2021 has been a challenging one for many economies globally as the full impact of COVID-19 was felt across various industries and sectors. The Middle East did not escape the disruption and chaos caused by a sudden contraction of the market last year. Travel, tourism and cross-border commercial activities have all been hugely impacted. Despite facing these turbulent times, it is encouraging to see that Qatar has quietly realized a number of financial and political objectives that have boosted economic activity within the State, particularly relating to the Islamic financial sector.
Review of 2021
The year started off with the welcome news of the signing of the Al-Ula Declaration on the 5th January between all the members of the GCC. The agreement primarily restored political relations between Qatar, Saudi Arabia, the UAE and Bahrain; effectively ending the three-year blockade against Qatar and allowing the free movement of people, goods and services throughout the region once more.
As a result, the Qatar Stock Exchange witnessed a significant rise of over 165%, as the market index reached QAR614 billion (US$167.17 billion) during the first month after the agreement was signed. Some of biggest beneficiaries of the agreement have been Islamic banks in Qatar, as they traditionally drew the attention of investors from all around the GCC.
The level of investment coming into Qatar steadily increased since the start of the year. In particular, the amount of cross-border activity involving Qatar and Saudi Arabia saw a marked increase following the establishment of a government-level committee aimed specifically at increasing bilateral investment opportunities.
The much-anticipated merger between Masraf Al Rayan (Masraf) and Al Khalij Commercial Bank (Al Khaliji) first announced in January 2021 has been gaining traction in the latter months of the year as the shareholders of both banks approved the merger during their respective extraordinary general assembly meetings in October.
This merger is seen as a landmark transaction in Qatar and the wider GCC region as it is set to create the largest Shariah compliant bank in Qatar, and one of the strongest in the GCC. In short, this is one of the major developments involving Qatar’s Islamic finance industry this year.
In more recent news, the largest state-owned petroleum company in Qatar, Qatar Petroleum, has been rebranded to Qatar Energy. Qatar, the world’s largest supplier of liquefied natural gas, still aims to expand production to 127 million metric tons annually by 2027 and expects the natural gas industry to remain a large part of the energy transition for the next few decades. The name change signals a shift in strategy, as Qatar moves its focus to more efficient means of energy and environmentally-friendly technology and away from petroleum and hydrocarbons.
The need for a more sustainable economy is more prevalent than ever, and which the Islamic banks have been instrumental in supporting. Qatar’s focus on alternative energy sources is likely to present new opportunities for the domestic Islamic banks to participate in project financings in the years to come.
Preview of 2022
We are entering the final year before Qatar hosts the much-awaited FIFA World Cup 2022. This event has been in the making for 12 years and has provided immense opportunities for Islamic banks since then.
More than US$200 billion has been spent on building the infrastructure required to host the World Cup. We are now seeing the growth in tourism, hospitality, event management, security and related sectors. These will need support from the local banking sector and Islamic banks will no doubt continue to play a key role in these businesses.
Qatar has demonstrated leadership in its handling of the COVID-19 pandemic by, among other things, being home to the only regional airline that continued to repatriate overseas people throughout the last 18 months.
Qatar has also provided much-needed humanitarian and political support to avert a humanitarian disaster in Afghanistan, by aiding with the airlifting of refugees. Recently, Qatar held its first-ever Shura’h elections which saw the appointment of a diverse number of Qatari nationals to the parliament.
All of these demonstrate that the country is being managed in a careful and placid manner by leadership aware of their wider duties. This is expected to continue to encourage cross-border investments in Qatar, to the benefit of the Islamic finance industry.
Qatar’s focus on fintech and its successful outreach to other countries over the past three years have meant that there is significant scope for the growth of Qatar-based Islamic institutions in other markets where the State is looking to develop closer ties.
These opportunities may come by way of the expansion of existing institutions abroad and by providing facilities to joint venture projects and investments being made by Qatari investors in overseas markets. With this, Qatar is well positioned to help develop the Islamic finance industry in new markets.
Qatar’s laws regarding foreign ownership caps of listed entities have changed in 2021. It is now possible for listed entities to increase the percentage of foreign ownership from a maximum of 49% to up to a 100%.
This is expected to increase the level of participation and trading in the Qatar Stock Exchange in 2022 and bring with it the prospects for greater growth in the local economy. This will create opportunities for conventional and Islamic funders.
In conclusion, while Qatar has not been immune to the shocks that were sustained by global economies as a result of COVID-19, it has made some significant progress in creating a positive and encouraging ecosystem that is the source of much optimism.
The lifting of the regional blockade has made a huge difference to global and regional sentiment about the GCC and its future. The rationalizing in the marketplace by the merger of Al Khalji with Masraf Al Rayan shows that there is appetite to cease on market gaps in the Islamic finance sector.
Finally, next year promises to be exciting for all sectors, including Islamic banks, with the hosting of the much-awaited World Cup. Let the games begin!
Amjad Hussain is a partner at K&L Gates. He can be contacted at [email protected]