Qatar’s Islamic finance sector set for growth

Qatar’s Islamic banking industry is one of the world’s largest and most experienced, given than its first entity – Qatar Islamic Bank (QIB) – was established in 1982. Four decades later, as business confidence and economic growth is returning after two years of the Covid-19 pandemic, the Islamic finance sector stands ready for renewed expansion. It can build on the important role it played in response to the virus, when it supported many businesses and individuals navigating the economic fallout from the global health crisis. However, the situation of recent years has had an impact on the sector: 2020, in particular, saw assets and profits decline. This came after several years of low oil and gas prices – a factor that constrained economic growth in Qatar and many other countries in the region. As a result, the local Islamic finance sector has followed the global trend of industry mergers, with market consolidation a widespread response to tough conditions.

Looking ahead, the eyes of the world are on Qatar as it gears up for the 2022 FIFA World Cup late in the year, and many businesses and individuals are exploring opportunities in the market. Qatar’s Islamic banks, takaful (Islamic insurance) providers, sukuk (Islamic bond) issuers and sharia-compliant asset managers are confident that the year will see robust growth as economic recovery gathers pace. “Growth in the sector will be underpinned by important events such as the 2022 FIFA World Cup, infrastructure projects and the North Field expansion,” Fahad Al Khalifa, group CEO of Masraf Al Rayan, told OBG. “There will be a need for varied financing mechanisms and Islamic finance can play an important role in this regard.”

Structure & Oversight

Considering Islamic finance as a whole, banking is by far the largest subsector, responsible for 86% of the QR528bn ($144.9bn) in Islamic financial assets in Qatar in 2020, or QR454bn ($124.6bn). Sukuk accounted for 12% of total assets (QR63.4bn, $17.4bn), while takaful and Islamic assets under management (AUM) comprised 1% each (QR5.3bn, $1.4bn), according to a June 2021 report by Bait Al-Mashura Financial Consultations.

The Qatar Central Bank (QCB) is the primary regulator and supervisor of the country’s banking and finance sectors, both conventional and Islamic. Regarding the latter, the QCB announced in mid-2019 that it would establish a unified sharia board for the sector to facilitate greater consistency between institutions and encourage their alignment with best practices locally and internationally. As of February 2022, however, Islamic finance institutions were still referring to their own sharia-compliance boards to evaluate products and practices.

Operating under the auspices of the QCB, the Qatar Financial Markets Authority (QFMA) is the regulatory body for the conventional and Islamic financial markets, apart from those registered with the Qatar Financial Centre (QFC). As an onshore financial area, institutions based in the QFC are regulated by the QFC Regulatory Authority (QFCRA). This body operates its own regulatory regime, with an Islamic Finance Rulebook applying to registered sharia-compliant businesses. Since 2015 the rulebook includes Islamic Banking Prudential Rules, known as IBANK.

The QFCRA is itself a member of the Islamic Financial Services Board, an international standards organisation based in Malaysia, as is the QFMA. The QCB also refers to rules set by the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions. All Qatari banks currently follow the Basel III international framework. Qatar is committed to adopting the revised Basel IV standards, which have had their global implementation date deferred from January 1, 2022 to January 1, 2023 due to the business disruptions of the Covid-19 pandemic.

Major Players & Funds

The main capital market under the jurisdiction of the QFMA is the Qatar Stock Exchange (QSE), which features a main market, a secondary venture platform and a fixed-income market, trading in both conventional bonds and sukuk. The largest sector represented on the exchange is banking and finance, with Islamic banking making up a major part of this. QIB, Qatar International Islamic Bank (QIIB), Masraf Al Rayan and Qatar First Bank (QFB), the last of which is based in the QFC, are the four listed Islamic banks. One of the QSE’s two exchange-traded funds is Al Rayan Qatar, the country’s first sharia-compliant listed fund that tracks the performance of the Qatar Exchange Al Rayan Islamic Index. As of February 2022, 20 sharia-compliant companies were listed on the index, with Industries Qatar (15%), Masraf Al Rayan (12%) and QIB (10%) the topthree companies in terms of weight.

Dukhan Bank, a relatively new player in the sector, was created by a merger in 2019 between Barwa Bank and International Bank of Qatar. It is unlisted and based outside the QFC. Another recent merger, between Masraf Al Rayan and Al Khalij Commercial Bank, wrapped up in November 2021 and represents Qatar’s first merger of two listed banks. The entities were integrating their daily operations as of early 2022 and operate as Masraf Al Rayan.

