Growing demand for Islamic financial services in Qatar

Islamic financial services (IFS) are playing an increasingly important role in Qatar’s economy, and the sector is poised for growth as the gas-rich country continues to invest in infrastructure and the expansion of its energy sector. In 2019 the country’s first bank merger, between Barwa Bank and conventional lender International Bank of Qatar, created a new sharia-compliant entity with a 6% market share, and the Qatar Central Bank (QCB) signalled its intent to create a centralised standards body for IFS in 2020.

According to regional advisory firm Alpen Capital, Qatar’s insurance industry was the fastest-growing in the GCC between 2013 and 2018, with takaful (Islamic insurance) playing a critical role. In addition, the world’s largest single-country Islamic exchangetraded fund was listed on the Qatar Stock Exchange (QSE) in 2018. The sector is also supported by the Qatar Financial Centre (QFC), a special economic zone that offers an attractive operating environment for international Islamic finance firms, and is positioning itself to become a global leader in IFS.

Structure & Oversight

Qatar Islamic Bank (QIB) is the country’s second-largest lender, with a market capitalisation of around QR39bn ($10.7bn) in February 2020. It is one of four local sharia-compliant banks and is listed on the QSE, along with Masraf Al Rayan and Qatar International Islamic Bank (QIIB). Qatar First Bank, the country’s corporate Islamic bank, is also listed on the exchange, but Barwa Bank is not. As of March 2020 there were five Qatari takaful operators and three takaful firms based in the QFC. In terms of Islamic non-banking financial institutions, there are two finance companies and two investment companies located in Qatar, as well as two investment banks and an investment management company based in the QFC.

Regulation

The QCB and the QFC Regulatory Authority (QFCRA) are responsible for setting standards for the sector, with the latter holding sole responsibility for businesses located within the QFC. It has produced the Islamic Finance Rule Book, a dedicated set of regulations offering guidelines on disclosure and sharia governance, since 2005. In 2015 the QFCRA first released its Islamic Banking Prudential Rules, which cover risk management and operational aspects of sharia-compliant banking. Both sets of rules are regularly updated. In September 2019 the QFCRA joined the Islamic Financial Services Board, a global IFS standards organisation based in Malaysia. Companies listed on the QSE, meanwhile, must also adhere to the standards set by the Qatar Financial Markets Authority.

In the banking sector, a QFC regulation introduced in 2011 prevents banks from offering both conventional and Islamic services, although standardisation is encouraged. For example, conventional banks were given until the end of 2018 to ensure that their financial reporting was compliant with International Financial Reporting Standard 9 (IFRS-9), an accountancy rule published under the IFRS framework in January 2018. Islamic banks were asked to adopt the same accounting system as their conventional counterparts in the event that similar stipulations were not made by the Accounting and Auditing Organisation for Islamic Financial Institutions. The IFRS-9 standard applies to the classification and measurement of financial assets, financial liabilities and derivatives. Although the QCB is the regulator for both conventional and Islamic banks, it has issued some circulars specific to sharia-compliant lenders.

The QCB allows general insurance groups to own takaful businesses, and permits those companies to submit consolidated accounts. There are a total of 12 insurance firms operating in Qatar, of which eight are domestic and four are branches of international companies. The domestic insurance sector does not include brokers, reinsurance firms or intermediaries. As of 2018 there were three finance companies that were licensed by the QCB – Qatar Finance House, Al Jazeera Finance Company and First Finance Company – which all offer sharia-compliant services. There were 19 conventional and three takaful firms under the QFCRA’s jurisdiction acting as insurance intermediaries in 2019. That year the QCB announced that it was drafting plans to streamline the regulatory framework for Islamic banks. While each bank has its own sharia supervisory board to uphold standards, a centralised supervisory authority would help to enforce consistency and improve credibility across the market (see analysis).

Performance

According to the QFC’s “Qatar Islamic Finance Hub Report 2019”, the IFS sector’s total assets grew by an average of 8% per year between 2015 and June 2019, when it was worth $129bn, equivalent to 33% of Qatar’s total financial sector assets. The largest contributor was Islamic banking, which had combined assets worth an estimated $107bn, or 82% of the sector’s total value. Takaful and non-banking financial institutions each contributed roughly $1bn, while sharia-compliant capital market assets represented approximately $20bn in outstanding sukuk (Islamic bonds) and $399m in assets under management. The report also noted that the exchange-traded fund established in 2018 captured more than one-third of Islamic assets under management that year.

