed conventional banks to cease accepting deposits through Islamic windows and wind down their sharia-compliant operations (windows or subsidiaries). This has helped Qatar’s four full-fledged Islamic banks to establish themselves as universal institutions, offering sharia-compliant services across the areas of corporate and retail banking, including the increasingly important small and medium-sized enterprise segment, as well as the more specialist fields of private banking, real estate finance, structured finance, investment and asset management. Qatar Islamic Bank (QIB), with assets of QR153.2bn ($42.1bn) as of January 2019, is the largest of these institutions. Incorporated in 1982 as the nation’s first Islamic financial institution, it is one of the most widely recognised brands in Qatar.

Through the QIB associates Daman Islamic Insurance Company (Beema) – a takaful provider– and Al Jazeera Finance – a consumer finance company – it is able to offer customers the complete lineup of Islamic finance products. Masraf Al Rayan, established in 2006, is the nation’s second-largest Islamic bank, with assets of QR99.6bn ($27.4bn) as of September 2018. The bank fully owns Al Rayan Investment, launched in 2008, with a capital of $100m. Qatar International Islamic Bank (QIIB) is the third-largest sharia-compliant operator in the country, with total assets of around QR50.3bn ($13.8bn) as of January 2019. Founded in 1991, the bank has established an international footprint by becoming one of the founders of the Islamic Bank of Britain and the Syria International Islamic Bank. 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 in 2007.

The bank expanded its operations in 2009 with the acquisition of The First Investor, the largest closed shareholding investment banking firm in the country. In 2010 it went on to acquire First Finance and First Leasing companies, consolidating all three into the Barwa Bank Group. As of September 2018, the bank held total assets of approximately QR47bn ($12.9bn). The four-bank market structure which has prevailed in the segment for some years is, however, about to be disrupted. In August 2018 Barwa Bank and International Bank of Qatar signed a final merger agreement that established a combined group with total assets of QR80bn ($22bn).

The new sharia-compliant institution is the result of a series of industry talks which originally included Masraf Al Rayan as a third potential partner. In February 2019 it was reported that the combined lender is to be rebranded as Lusail Bank, and that the integration of the founding institutions will be carried out towards the end of the first quarter of 2019.

Performance

Qatar’s Islamic banks have grown more quickly than their conventional counterparts over recent years, and collectively posted a 9.1% growth in assets over 2017 to continue this trend. However, the diplomatic crisis between Qatar and a number of other nations that began in 2017 led to concerns regarding the performance of the nation’s Islamic financial institutions.

Following the June 2017 economic blockade of the country, the government moved quickly to defend the banking sector with injections of public liquidity, a capability it enjoys thanks in large part to Qatar’s sizeable reserves and the revenues it receives from its hydrocarbons exports. Qatar’s four Islamic banks have also to some degree been protected from the diplomatic rift by their focus on the domestic market. QIB, considered by analysts to be the most vulnerable to the effects of the blockade, reported that its customer deposits rose by 2% in the six months to the end of June 2018, while its second quarter net profit rose by 14.8% year-on-year (y-o-y).

In the first nine months of 2018 the Islamic banking sector showed similar robustness. The total assets of the four institutions rose by 1.77%, while their financing assets climbed by 3.81%. The sector also remained profitable during this period, with y-o-y net profit showing an 8.36% gain. Importantly, the margins secured during this challenging period were made without any significant deterioration in financial stability indicators. According to the Islamic Financial Services Board, the Malaysia-based international standard-setting organisation, Qatar’s Islamic banks showed a capital adequacy ratio of 17.3% in the second quarter of 2018, against 17.5% at the end of 2016. Non-performing financing, meanwhile, showed only a modest gain over the same period, rising from 0.6% to 1.2%.

Regulation

Qatar’s Islamic banks operate according to the same regulatory framework as their conventional counterparts, and are overseen by the QCB. On matters of sharia, the country operates the self-regulation model, whereby Islamic finance institutions turn to their own sharia supervisory boards for rulings on new products and services.

The QCB has not established a centralised sharia board to determine policy and pronounce on points of law but has recourse to sharia scholars on an as-needed basis should a regulatory question arise. While the lack of a centralised sharia advisory board is sometimes viewed as a hurdle to sector development, the consistency of sharia rulings is greatly aided by the fact that sharia advisors normally sit on more than one of the banks’ proprietary boards. Islamic institutions also have recourse to a number of external references, including the Supreme Sharia Council attached to the Ministry of Awqaf and Islamic Affairs and the accounting, auditing, governance and ethical principles established by the Accounting and Auditing Organisation for Islamic Financial Institutions.

The regulatory framework supporting Qatar’s Islamic finance sector may soon, however, undergo a significant alteration. In 2018 the QCB revealed that it was planning to establish a central sharia committee for Islamic banks as part of a broader reform outlined by the Second Strategic Plan for Financial Sector Regulation (2017–22).

Qatar is one of a number of GCC jurisdictions to come to the conclusion that a centralised system is the solution to the challenge of a rapidly evolving market. As well as the anticipated ramping up of the activities of Oman’s already extant board, other countries are also introducing centralised initiatives to improve the consistency of sharia rulings in the IFS industry. The centralisation of sharia regulation is therefore likely to remain a key theme in the regional IFS industry over the coming years, and Qatar is positioned to play a leading role within in it.

Takaful

Qatar’s takaful providers have not made as big an impact in the nation’s financial sector as their banking counterparts. There are currently five national takaful and re-takaful companies licensed by the QCB, including the Al Khaleej Takaful Group; Beema; The Group Islamic Insurance Company ( previously Qatar Islamic Insurance Company); Qatar Takaful Company; and General Takaful Company. Between them they accounted for just $178m of the nearly $3.6bn total premium taken by the insurance industry in 2017, according to the QFC. Although gross takaful contributions have shown double-digit growth since 2013, they have been outpaced by the expansion of conventional premium.

