New horizons: Recent changes in regulations mean added opportunities

With strong banking and financial services segments combined with an expanding insurance sector and global demand for Islamic bonds, sharia-compliant finance in Qatar is expected to see continued growth in 2012. During a year in which the sector underwent many regulatory changes to close Islamic windows in Qatar’s conventional banks in favour of sharia-compliant entities, new regulations were also implemented in 2011 to limit credit growth by capping consumer loans impacted the banking sector (see Banking chapter).

In addition, there was also movement towards creating a more unified system to price Islamic products on a global scale by establishing the Islamic Interbank Benchmark Rate (IIBR) and Gulf-wide procedures concerning sukuks, or Islamic bonds.

MARKET SIZE: Currently, the Qatari sharia-compliant banking sector consists of four entities: Qatar Islamic Bank (QIB), Masraf Al Rayan (MAR), Qatar International Islamic Bank (QIIB) and the newest, Barwa Bank. In terms of assets, QIB was the largest of these institutions at the end of 2011. According to the bank’s consolidated statements, it had QR58.29bn ($16bn), up from QR51.88bn ($14.25bn) the year before, but QIB’s net profit for 2011 was slightly down on 2010, from QR1.76bn ($483.3m) to QR1.73bn ($475.1m).

Meanwhile, net operating income rose from QR2.28bn ($626.1m) to QR2.68bn ($735.93m), and net profits benefitted from a nearly tripled increase in investment income from QR213.7m ($58.68m) to QR631.34m ($173.37m) year-on-year (y-o-y). On the other hand, general and administrative expenses nearly doubled from QR444.6m ($122.1m) in 2010 to QR700.8m ($192.44m) in 2011. Impairment losses were also much higher y-o-y. However, when other factors, such as sukuks, were taken into account, net profit attributable to shareholders went up from QR1.26bn ($346m) to QR1.36bn ($373.5m) from 2010 to 2011.

When looking at liabilities, customer accounts grew from QR8.73bn ($2.4bn) in 2010 to QR9bn ($2.47bn) in 2011. Return on average equity stood at 16% at the end of 2011 with earnings of QR5.87 ($1.61) per share – about the same as the previous year.

RESULTS & DEVELOPMENTS: QIB also took over the International Bank of Qatar’s (IBQ’s) Islamic corporate portfolio in December 2011. This was due to the new regulations that imposed a year-end deadline for conventional banks to close their Islamic windows.

QIB also made a major sukuk sale in early October 2012, issuing a five-year Islamic bond with a profit rate of 2.5% and a spread of 175 basis points over midswaps.

The $750m issuance – the first the bank had made since 2010 – tapped into an investor demand for long-term dollar funding, as a result of the range of large infrastructure projects in Qatar’s pipeline. Reuters reported around $6bn in orders for the sukuk, demonstrating that global appetite for such instruments was still buoyant into the fourth quarter of 2012. The bank announced that it would be using the sale’s proceeds for local projects. The year 2012 was also a good one for QIB in that it won the Best Islamic Financial Institution in Qatar award, presented by Global Finance magazine for the second year running.

Qatar’s second-largest sharia-compliant bank, MAR, saw a 62.7% jump in assets between 2010 and 2011, standing at QR55.27bn ($15.2bn). The bank has concentrated on building its asset base, achieving the fastest growth in assets of any Qatari bank in 2011.

MAR also reported a rise in net profits from QR1.21bn ($332.7m) in 2010 to QR1.41bn ($387.2m) in 2011, while customer deposits increased 71.2% over the same period to stand at QR46.26bn ($12.7bn). The bank entered the market only five years ago and has been able to maintain a very strong asset quality from the outset.

For example, the non-performing loan (NPL) rate in 2010 was just 0.04%. Provisioning expenses have therefore been extraordinarily low as well.

In September 2011 MAR’s A3 long-term issuer rating was upgraded by Moody’s from stable to positive due to strong earnings generation, a rapid build up of assets and high capitalisation levels. Its Tier 1 ratio is around 20%. MAR also has strong connections with the government and public entities, Moody’s noted in its upgrade notice, making it likely to benefit from the huge programme of investment in infrastructure and the oil and gas sector that the state has planned for the next decade (see Economy chapter).

The third-largest Islamic bank in terms of assets at year-end 2011 was QIIB, which reported total assets had grown from QR18.2bn ($5bn) in 2010 to QR23.4bn ($6.43bn) a year later. Net profit, meanwhile, increased 17% to QR653m ($179.31m), and deposits jumped from QR13.1bn ($3.6bn) to QR16.6bn ($4.56bn) over the year. The financing portfolio also rose from QR9.2bn ($2.53bn) to QR10.6bn ($2.91bn), between year-end 2010 and year-end 2011. QIIB also had a strong capital adequacy ratio, at 24.4% in 2011.

