Qatar a regional leader and major global competitor in Islamic financial services

It has been another strong year for Qatar’s Islamic financial services (IFS) companies, which have continued a well-established trend of outpacing their conventional rivals in terms of growth. The nation’s IFS sector has emerged as one of the region’s most vibrant, comprising a rapidly expanding Islamic banking segment, an array of Islamic financing companies, an Islamic insurance market that is well-positioned to capitalise on an underserved market, and an increasingly sophisticated Islamic investment component. With a regulator determined to establish the nation as a centre for Islamic finance, plus the promise of continued growth on the back of the large project pipeline associated with Qatar National Vision 2030 and the 2022 FIFA World Cup, expectations are high for the sector’s future performance.

MARKET STRUCTURE: Qatar has been a prominent player in the region’s Islamic banking sector since the early 1980s, when its first sharia-compliant bank opened for business. The latest market entrant came as recently as 2009, and as of 2015 a total of four Islamic banks operate in the country: Barwa Bank, Masraf Al Rayan, Qatar International Islamic Bank (QIIB) and Qatar Islamic Bank (QIB). According to EY’s “World Islamic Banking Competitiveness Report 2013-14”, these accounted for about 24% of the country’s total banking assets, despite competing for business in one of the most dynamic banking sectors in the region. This figure had risen to 26% as of March 2015, QIB reports. As of early 2015 a total of 18 banks have been licensed by the Qatar Central Bank (QCB) – seven of them national, conventional lenders – which between them operate a total of 268 branches.

Additional competition comes from seven foreign banks, which have played a key role in Qatar’s economy for half a century. While their presence is limited to 15 branches, these include both global players, such as Standard Chartered and BNP Paribas, and regional players like Mashreq Bank and Bank Saderat Iran. Besides the institutions licensed by the QCB, more than 20 banks operate from within the distinct regulatory environment of the Qatar Financial Centre (QFC), although their activity is generally conducted through smaller representative offices – one exception being QI nvest, a sharia-compliant investment bank licensed in 2007 with an authorised capital of $1bn. The Islamic finance market also includes three sharia-compliant financial services firms: Al Jazeera Finance, First Finance and Qatar Finance House. Although they do not hold banking licences, these companies have traditionally competed with Islamic banks in the retail segment by providing financing for car purchases and other small-ticket deals.

In recent years, caps on profit rates and charges on financing to retail salaried customers have encouraged finance houses to turn their attention to small and medium-sized enterprises (SMEs). In doing so, they have found a good source of revenue. “One of the most underserved segments in the market is smaller and micro SMEs,” Eslah Assem, CEO of First Finance, told OBG. “Most banks start loans for SMEs at QR10m ($2.7m), while you find a lot of smaller businesses looking for loans in the QR1m-2m ($274,100-548,200) range, which a bank most probably would not consider. This is a prime area being targeted by finance houses that banks cannot compete with.”

Globally, Qatar is one of six countries EY considers vital to making the industry more international. This group – including Indonesia, Saudi Arabia, Malaysia, the UAE and Turkey – collectively accounted for 78% of global Islamic banking assets in 2012 and is expected to grow at a compound annual growth rate (CAGR) of 19.7% through 2018, considerably faster than is forecast for the rest of the Islamic finance world.

REGULATION: In terms of oversight, Islamic banks are governed by the QCB and subject to the same regulatory regime as their conventional counterparts (see Banking chapter). While the QCB retains the ability to appoint sharia scholars “as needed” should a regulatory issue arise, it does not operate a centralised sharia advisory board. Where clarification is needed on the application of sharia, Qatar’s Islamic banks have recourse to the Supreme Sharia Council attached to the Ministry of Awqaf and Islamic Affairs. In practice, however, the nation’s Islamic lenders are mostly self-regulated in terms of sharia compliance through their own sharia boards, which are usually made up of five scholars of international repute.