In 2020 QIB was the fourth-largest Islamic bank in the world by asset volume, with $47.9bn, while Masraf Al Rayan was seventh, with $33.3bn.

Banking

Since a QCB ruling in 2011 banks operating in Qatar must be either conventional or Islamic to keep the two separate from each other. Government and semi-government entities accounted for the largest share of finance from Islamic banks in 2020, at 22%, followed by the real estate sector, at 20.7%, and personal finance, at 15.7%. Murabaha ( costplus financing) and musawama (bargaining sale) are the most common varieties of finance, representing 79% of the total volume, while ijara (leasing) and ijara muntahia bittamleek (leasing with ownership transfer) accounted for 16% in 2020.

Overall, Qatar’s Islamic banking sector saw its assets expand by 8.4% in 2020, with deposit growth of 8.7% and revenue up 3.4%. Profits, however, fell by 2.9%, from QR6.9bn ($1.9bn) to QR6.7bn ($1.8bn), on the back of increased provisions for expected credit losses from the impact of the pandemic.

According to January 2022 result notices, however, most of Qatar’s Islamic banks returned to profit growth in 2021 and recorded significant asset expansion. The largest Islamic bank, QIB, reported that net profits were up 16% to QR3.55bn ($975.7m) for 2021 and assets rose by 11.2% to QR194bn ($53.2bn). QIIB recorded total assets of QR61.8bn ($17bn) in 2021, up 0.8% over 2020, and net profit rose by 7% to QR1bn ($274.5m). Masraf Al Rayan saw total assets grow by 43.7% to QR174bn ($47.8bn) as a result of the merger with Al Khalij Commercial Bank in 2021, but net profit dipped by 21.2% to QR1.7bn ($467m).

Net profit at QFB, meanwhile, was QR64.8m ($17.8m) in 2021 – a considerable turnaround from the net loss of QR255.3m ($70.1m) that was recorded in 2020. The bank’s real estate AUM drove much of his, rising from QR14.8m ($6.1m) in 2020 to QR226.4m ($62.1m) in 2021, while total assets increased by 12.9% to QR3.2bn ($878.3m). Dukhan Bank had yet to release its full-year 2021 results as mid-February 2022, but reported a net profit of QR900m ($247m) for the first three quarters of 2021, up 12% year-on-year (y-o-y). The entity’s total assets rose by 29% to QR103.5bn ($28.5bn).

Indeed, Qatar’s Islamic banks logged a positive performance in the second year of the pandemic despite the virus’ ongoing impact on business. Looking at the 2016-20 period, Islamic banks in Qatar saw a compound annual growth rate (CAGR) in assets of 6.9%, while conventional banks posted a CAGR of 5.6%.

As with conventional banking, however, the sector has seen net external debt rise in recent years. Historically, credit ratings agencies have regarded the strong connections between local banks and the government as an indicator of a high level of likely support for the banking sector should any difficulties arise. But, given the current size of the sector – the total assets of conventional and Islamic banks rose to 302% of estimated GDP in August 2021 – Fitch has expressed concern over the government’s ability to lend sufficient support going forwards.

Foreign funding for all banks stood at $193bn in August 2021 and represented nearly half of the sector’s total liabilities, up from $121bn and 38% at the close of 2018. Fitch therefore put several large Qatari banks across the conventional and Islamic segments on a negative watch list in October of that year despite their high credit ratings. However, such worries have likely eased since then, as Qatar’s economy and government revenue picked up considerably in late 2021 and early 2022.

Takaful

While banks must be clearly designated as conventional or Islamic, the demarcation is not as distinct for insurance. Companies can offer both conventional and Islamic varieties of insurance but usually provide the latter via a dedicated subsidiary. Doha Insurance Group, for example, has subsidiary Doha Takaful for sharia-compliant products.

There are several dedicated takaful issuers in the market as well. Among these are Al Khaleej Takaful Insurance and Qatar Islamic Insurance Group (QIIG), both of which are included on the QSE’s insurance board. Shareholders in a third company, the conventional Qatar Insurance’s affiliate Damaan Islamic Insurance, known as Beema, voted to list the company on the QSE in December 2021. Two other national takaful providers are Qatar Takaful and General Takaful. In the QFC Bahrain’s Medgulf Takaful offers Islamic insurance products.