The penetration rate for sharia-compliant insurance also remains relatively low: the penetration rate for the entire insurance sector stood at 1.74% of real GDP in 2017, a significant improvement of the 0.77% recorded in 2013. Takaful penetration, however, remained significantly lower and flat at 0.08% during this period. Part of the challenge facing takaful providers is that, as with the banking sector, the Qatari insurance industry is highly competitive. Takaful companies chase market share with four large national insurance companies and four international players licensed by the QCB, as well as 12 insurance companies that operate from within the QFC’s regulatory framework.

The QFC has also identified a lack of differentiation between takaful offerings and their conventional counterparts as a hurdle to sector growth, meaning that in the domestic market companies tend to compete on pricing alone. Despite the small size of the local market, however, Qatar has made its presence felt in the international 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 the Qatar National Bank (QNB), and has played a key role in opening up the Pakistani market. 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.

Islamic Assets

Until relatively recently, individuals and businesses who wished to deploy their capital with sharia-compliant asset managers were limited to a number of boutique and niche operators which lacked the weight of capital to generate much interest in the region. The arrival of QI nvest to the Qatar Financial Centre in 2007, however, kickstarted the growth of a more prominent Islamic investment segment, and greatly enhanced domestic capacity in areas such as investment banking and advisory, principal investment, private client advisory and brokerage. Over the past decade QI nvest has established itself as one of the most prominent Islamic financing institutions in the world, with operations across the Middle East, Africa and Europe.

It has claimed a number of industry firsts over this period, including its creation of a sharia-compliant mezzanine fund in partnership with Fortis Bank Nederland. In 2009 it was joined in the QFC by Qatar First Islamic Bank, a new investment institution backed by Qatari and regional shareholders, with a business focus on the MENA region and Turkey.

Beyond the specialist investment banks, Qatar’s four universal Islamic banks offer both retail and corporate clients a range of sharia-compliant products, such as equity participation and investment funds. The Qatar Stock Exchange (QSE), meanwhile, has teamed up with the investment subsidiary of Masraf Al Rayan to create an Islamic index based on QSE listed stocks, which has added further momentum to the development of the sharia-compliant asset management segment.

The index forms the basis of Masraf Al Rayan’s recently launched Exchange Traded Fund (ETF), the world’s largest single-country sharia-compliant instrument of its kind. The rapid development of Qatar’s Islamic fund universe, which now accounts for more than half of mutual fund assets in the country, has established it as a leading sharia-compliant investment centre in the region (see analysis).

Sukuk

Qatar has also played a leading role in the development of sukuk over recent decades. In 2017, sukuk accounted for approximately 18% of the nation’s Islamic finance assets, according to the QFC, with total outstanding issuances amounting to $2bn.

Since the first sovereign sukuk issuance in 2003 the government has been Qatar’s biggest issuer of sharia-compliant debt. In 2013 it shifted from a policy of single, ad hoc issuances to a regular programme of quarterly QR1bn ($274.6m) offerings, evenly split between three- and five-year tenors. This development brought numerous advantages, including an increased range of monetary policy options and more liquidity management tools for the banking sector. The regular sovereign issuances also help to establish a benchmark for local currency corporate sukuk offerings. Between 2013 and the first half of 2018 the government sukuk programme accounted for 73% of total issuances in the sharia-compliant segment, with the largest single sukuk coming in 2011 when the government raised $9bn.

Rising oil prices throughout 2017 and the first half of 2018 reduced the need of the GCC’s energy exporters to raise funds through the sukuk market. However, the QCB ramped up its sukuk programme during the first half of this period, issuing nearly $3bn in 2017, which represented an expansion of 80% from to the previous year. Beyond the sovereign offerings, Qatar’s Islamic banks have been the most regular issuers of sukuk. The tenor of the interest-free deposits of Islamic institutions tends to be short term, while the financing durations of their larger facilities are longer. This mismatch between deposits and financing has implications for risk management, and in order to establish a more stable funding profile, Islamic banks frequently resort to debt capital markets – where sukuk represent a sharia-compliant alternative to conventional instruments. During 2016 and 2017 QIB drove corporate sukuk growth, as it accessed international capital markets for funding.

On the international stage Qatar is also playing a part in the expansion of the sukuk market through its membership of the International Islamic Liquidity Management Corporation (IILM), which was established in 2010 by the central banks and monetary authorities of, among others, Qatar, Indonesia, Kuwait, Luxembourg and Malaysia. From its Malaysian headquarters, the IILM has sought to develop and issue short-term sharia-compliant financial instruments to facilitate liquidity management for IFS institutions across the globe. It launched its first US dollar-denominated, highly rated, short-term, tradable, sharia-compliant sukuk in August 2013.

Outlook

The continued expansion of the GCC’s sharia-compliant assets is being driven by a number of ongoing regional developments, including the 2022 FIFA World Cup, which is hosted by Qatar, and the stabilisation of energy prices. Ratings agency S&P Global forecasts growth of 4-5% for GCC Islamic banks in 2019. Downward pressure on the profitability of Qatar’s Islamic banks is likely to come in the medium term from the planned introduction of the value-added tax, originally expected in 2019 but recently deferred, and expected to be implemented in 2020 or 2021. More broadly, the growth prospects of Qatar’s IFS sector are closely tied to the continued expansion of its economy, which is expected to remain buoyant as its natural gas exports persist.