The bank also celebrated receiving the “Best Islamic Bank in Qatar” award for 2011 from the London-based World Finance magazine. QIIB owns the Islamic Bank of Britain and a stake in the Syria International Islamic Bank. QIIB also received its inaugural credit ratings from both Moody’s and Fitch in 2011 of A3 (stable) and A- (stable), respectively. This was followed in October 2012 by reports that QIIB was to be mandating banks for a potential sukuk issuance, with this likely to be a dollar-denominated instrument issued later in the year using momentum from QIB’s success.

Finally, Barwa Bank Group, a unit of Barwa Real Estate Company that opened in October 2009, is the youngest of the sector players. The bank opened five new branches over the course of 2011. Net income for 2011 reached QR244m ($67m) compared to QR25m ($6.87m) in 2010 as Barwa Bank recorded strong growth across a range of businesses. At the end of 2011 the bank’s total assets stood at QR19bn ($5.22bn), up 143%. In January 2012, the bank made a QR1.7bn ($466.82m) rights issue, which was oversubscribed by QR233m ($63.98m). Barwa also took over IBQ’s Islamic retail portfolio because of the new regulations. Islamic Finance News heralded the deal as the “Qatar Deal of the Year”.

BRINGING CLOSURE: The closure of Islamic windows was a major event in Qatari banking in 2011. The move came about as regulators sought to provide a clearer structure for the financial sector and address the concerns of some Islamic scholars over the contamination that could result from comingling sharia and conventional products within one institution.

Islamic and non-Islamic finance sometimes work to different sets of international rules. Many believe that Basel III, the regulations towards which Qatar’s banks are currently moving, may diverge further still from international Islamic Financial Services Board (IFSB) standards. At the same time, combining Islamic and non-Islamic products in a single balance sheet causes complications in making international comparisons and ratings. Thus the two banks were separated – a move widely thought to see a major boost in Islamic banks’ portfolios, particularly for the newer institutions on the market, like MAR and Barwa.

“Achieving a global unification for Islamic finance is very difficult, so educational programmes are very much country or region-specific,” said Hatem El Karanshawy, dean of the Faculty of Islamic Studies. “There is, however, an ever-enhancing worldwide coordination regarding sharia-compliant products.”

By the end of 2011 the conventional banks had all divested their Islamic portfolios. Only IBQ had transferred en bloc while the remaining banks’ accounts were converted, closed or moved on an individual basis.

The results of these changes were not as dramatic as many had forecast. The conventional banks reported year-end 2011 results that showed increasing assets, net profits, deposits and loans (see Banking chapter). Although Islamic banks also had a good year, this may not have been entirely driven by the Islamic windows closure. “Before even this regulation, the trend was only one way,” said Farah Ahmed Hersi, the executive manager of economics and treasury at Masraf Al Rayan. As the aforementioned results show, asset growth for a number of Islamic entities far outstripped the broader banking sector’s average.

What may be of greater concern than the closure of Islamic windows is that the number of entities in the sector has now shrunk considerably, with no sign of new licences on the horizon. The sector is, in some ways, less competitive now, although it may well have been overcrowded before. Regulators are hoping that a smaller Islamic banking segment in terms of entities will be a stronger one in terms of profits in the years to come.

At the same time, into 2012, reports by Reuters and later Fitch suggested that some customers who had switched to fully fledged Islamic banks when Islamic windows had closed at conventional banks were being won back over time by the conventional lenders. In a highly competitive environment, the larger conventional banks can often leverage their larger size to keep prices down, meaning that for the Islamic banks keeping customers is not only about religious preferences, but also about offering better and wider services. Several Islamic banks are already doing this, offering new products such as sharia-compliant mortgages, which are expected to take off in the years ahead, as the economy continues to grow and the large percentage of youth look to enter the property market.

FINANCE HOUSES: In addition to the four Islamic banks, Qatar possesses three, non-banking finance companies – Qatar Finance House (QFH), Al Jazeera Finance (AJF) and First Finance. All three are sharia-compliant entities, offering Islamic products, but differ from banks in that they are not allowed to take deposits. In addition, there is also joint-stock company Alijarah, which – while not a finance house in the usual sense – nevertheless helps support the implementation of various economic development initiatives.