The lack of a centralised advisory board is often cited as a challenge to the sector’s further development, yet rulings are generally consistent given that sharia advisors typically sit on the proprietary boards of more than one bank. Like most jurisdictions in the region, Qatar also closely follows the accounting, auditing, governance and ethical principles established by the Accounting and Auditing Organisation for Islamic Financial Institutions, based in Bahrain.

ISLAMIC WINDOWS: As the market regulator, the QCB has significantly influenced the development of the Islamic banking sector. Two of its decisions over the past decade have had particularly far-reaching effects on its ability to grow within the wider financial services industry. In 2005 the QCB allowed conventional banks to offer Islamic banking services through sharia-compliant windows, a decision that led to a period of intense competition for the three fully sharia-compliant banks then operating in the country. A number of domestic institutions then moved into the Islamic banking space: Qatar National Bank, through QNB Al Islami; the Commercial Bank of Qatar, through Commercial Bank Islamic; International Bank of Qatar, through Al Yusur Islamic Banking; Ahli United Bank, through Al Hilal Islamic Banking; and Doha Bank, through Doha Islamic.

The market also caught the interest of a number of foreign operators, most notably HSBC, which opened its first Amanah branch to be located outside of Saudi Arabia in 2010. By that time, however, the QCB was showing signs of a desire to strengthen the hand of fully sharia-compliant institutions, and restricted conventional banks to using up to 10% of their issued capital in their Islamic banking windows.

Finally, in February 2011 the regulator instructed conventional banks to cease taking deposits through their Islamic windows and to wind down their sharia-compliant operations (windows or subsidiaries) by the end of the year. At the start of 2012, Islamic banking in Qatar became the exclusive preserve of the four fully sharia-compliant players. With competition thus reduced, these made significant gains in customers, assets and physical infrastructure, in some cases acquiring entire sharia-compliant portfolios from conventional lenders, such as International Bank of Qatar’s sale of its retail portfolio to Barwa Bank and its corporate portfolio to QIB. Other Islamic banks capitalised on the regulator’s move by launching marketing campaigns for sharia-compliant offerings.

LEAD PLAYERS: The country’s first Islamic financial institution, QIB, was incorporated in 1982 and reached total assets of QR77.4bn ($21.22bn) as of the end of 2013, which at 38% of the national total made it the largest sharia-compliant operator in the country. In early February 2015, the bank announced that its total assets for 2014 stood at QR96bn ($26.31bn), a 24% increase on the previous year. In the sector as a whole, QIB is the third-largest bank in Qatar, with a domestic network of 29 branches and offices, and over 170 ATMs and cash deposit machines as of March 2015. With more than 214,000 retail clients, it is one of the most widely recognised brands in the country. Its domestic holdings include the investment bank QInvest, in which it has a 47.15% stake. QIB also has a growing international footprint, with holdings in the UK, Malaysia, Sudan and Lebanon. Publicly listed, its largest shareholder is the Qatar Investment Authority (QIA), with the remaining stockholders including prominent Qatari individuals, families and institutions.

Masraf Al Rayan is a relatively recent market entrant, established in 2006, but has grown quickly to become the nation’s second-largest Islamic bank. Its total assets reached QR77.8bn ($21.32bn) in September 2014 and QR80.891bn ($21.95bn) by the end of 2014, a 20.4% rise on QR66.55bn ($18.24bn) a year earlier. With a domestic network of 10 branches, its physical presence in Qatar is more modest than that of QIB, but it has already set about expanding its activities beyond the nation’s borders. In early 2014 Masraf Al Rayan announced that it had completed its acquisition of QIIB’s majority stake in the Islamic Bank of Britain, now Al Rayan Bank, marking its first foray into a foreign market. The government retains an interest in the bank through ownership stakes held by a number of government or quasi-public organisations, including Qatar Holding (11.9%), the Qatar Armed Forces Portfolio (10%), and the General Retirement and Social Insurance Authority (2.2%).

