Islamic finance in Qatar adopting sustainability criteria

Qatar’s Islamic financial services sector is engaged in a shift towards sustainability to take advantage of robust global growth in demand for sharia-compliant investments and rising interest in green finance.

Globally, Islamic financial services continue to exhibit strong momentum, with loans expanding at an average compound annual growth rate (CAGR) of 10.5% in 2020 and 2021, according to a 2022 report from credit ratings agency Moody’s. This compares favourably with conventional financing’s CAGR of 3.4% over the same period. The favourable performance is due in part to the fact that Islamic finance providers have been drawing on a large base of previously unbanked or underbanked customers, maintaining growth despite economic headwinds. This trend is likely to continue in the years ahead.

Efforts by the Qatar Central Bank (QCB) to harmonise the sharia-compliant regulatory framework and the formation of the Qatar National Financial Technology Taskforce in 2017 laid the groundwork for a mature Islamic financial services ecosystem and asset growth: the country’s Islamic finance assets reached $3.7trn at the close of 2021, including $49bn of financial technology (fintech) assets. According to the Qatar Financial Centre (QFC), an onshore business and financial centre located in Doha, Qatar’s Islamic fintech assets are forecast to reach $122bn by the end of 2022. The QFC identified environmental, social and governance (ESG)-focused finance and Covid-19 pandemic-related restrictions to physical interactions among the key enablers of expansion in fintech (see Banking chapter).

Sustainable Upswing

Qatar’s Islamic financial services expansion is taking place in tandem with an upswing in global interest in sustainable financing as economies embark on net-zero transitions. Worldwide green bond issuances reached $75bn in 2021, and the EU has committed to raising up to 30% of funds in its NextGenerationEU programme through the issuance of green bonds, led by a maiden €12bn issue in October 2021 – the world’s largest green bond to date. Social and sustainability bonds set new records that year, and the global green bonds segment is forecast to exceed the $1trn mark in 2022.

In the Middle East, the Islamic Development Bank (IsDB) successfully issued a €1bn green sukuk (Islamic bond) in November 2019 under its Sustainable Finance Framework, with the proceeds earmarked for green projects. In 2021 IsDB issued a $2.5bn sustainability sukuk, its largest-ever US-dollar public financing. The issuance received significant demand, allowing the bank to tighten pricing by more than 15% between the announcement and closing of the issuance. The issuance attracted a diverse investor base, with 61% of the value of the issuance allocated to investors in the MENA region, 24% to those in Asia, 13% to Europe, and 2% to others, including US offshore investors. Among the investors were central banks and official institutions, Treasuries, fund managers and private banks.

Local Shift

Propelled by these indicators, Qatar’s Islamic finance institutions are diversifying their portfolio of sustainable debt instruments, in line with Qatar National Vision 2030 (QNV), and the QCB’s strategic goal of developing financial markets and fostering innovation.

In March 2022 the QFC pioneered a Sustainable Sukuk and Bonds Framework (SSBF) – the first in the GCC – based on the International Capital Markets Association’s Green Bond Principles, Social Bond Principles and Sustainable Bond Guidelines. The SSBF will allow operators of green projects to broaden their investor base to include Islamic financial services backers, and enable both debt issuers and purchasers to comply with increasingly stringent international ESG guidelines. This development comes at a particularly opportune time as Qatar has committed to reducing carbon emissions by 25% by 2030, and lowering the carbon intensity of its liquefied natural gas export operations via carbon capture and storage (CCS) at its gas production facilities. Under the SSBF, CCS operators can tap Qatar’s burgeoning pool of green Islamic finance assets and the wider group of international investors seeking high returns to finance the rollout of infrastructure and operational expenditure.

Government revenue is positioned to further support sustainable spending. Qatar’s export revenue hit a recent high of $87.2bn in 2021 amid surging oil and gas prices. While the revenue eases the need for sovereign bond issuance, especially after the government tapped the market for $10bn in pandemic relief funds in 2020, the banking system is set be supported by high levels of liquidity.

As global inflationary pressures mount and feed into domestic price pressures in Qatar – the consumer price index rose 4.4% year-on-year in March 2022 – sharia-oriented investors and their conventional counterparts will likely look to high-return bonds that are compliant with ESG criteria.

Green Energy

Renewable energy resources are also expected to drive demand for sustainable investment. Under the government’s Sustainability Strategy, Qatar aims to roll out over 5 GW of solar energy capacity by 2035, starting with the first phase of the 800-MW solar project in Al Kharsaah, which a consortium led by TotalEnergies is set to complete in 2022 (see Energy chapter). Other sources of demand for sustainable financing include opportunities for solar to reduce the carbon footprint of the energy-intensive desalination plants that supply Qatar with fresh drinking water, and Qatar’s potential to develop offshore wind and bio-energy sources.

The country has committed to organising the first carbon-neutral 2022 FIFA World Cup, featuring the use of solar-powered stadia, and water- and energy-saving cooling and lighting technology. This – combined with innovative efforts to improve air quality, recycle waste and increase green spaces – are expected to bolster the domestic market for sustainable investment in technology.

Opportunities

Local banks are looking to capitalise on the shift towards sustainability. In April 2022 Islamic bank Masraf Al Rayan launched a sustainable financing framework of its own, in alignment with the SSBF. Credit ratings agency Standard & Poor’s assessed the framework as “strong” in terms of its ESG criteria, raising the likelihood that financial instruments issued under its mandate will be able to attract international investors.

Meanwhile, a broader drive is under way to position Qatar as a regional centre for sustainable finance. Environmental development is one of QNV’s four core pillars, and this is supported by the Second Strategic Plan for Financial Regulation 2017-22 (SSP-2), published collaboratively by the domestic regulator. The framework shows the need to promote sustainable investment and green finance. Under SSP-2, the Qatar Stock Exchange (QSE) launched an online sustainability and ESG dashboard to enable listed companies to communicate their performance in these areas. As of early 2022 the QSE was in talks with an asset manager to launch an ESG fund that will act as an incentive for listed companies to embrace sustainability data collection and disclosure, ahead of potentially making ESG reporting mandatory. In a bid to make Qatar the regional destination of choice for ESG investment, in 2021 the QSE launched an ESG index in collaboration with MSCI, a global provider of equity analysis tools. The index aims to identify the top-20 securities on the exchange in terms of their ESG profile.

In keeping with the government’s strategic focus on sustainability, in 2020 the QCB issued green bonds worth $600m on the London Stock Exchange. The release was oversubscribed to the tune of $1.8bn, indicated the scale of latent demand. By January 2022 local banks had adopted green initiatives in their business practices by issuing green bonds, and offering green loans and mortgages that provide discounts on loan fees or interest rates favoured energy-efficient and environment-friendly investment opportunities. For example, conventional bank Qatar National Bank (QNB) and the UK’s HSBC launched a green energy-focused financing instrument in February 2022, broadening the international scope of Qatar’s sustainable financing. Under the agreement, QNB will receive green bonds from HSBC, which will allocate an equal amount to environmentally friendly projects.

Qatar is already well on its way to developing a green finance ecosystem that will enable its government, banks and corporations to achieve sustainability goals outlined in QNV. In light of the robust international demand for investment options that meet ESG criteria, synergies between Islamic and green lenders should help Qatar in its efforts to become a regional leader in sustainable finance.