The finance companies operate under the supervision of the Qatar Central Bank (QCB) and reportedly had a strong 2011 partly due to the new regulations separating Islamic services from conventional banks. As banks were required to close Islamic accounts by the year-end, a number of customers have sought out sharia-compliant loans from Islamic finance companies. But the QCB’s decision to maintain caps on the consumer loan market affected finance companies negatively. Qatari citizens can seek personal up loans to a maximum of QR2m ($549,200) and expatriates up to QR400,000 ($109,840) to be repaid within six years. “The QCB’s recent law to cap consumer financing at 6% has made retail financing unattractive to finance companies due to the low margins and high risk involved,” QFH’s acting CEO Jaber bin Ali Al Hedfa told OBG.

Under an April 2011 QCB decision aimed at reigning in growing household debt, an upper limit for personal loans of QR2m ($549,200) for Qatari nationals and QR400,000 ($109,840) for expatriates was set. These loans also set a maximum repayment period of 72 months for nationals and 48 months for expatriates, while the maximum ratio of monthly repayment to monthly salary was fixed at 75% for Qataris and 50% for foreigners. This has given an impetus for financial intermediaries across the board to move away from focusing on retail customers and concentrate instead on corporate business. The shift is thought likely to benefit considerably from the large government programmes coming up in infrastructure and oil and gas.

The sharia-compliant finance companies have thus boosted their involvement in the financing of small and medium-sized enterprises (SMEs) – partly in conjunction with the Qatar Development Bank’s Al Dhameen programme. Finance First, QFH and AJF have all joined this scheme, which seeks to boost financing for SMEs as part of the government’s long-term programme to diversify the Qatari economy away from oil and gas.

SME financing is seen as an area in which Islamic banking has a competitive edge over conventional, given the risk-sharing nature of transactions in Islamic banking.

TAKAFUL: Qatar has also seen the development of an Islamic insurance, or takaful, sector in recent years, which is expected to expand in the near future. Currently, there are dedicated Islamic insurers and Islamic subsidiaries owned by conventional companies.

The Qatar Islamic Insurance Company (QIIC), founded in 1995, was the first sharia-compliant insurer in Qatar. The company had not yet published its 2011 annual report as OBG was going to print, but earlier results showed steady growth in gross premiums – from QR153.6m ($42.18m) in 2006 to QR178.6m ($49.04m) in 2010. Figures in the local media from the QE, where QIIC is listed, showed these had increased again in 2011, by 17.62%, to QR210bn ($57.67bn) – one of the strongest gains in the listed insurance sector.

The company’s net profits also rose from QR32m ($8.8m) to QR46m ($12.63m) between 2009 and 2010, with unreviewed figures suggesting net profit through September 2011 stood at QR41.2m ($11.31m). The QE results, however, showed net profitability down 4.65%. Net claims were up by 27.16%, according to the QE results, although there were fewer claims passed over to the reinsurance companies, down from 19% to 14% between 2010 and 2011. Total assets stood at QR640m ($175.74), up 4.27% on 2010.

The second market entrant was the Al Khaleej Takaful Group, which began operations as a fully sharia-compliant business in 2010, after previously operating as the Al Khaleej Insurance and Reinsurance Company. The QE reports showed the company’s net profit up by 12.89% between 2010 and 2011, although the gross premium shrank slightly, by 4.02%, to QR270m ($74.14m). Total assets stood at around QR920m ($252.63m), up 6.16% on the previous year.

Two other companies operating locally, Doha Solidarity and General Takaful, are sharia-compliant subsidiaries of other groups. Doha Solidarity is a partnership between the Doha Insurance Company and Bahrain’s Solidarity, while General Takaful is a subsidiary of Qatar General Insurance and Reinsurance (QGIR).

General Takaful’s 2011 figures showed that total assets had increased to QR114.1m ($31.3m) from QR92.7m ($25.46m) in 2010. Takaful gross written premiums totalled QR75.9m ($20.84m) compared with QR77.9m ($21.39m) in 2010.

In early 2012 Doha Solidarity’s parent company Doha Insurance reported to the local press a QR656,309 ($180,222) net surplus that was largely attributable to its takaful policyholders in 2011, up from a QR2.4m ($659,040) deficit in 2010.

Another takaful success story can be seen in Pak-Qatar Family and General Takaful, which offers Islamic insurance products in Pakistan. The company is backed by some of Qatar’s most important financial institutions, including QIIC, QIIB and the Qatar National Bank (QNB), and has been a key player in opening up the key Pakistani market to takaful products.

ISLAMIC REINSURANCE: In terms of Islamic reinsurance, or re-takaful, Qatar’s Islamic insurers often refer business to regional and international entities, such as Munich Re and the Dubai-based Takaful Re. Indeed, in this way international players have an important place in the takaful market as well.