The third largest sharia-compliant operator in the country is QIIB, with total assets of QR38.4bn ($10.52bn) as of December 2014, an 11.5% rise over QR34.42bn ($9.42bn) in 2013. As of March 2015, the bank has 17 branches in its home market, and has established an international footprint by becoming one of the founders of the Islamic Bank of Britain and the Syria International Islamic Bank. It is currently looking into further opportunities abroad, and is in the process of raising capital for such a move. The bank’s largest shareholder is the Ezdan Holding Group, which is owned by Sheikh Khalid bin Thani bin Abdullah Al Thani, and is one of the most prominent public joint stock companies in Qatar, with a 22.7% stake in the institution. The government also retains an interest in the bank through a 17% stake held by QIA.

NEW ENTRY: The most recent entry to the Islamic segment is Barwa Bank, which began its operations in 2009, having been set up as a real estate lending subsidiary of Barwa Real Estate Group in 2007. In January 2014, the real estate group sold its 37.34% stake in the bank to the General Retirement and Social Insurance Authority, the country’s national pension fund, for QR2.39bn ($655.09m). The bank began its new life as a full-service bank with starting capital of QR2.5bn ($685.25m), and has since expanded on its real estate base by establishing seven branches as of March 2015 and acquiring First Investor, the country’s largest closed-shareholding investment bank. In 2010 it went on to acquire First Finance and First Leasing, consolidating all three into the Barwa Bank Group. In December 2014, International Finance Magazine recognised the bank as the fastest-growing in the region. From 2010 to 2013, the bank saw its total assets grow from QR7.86bn ($2.15bn) to QR33.63bn ($9.22bn), a CAGR of 62.35%, while net income rose from QR359.45m ($108.39m) to QR503.89m ($138.12m). As of early March 2015, the bank had not yet released its 2014 annual report, but in the nine months to September 2014, the bank held total assets of QR36.61bn ($10.03bn), an 27.78% rise over QR28.65bn ($7.85bnbn) for the same period in 2013, while net income for the first three quarters reached QR641.34m ($175.79m).

What Barwa Bank has achieved since 2009, Khalid Yousef Al Subeai, its acting group CEO, attributes to a focused strategy targeting strong relationships with other sector players and a growing SME portfolio, among other measures. The bank has also taken advantage of new opportunities abroad and has a proven track record of high-profile international issuance of sukuk (sharia-compliant bonds), most recently the UK’s £200m sovereign sukuk issuance in mid-2014. The transaction was the first of its kind in a Western nation and indicates that Barwa Bank is well-placed to benefit from trends overseas as the Qatari market irons out issues at home. “The domestic sukuk market is limited and will remain so while bilateral credit, bank to client, remains inexpensive and convenient,” Al Subeai told OBG. “In addition, we need a deeper, broader institutional end-investor community, such as insurance companies and pension funds.”

PERFORMANCE: Despite regional unrest and a slow global recovery from the economic crisis, Qatar’s Islamic banking industry shares the same comparative advantages as its conventional counterpart: in recent years, growth has been driven by an expanding hydrocarbons industry, population growth and the large pipeline of projects related to the country’s ambitious national development strategy and preparations for the 2022 FIFA World Cup.

According to QNB, total credit facilities in Qatar grew at a CAGR of 20.06% between 2010 and 2014, while deposits grew at a similarly impressive rate of 18.31%. This expansion has been achieved without any deterioration of the banking sector’s financial soundness: capital adequacy ratios remained above 16% between 2009 and 2013, already comfortably exceeding the Basel III guideline for 2019, while non-performing financing has not risen above 2% of aggregate sector lending – a figure that is considered low for the region. Qatar’s banks have also managed to remain profitable over this period, showing a sector CAGR of 12.5% between 2009 and 2013.