Islamic Banks

The QCB’s annual report noted that between 2012 and 2018 Islamic banks registered a compound annual growth rate (CAGR) of 10.3%. In comparison, conventional lenders recorded a CAGR of 9.8%. However, sharia-compliant banks lagged behind their conventional counterparts in 2017 and 2018. In 2016 Islamic banks’ credit and deposits rose by 14.7% and 7.5%, respectively, while conventional banks saw growth of 14.7% and 8.4%. In 2017 Islamic lenders’ credit and deposit growth both fell to 7.6%, and in 2018 credit increased by 0.4% while deposits contracted by 0.1%. In comparison, conventional banks experienced more robust performance in 2018 with credit and deposits growing by 6.8% and 5.3%, respectively.

As of March 2020 end-2019 figures were only available for just two Qatari banks, QIB and Masraf Al Rayan. In 2019 QIB’s financing and deposits both grew by approximately 11%. Financing increased from QR102bn ($28bn) to QR113.8bn ($31.2bn), while deposits rose from QR100.6bn ($27.6bn) to QR111.6bn ($30.6bn). QIB’s assets grew by 6.7% from QR153.2bn ($42bn) to QR163.5bn ($44.9bn), its revenue increased by 12.4% from QR6.9bn ($1.9bn) to QR7.7bn ($2.1bn), and its net profits were up 10.9% from QR2.8bn ($768.5m) to QR3bn ($823.4m).

Masraf Al Rayan’s financing grew by 3.2% from QR72.5bn ($19.9bn) to QR74.8bn ($20.5bn), while its deposits were up 10.9% from QR19.7bn ($5.4bn) to QR21.9bn ($6bn). Masraf Al Rayan’s assets increased from QR97bn ($26.6bn) to QR106bn ($29.1bn), its revenue grew by 7.1% from QR4.9bn ($1.3bn) to QR5.2bn ($1.4bn), and its net profits rose by 2.3% from QR2.1bn ($576.4m) to QR2.9bn ($796m).

According to its most recent figures, QIIB, Qatar’s third-largest lender, saw a 13.1% year-on-year increase in assets in the first six months of 2019, from QR50bn ($13.7bn) to QR57bn ($15.6bn). Revenues were up 14.6% from QR2.1bn ($576.4m) to QR2.4bn ($658.7m) and profits were up 5.1% from QR882m ($242.1m) to QR927m ($254.4m). The newly merged bank has total assets worth more than QR80bn ($22bn) and a shareholder equity base of over QR12bn ($3.3bn). Combined Islamic banking assets increased by 11.4% in the first half of 2019, with domestic credit accounting for 64% of assets, compared to around 60% growth in conventional assets. The QFC suggested that Islamic banks’ investment portfolios had a higher proportion of investments in Qatar, at 19%, compared to their conventional counterparts, with 9%.

In the first six months of 2019 Islamic financing facilities accounted for 28% of total credit to clients, up from 25% at the end of 2018. The most popular sectors for credit from Islamic lenders were services (58%), general trade (18%) and industry (16%). Over the period there was a 7% decline in government funding requirements across the board as a budget surplus eased pressure on public sector borrowing requirements. This translated into a decrease of 11.5% in lending to the government by conventional banks, while at the same time government borrowing from Islamic banks grew by 17%.

However, Qatari Islamic banks’ loan books are more concentrated on the domestic private sector, which accounted for 72% of all loans in the first six months of 2019, compared to 57% at conventional banks. In particular, real estate loans accounted for 29% of total Islamic bank financing. The QFC report noted that international confidence in Qatar’s banking sector has clearly been restored after the substantial withdrawal of funds by blockading countries in 2017, with Islamic banks seeing an 83.6% increase in international deposits in the first half of 2019.

Energy Bank

In March 2019 the QFC announced the planned launch of a new Islamic bank based in Qatar with a focus on funding global hydrocarbons projects. Energy Bank, which was expected to begin operations by the end of 2019, was to have $2.5bn in paid up capital and had $2bn committed by investors as of early 2019. The bank aims to gradually scale up to become the world’s largest sharia-compliant lender, with initial plans to target $10bn worth of investment in the global energy sector. However, as of March 2020 the bank had not yet launched.

Takaful

According to Alpen Capital, the six GCC members collectively accounted for 77.2% of the global takaful market in 2017, with 37 Islamic insurers and subsidiaries operating across the region. Gross written premium (GWP) peaked in 2016 at $10.9m, declining to $10.6bn in 2018 due to difficult economic conditions. Between 2012 and 2015 the GCC takaful market expanded at a CAGR of 18%. In terms of both conventional insurance and takaful, Qatar was the fastest-growing market in the GCC between 2013 and 2018, with a CAGR of 16% over the period. GWP increased by 7.5% in 2018 to QR15.5bn ($4.3bn), according to the QCB, with the dominant non-life segment accounting for over 98% of GWP.