The Islamic insurance industry posted positive results in 2021 after mixed outcomes in 2020. Total assets stood at QR2.2bn ($603.8m) in 2020, down 4.6% down on 2019, while subscriptions remained largely steady, at QR1.3bn ($356.8m). Surpluses, however, increased sharply in 2020 – from QR5.8bn ($1.6bn) to QR149bn ($40.9bn) – benefitting greatly from one aspect of the lockdown and other pandemic-related restrictions: a substantial decline in claims.

The first three quarters of 2021 saw Al Khaleej Takaful boost its net profit from QR28.8m ($7.9m) in the same period of 2020 to QR43.1m ($11.8m). QIIG saw net profit rise from QR58.4m ($16m) to QR59m ($16.2m) y-o-y. Damaan Islamic Insurance posted net profit of QR24.5m ($6.7m) for the first half of 2021, up 1.2% y-o-y. Results for Doha Takaful were not available as of early 2022, although in October 2021 its parent company, Doha Insurance Group, reported that combined net profit climbed from QR44.8m ($12.3m) in the first nine months of 2020 to QR54.8m ($15m) in the same period of 2021.

Finance & Investment Companies

Qatar is home to a handful of Islamic finance companies, which are under the regulation of the QCB: Al Jazeera Finance, also known as Tamweel; First Finance Company (FFC); and Qatar Finance House (QFH). In addition, there are two Islamic investment companies operating inside the QFC – Al Rayan Investment, a subsidiary of Masraf Al Rayan, and QI nvest Bank – and two outside – First Investor and Investment House.

Recent years have seen a steady decline in the performance of these Islamic finance companies, with total assets of Al Jazeera, FFC and QFH shrinking by a CAGR of 3.9% between 2016 and 2020. In 2020 total assets were down 12% on 2019, at QR2.6bn ($713.6m). The two investment firms outside the QFC witnessed a decline in total assets by a CAGR of 3.4% over the same five years. In 2020, however, First Investor’s assets declined by 9.8% to QR468.8m ($128.7m) while Investment House’s increased by 28.1% to QR70.9m ($19.5m). Income also varied, with First Investor recording a loss of QR38.6m ($10.6m) and Investment House registering a QR7m ($1.9m) profit – up 229% on 2019. For the Islamic finance companies, Al Jazeera saw its profits jump by 200% in 2020 to QR21.1m ($5.8m); QFH recorded a loss of almost QR3m ($823,000), an improvement on the QR5.4m ($1.5m) in losses in 2019; and FFC’s profit fell by 57.5% to QR40m ($11m).

Sukuk Issuance

Qatar’s government has long been an issuer of Islamic bonds, accounting for some 58% of the total value of sukuk issued over the 2016-20 period. However, the QCB did not issue any sukuk in 2020, and as a result Islamic banks dominated the market. Together they issued QR8bn ($2.2bn) worth of sukuk that year, 2.7% lower than in 2019. One of the most well subscribed was QIB’s $750m issuance of five-year sukuk in October 2020, which received approximately $2.2bn in orders.

In September 2021 the government returned to the sukuk market, issuing QR4bn ($1.1bn) in five-year bonds and QR2bn ($549.2m) in seven-year bonds. They received QR7.75bn ($2.1bn) and QR8.25bn ($2.3bn) in bids, respectively. In July 2021 Dukhan Bank sold $500m in additional tier-1 sukuk – perpetual bonds, but issuers can call them in after 5.5 years – with $2.25bn in bids received.

The QFC published a Sustainable Sukuk and Bonds Framework in March 2022 – the first in the GCC. This is expected to encourage the uptake of sukuk and strengthen the local market for debt transactions.

Outlook

The year looks poised for further growth and development for Qatar’s Islamic finance institutions as the economy expands in the run-up to the 2022 FIFA World Cup, which was a major driver of financing and insurance over the last decade. While an ongoing concern is the economic fallout from pandemic-related limitations on business, with strong financials and a supportive government, Qatar’s Islamic finance sector should be well placed to overcome any lingering challenges.

Innovations in financial technology (fintech) will help in this regard by cutting costs and boosting efficiencies. Qatar has been praised for having one the world’s best ecosystems for Islamic fintech: the “Global Islamic Fintech Report” for 2021 showed Qatar ranking 10th out of 64 Islamic fintech markets in 2020, and the local market is expected to grow from a value of $849m in 2020 to $2.1bn in 2025.