The country’s Islamic banks have played an important part in this robust performance. An OBG analysis of their performance shows that, in the first nine months of 2014, growth in the industry’s sharia-compliant segment outstripped that of Qatar’s largest banks, with total Islamic assets growing by 14.5%, compared to 11.6% at Qatar’s five largest lenders. Aggregate financing of the Islamic banks grew at an impressive 28.7% over the same period, while net profit for the segment rose by 20.8%.

Qatar’s Islamic finance houses have recently faced a more challenging environment than their banking counterparts. The QCB’s 2011 decision to put limits on the profits that can be gained on retail lending (see Banking chapter), which in Islamic finance translates to the profit rate applied to financing, has adversely affected the profitability of non-bank sharia-compliant finance companies. The bulk of these firms’ business takes place in the retail segment, and since they do not take deposits, their access to cheap funds is less than that of licensed Islamic banks. The new regulation has thus significantly reduced their profit margins and, though they have requested exemption, prompted them to alter their business models. A popular solution has been to shift their focus from retail financing to serving SMEs, many of which appreciate the quick turnaround times for financing applications that such finance houses offer.

PENDING PROPOSAL: In August 2014 the QCB issued a draft regulation that rolls back the limitations placed on finance companies, as well as removes a QR1.5m ($411,150) cap on housing financing. Under the proposed regulation, a finance firm would be able to offer facilities of 2-3% of their equity. This would grant companies like Al Jazeera Finance, which has equity of QR600m ($164.46m), considerably more room to operate in the market. While the regulation had yet to be granted final approval as of February 2015, it is possible that home financing will become a significant avenue of expansion for sharia-compliant companies that have adapted to the regulatory environment since 2011.

TAKAFUL: As Qatar’s Islamic banks thrive within the banking sector, its operators of takaful (sharia-compliant insurance) are staging a similar expansion within the insurance industry. Takaful companies in Qatar sit within a wider sector made up of local, regional and international firms – 27 in all, according to Alpen Capital. These operate in two distinct regulatory environments: those within the QFC’s jurisdiction and those outside it (see Insurance chapter).

Despite the market’s fragmented nature, much of Qatar’s insurance business is run by a relatively small number of institutions. Of the country’s five largest insurers, two are full-fledged takaful operators. The largest of these, Qatar Islamic Insurance Company (QIIC), was founded in 1995 and for 15 years operated as the country’s sole sharia-compliant insurance provider. Nevertheless, during this time takaful premiums grew exponentially, with EY reporting that gross takaful contributions in Qatar expanded at a CAGR of 41% between 2005 and 2009. In 2010 Al Khaleej Takaful Group, which previously operated as Al Khaleej Insurance and Reinsurance Company, became the second market entrant. These two players remain the dominant players in the industry, with the rest of the nation’s Islamic insurance business largely accounted for by a further three companies, all of which operate outside the QFC’s jurisdiction: Doha Takaful, a branch of Doha Insurance Company; Daman Islamic Insurance Company, founded in 2009; and General Takaful, a subsidiary of Qatar General Insurance and Reinsurance.

Qatar’s takaful firms have also met with success in the international arena, most notably Pak-Qatar Family and General Takaful, which offers Islamic insurance products in Pakistan. Backed by some of Qatar’s most prominent financial institutions, including QIIC, QIIB and QNB, the company has played an important role in opening up the Pakistani market to takaful products. As with other GCC markets, the majority of takaful business in Qatar is derived from family takaful, with other key lines of business including motor, property and accident, and marine and aviation.

GENERATING GROWTH: Recent years have seen the nation’s gross takaful contributions continue to grow, rising from $274m in 2011 to an estimated $384m in 2014, according to EY. While Saudi Arabia’s compulsory cooperative model means it dominates the region’s takaful sector, Qatar’s 4% share of the GCC’s total gross takaful contribution puts it ahead of neighbouring financial centres like Bahrain and Kuwait.