For example, UAE-based Mashreq Bank, which has a presence in Qatar via Mashreq Qatar, launched a family takaful product in October 2012 in partnership with MedGulf Allianz Takaful, through its branches. Islamic bancassurance is therefore a major distribution mechanism in Qatar, as indeed, elsewhere in the world.

The Islamic insurance sector in Qatar continues to work within some of the same constraints as insurers more generally. There is very little awareness of the need for insurance, with penetration rates in the country remaining low. A recent Qatar Financial Centre (QFC) Authority survey shows that even in non-life, the rate was only around 0.75%. In Islamic life products, the rate is likely even lower, with religious considerations a factor in deterring potential policyholders. There is also competition between institutions located inside and outside the QFC, with brokers who are not always based in the country selling insurance products in Qatar, competing on price with local operations.

REGULATION: Islamic finance as a whole does not have a specific specialist authority in Qatar. Currently, the banking, finance and insurance sectors are regulated by the QCB, while insurance outside the QFC comes under the Ministry of Economy and Finance.

In case of a dispute over sharia compliance, the QCB or the ministry can refer disputes to the Supreme Sharia Council at the Ministry of Awqaf and Islamic Affairs. The QCB may also appoint sharia scholars on a case-by-case basis. At present, however, there are plans to establish a new and dedicated regulatory authority for the insurance sector. Announced in March 2012, such a body could have implications for takaful as well. This move was announced as part of an overall strategy to establish a single authority for the financial sector – conventional and Islamic – with the new insurance body likely to fall under its purview.

The single regulator would take on the supervisory roles of the QCB, the QFC Regulation Authority (QFCRA) and the Qatar Financial Markets Authority. In March 2012, the QCB governor took over as chair of the QFCRA, a sign of progress in this unification, which some believe may occur before the end of 2012.

CONVERGENCE: The year 2011 saw some important convergence in the global Islamic finance world, with the establishment of the Thomson Reuters Islamic Interbank Benchmark Rate (IIBR) – a sharia-compliant counterpart to the London Interbank Offered Rate (LIBOR). In contrast to LIBOR, the IIBR measures expected profit, rather than a rate of interest.

The IIBR, launched in November 2011, thus offers the Islamic financial world an alternative way to price products, and is likely to be far more reflective of the economies of the Muslim world. Some 16 banks around the globe (including QIB) send their data to Thomson Reuters, which then calculates an average that can then be used as a benchmark rate. While not completely delinked from LIBOR, as money can still flow freely in and out of the Islamic financial world, it represents an important step towards a more accurate, sharia-compliant market. It is also a sign of the growing maturity and the importance of Islamic finance.

There have long been calls for the establishment of a unified regulatory framework for the sector, with a single, definitive interpretation of sharia compliance. Although this may still be a ways off, the Gulf Bond and Sukuk Association (GBSA) agreed to a set of standards for bond and sukuk issuances in the region in 2011 (see analysis). Currently, in most sharia compliance issues, Qatar has a similar view to those of the other Gulf countries, although there are discrepancies with some South-east Asian interpretations.

The first Islamic repurchase agreement (repo) in the GCC area was launched in Abu Dhabi in November 2011. Islamic repo would address the current challenge Islamic banks face in finding short-term liquidity that is also sharia-compliant.

Qatar is also set on developing as a global financial centre, an aim that will likely continue to draw attention across the Islamic world. With a programme of infrastructure development that could be worth $130bn over the next few years, the attraction for financial institutions has also become clear.

“People come to Qatar because there will be great future growth,” Bernard Barbour, the head of legal and sharia affairs and corporate secretary at investment bank QI nvest, told OBG. “To get a share of the project financing on offer, I think we’ll also see overseas entities doing a lot of partnering with Qatari institutions.” Indeed, such partnerships may be a way forward rather than establishing a wholly owned local operation because the local market is relatively small.

OUTLOOK: As the Islamic finance sector continues to mature globally, Qatar’s Islamic financial institutions will likely continue to reap the benefits. New products and closer international integration will also bring greater confidence to investors, both from within and outside the Islamic world, who are seeking portfolio diversification and robust returns.

Indeed, in banking, insurance and general finance, the sharia-compliant segment has recently shown some of the best growth figures in a country where growth is generally high, and in 2012, Islamic finance will likely continue to expand. With such a variety of domestic projects to finance, alongside growing personal wealth and a solid commitment from the government to back the sector, Qatar’s financial services sector should see a great deal of opportunities in the near future.