The market is dominated by the country’s largest insurer, Qatar Insurance Company, which had the highest GWP in the GCC in 2018 at $3.6bn. There were three standalone takaful companies in Qatar as of 2019: Al Khaleej Takaful, General Takaful Company and Qatar Islamic Insurance Company, with Doha Takaful, General Takaful and Qatar Takaful Company operating as subsidiaries. Although the total assets of takaful companies grew by 29% from $844m in 2015 to $1.1bn in the first half of 2019, its value as a percentage of overall insurance assets declined over this period, from 7.7% to 6.8%. The takaful segment expanded at a CAGR of 5% between 2015 and mid-2019, while conventional insurance assets increased at a CAGR of 11%. According to the QFC, the takaful segment’s sluggish growth can be attributed to a decline in assets of Qatar Insurance Company, which held around 27% of the country’s takaful assets.

Takaful companies performed better in the first six months of 2019: the segment’s assets grew by 6% compared to 3% for the insurance sector as a whole. In the coming years growth is likely to be driven by ongoing infrastructure projects associated with the 2022 FIFA World Cup and wider economic expansion plans aimed at boosting liquefied natural gas output by 64% by 2027. Qatar is also in the process of drafting a new health insurance policy, which would make insurance cover for citizens compulsory. Insurance penetration remains low at 1.6%, according to Alpen Capital, below the GCC average of 1.7% and the global average of 6.1%. Life insurance or family takaful accounts for only 0.03% of the sector’s total GWP.

Financial Institutions

As of March 2020 the number of central-bank regulated, non-banking Islamic financial institutions had remained the same since 2012. There are two investment companies, Investment House and Qatar First Bank, and three financing companies: Al Jazeera Finance Company, First Finance Company and Qatar Finance House. As of June 2019 the two investment companies had combined assets of $157m and the three finance houses were worth a total of $852m. In 2019 Al Jazeera Finance Company announced plans to increase the share of its financing for small and medium-sized enterprises from 60% of its portfolio to 70%.

Sukuk

According to the QFC report, there were 11 conventional bond issuances in the first six months of 2019 and six sukuk issuances, with the latter accounting for 14% of total debt issuance value, or $3.2bn. The total value of outstanding sukuk as of June 2019 was $19.9bn. The QFC attributes the lower share of the sukuk segment to the increase in government issuances, including a $12bn conventional bond in April 2019. The bond was issued in three tranches with five-, 10- and 30-year maturities and was heavily oversubscribed. Conversely, government sukuk issuances in the first six months of 2019 had three-, five- and eight-year maturities. The QFC noted that there had been corporate sukuk issuances by QIB and QIIB in the first quarter of 2019, whereas there were no such issuances in 2018.

The total value of sukuk issuance in Qatar has fluctuated in recent years, falling from $3.5bn in 2015 to $3.1bn in 2016, peaking at $5.6bn in 2017 and declining to $2.4bn in 2018 before picking back up to $3.2bn in the first half of 2019. The segment’s share of total debt issuances has also shifted significantly, declining from 48% in 2015 to 16% in 2016, rising to 61% in 2017 before falling to 10% in 2018, and accounting for 14% in the first half of 2019.

Recent Issuances

In the second half of 2019 two of Qatar’s Islamic banks made sukuk issuances. In November 2019 Masraf Al Rayan issued a $500m sukuk with a five-year term under its existing $2bn programme. The debt issuance was three-times oversubscribed and confirmed Qatar’s ability to attract international interest, with 44% of investors from Asia, 44% from the MENA region and 12% from Europe. In the same month the London Stock Exchange (LSE) listed QIIB’s $300m sukuk. The issuance was nine-times oversubscribed and generated an order book of over $2.6bn. It was the second LSE listing for a QIIB sukuk in 2019. Investors from 122 institutions in 22 countries subscribed to the offer.

In January 2020 QIB turned issued the Gulf region’s first Formosa sukuk, a bond issued in Taiwan but denominated in another currency. Credit ratings agency Fitch Ratings reported that the $800m sukuk had a five-year term, adding that Qatari issuers have been increasingly looking beyond the Gulf region for funding since the blockade. To this end, QIB entered into a $4bn trust certificate issuance programme approved by the Central Bank of Ireland. In March 2019 QIB issued a five-year $750m sukuk on the Irish Stock Exchange as part of this programme. In February 2020 Fitch Ratings announced that there had been a 6% increase in global sukuk issuances in 2019 to $42.2bn, an increase of 40% compared to 2009.

Outlook

Sharia-compliant banks are the dominant players in Qatar’s IFS sector, and the merger between Barwa Bank and International Bank of Qatar is a crucial step in increasing the sector’s share of the country’s overall banking market, which has experienced a decline in recent years. Although conventional players still dominate both the banking and insurance sectors, recent growth figures indicate that there is a increasing appetite for sharia-compliant banking and takaful, particularly in the domestic market. Looking ahead, the QCB’s decision to standardise and centralise sharia regulations looks set to boost confidence and encourage growth (see analysis).