Both of Qatar’s largest takaful vendors posted a strong performance in the past year. In fiscal year 2014, QIIC saw a total surplus of QR17.2m ($4.71m), up 3.3% on QR16.7m ($4.57m) in 2013, while profits rose 3.5% from QR70.88m ($19.43m) to QR73.37m ($20.11m). Al Khaleej Takaful’s surplus, meanwhile, was QR1.2m ($328,920), up from QR740,561 ($202,988) the previous year, while profits rose 12.6% from QR66.05m ($18.1m) to QR74.41m ($20.30m).

SECTOR DEVELOPMENT: Financing and insurance form the base of Qatar’s IFS sector, upon which an increasingly complex range of financial activity is emerging. As Islamic financial institutions move beyond the basic products they have built their businesses on to date, investors who wish to comply with the principles of sharia have an increasing array of options in deploying their capital. In its early stages, the Islamic investment banking segment was the preserve of a number of boutique and niche operators, and lacked the capital heft to generate much interest in the region. The arrival of QI nvest to the QFC in 2007 began the emergence of a more prominent investment segment and greatly enhanced domestic capacity in areas like investment banking and advisory, principal investment, private client advisory and brokerage services. Since then, it has ticked off numerous industry firsts, such as its creation of a sharia-compliant “mezzanine” shipping fund in partnership with Fortis Bank Nederland, and has applied its advisory capability to a range of high-profile deals.

In 2009 it was joined in the QFC by Qatar First Bank, a new investment institution with Qatari and regional shareholders and a focus on Turkey and the MENA region. Beyond its specialist investment banks, Qatar’s four universal Islamic banks have addressed the needs of the investment community with a range of shariacompliant products, such as equity participation and investment funds aimed at both retail and corporate clients. The country’s stock market, the Qatar Stock Exchange (QSE), meanwhile, has, in partnership with the investment arm of Masraf Al Rayan, created an Islamic index based on QSE-listed stocks, adding further momentum to development of the sharia-compliant asset management segment (see analysis).

One key challenge to the industry’s continued development globally is the absence of a sharia-compliant interbank market. The problem of securing long-term, stable liquidity has been answered partly by the increasing popularity of sukuk. Qatar has played a significant role in the development of this instrument at both the sovereign and corporate levels. The $3. 02bnworth of sukuk offered in the country in 2014 made Qatar the third-largest issuer in the MENA region that year, a position it also held in 2013 (see analysis).

On the international stage, Qatar is also helping expand sukuk through its membership in the International Islamic Liquidity Management Corporation (IILM), set up in 2010 by the central banks and monetary authorities of Qatar, Indonesia, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Turkey and the UAE. From its headquarters in Kuala Lumpur, the IILM has sought to develop and issue short-term Islamic financial instruments to facilitate liquidity management for IFS institutions across the globe.

OUTLOOK: The preference shown to Qatar’s Islamic banks, which has allowed them to operate in the sharia-compliant segment without direct competition from their conventional peers, demonstrates the nation’s commitment to making Qatar a centre for Islamic banking. Providers of IFS in the country are wellpositioned to take advantage of the country’s expected economic growth. In a forward-looking 2014 report, QNB cited rapid population growth and a series of large fiscal surpluses as the chief drivers behind the 12.5% annualised growth in deposits it expects in the 2015-16 period. Moreover, with GDP growth forecast for around 6.8-7.8% for 2015 through 2016, and ongoing infrastructure spending in both the hydrocarbons and non-hydrocarbons sectors, the prospect for continued asset growth at Qatar’s Islamic banks looks solid: in a 2014 report, rating agency Standard & Poor’s forecast that this figure would pass the $100bn mark in 2017, up from $54bn in 2012.

The double-digit growth of Islamic banking in recent years has been emulated in the fast-growing takaful sector, and Qatar’s stable economy, sound macro management and young population continue to underwrite this trend. The segment’s prospects are further enhanced by the relatively small amount of capital that Qatari authorities require from Islamic insurers – $10m, compared with $28.32m in the UAE, $26.64m in Saudi Arabia and $13.2m in Bahrain – thus enhancing the country’s appeal for potential new entrants.