When it comes to Islamic finance, much attention has been focused on Bahrain and Dubai, partly because these countries have a need to promote themselves as financial centers and draw business. By contrast, oil and gas-rich Qatar appears to be sitting back and taking it easy. A closer examination, however, would reveal that this is anything but the case.
The government has put in place the necessary laws for the regulated development of the industry, and the corporate sector is going all out both domestically and abroad to develop Islamic financial institutions. In addition, Qatar’s economy continues to grow while those of its neighbors stagnate or even contract, presenting it with all the right fundamentals for continued sustained development. All of this makes Qatar one of the most dynamic centers for Islamic finance in the Gulf Cooperation Council (GCC).
Qatar Islamic Bank
More than a quarter of the retail bank deposits in Qatar are Shariah compliant, the highest proportion of any GCC state, indicating the client commitment to Islamic banking. The leading Islamic financial institution is the Qatar Islamic Bank (QIB), established in 1982. Today it is the fourth largest Islamic bank in the GCC with assets valued at QAR33 billion (US$9.1 billion) as at the 31st March 2009.
Although it faces stiff competition in the local market from both conventional and other Islamic banks, it still accounts for over 50% of the Shariah compliant assets in the country, and around 20% of the total bank assets. It has 24 branches and over 100 ATMs throughout Qatar, and plans to increase its branch network to 35 by 2012.
QIB’s unrestricted investment deposits based on a Mudarabah structure are worth over QAR14 billion (US$3.8 billion), mostly subject to periods of notice for withdrawal. Its current account deposits are worth QAR5.5 billion (US$1.5 billion) and are subject to withdrawal on demand.
As Qatar has been less affected by the international financial crisis than its GCC counterparts, QIB continues to be profitable, with QAR420 million (US$115 million) recorded for the first quarter of 2009. This was, however, a decline from QAR574 million (US$158 million) recorded for the same period in 2008.
Income from financing activity has continued to rise, but income from investment activity has fallen dramatically, accounting for much of the decline in profitability. Nevertheless, unrestricted investment account holders received QAR74 million (US$20 million) in the first quarter of 2009, only a 10% decline from the first quarter of 2008.
Shareholders suffered a greater loss of earnings. Although they received QAR350 million (US$96 million) in distributions during this period, this was a decline of almost 25% from the January to March period of 2008.
QIB took a strategic decision to expand overseas in 2003. In 2004, it led a consortium of GCC banks in establishing Lebanon’s leading Islamic bank, Arab Finance House. It has subsequently moved further afield with the setting up of Asian Finance House in Kuala Lumpur in March 2007, in which QIB is a major shareholder. The following year QIB formed an Islamic bank in London, the European Finance House.
Income from its overseas operations has become increasingly significant, accounting for almost 40% in the first quarter of 2008. This declined to 31% in the first quarter of this year, reflecting the fact that financial conditions in the UK, Lebanon and Malaysia were worse than in Qatar.
Nevertheless, the success of its international diversification strategy should be judged from a long-term perspective rather than from results under exceptional economic conditions.
Apart from its London and Beirut affiliates, QIB has subsidiaries in Bahrain, Yemen and Kazakhstan. It is undertaking feasibility studies with a view to setting up subsidiaries in Turkey, Egypt and Indonesia.
Qatar National Bank Al Islami
QIB’s main competition does not come from other Islamic banks in Qatar but rather from conventional Qatar National Bank’s (QNB) Islamic banking division, QNB Al Islami. QNB, by far the largest bank in Qatar accounting for 40% of the country’s total banking assets, has been operating in Doha since 1964. It has 41 conventional branches but its Islamic arm, Al Islami, which was only launched in 2005, has already opened a network of 11 branches.
By the first quarter of this year, Al Islami’s assets were worth almost QAR15 billion (US$4 billion), roughly half the value of QIB’s total assets. However, its profitability was lower at QAR15 billion (US$4 billion) during that period, only 22% of QIB’s. This may reflect the costs of expanding the branch network, although it also demonstrates that the external economies and overhead savings that conventional banks are thought to enjoy when providing Shariah compliant services could be exaggerated. The main cost savings come from sharing the QNB information technology platform.
QNB Al Islami provides a range of financial products to suit the needs of most retail and commercial clients. Its current accounts are based on a Qard Hasan structure with no monetary return to the client but with access to ATMs via debit cards. It also offers Al Islami Master Cards which enable customers to earn points on purchases and qualify for free flights through a partnership with Qatar Airways.
Those with Mudarabah investment accounts also benefit from these cards, in addition to the attractive returns earned on their deposits. For the first quarter of this year, they earned 5.6% for investment deposits of six months or longer, 5.27% for three-month deposits, 4.94% for deposits of less than three months and 3.30% for call deposits. However, these returns have to be viewed in the context of inflation in Qatar. Although it has fallen significantly since 2008, inflation is still at about 8.5%.
Like other Islamic banks in Qatar, QNB Al Islami provides vehicle financing of up to 60 months for Qataris and 36 months for expatriates. It also provides finance for housing for up to 360 months for Qataris and 300 months for expatriates (with grace periods allowed). If the dwelling is under construction, buyers must come up with a minimum deposit of 10% of the purchase price but this requirement is waived for existing property.
While prices of newly-built properties are falling, prices of dwellings in established developments, especially those in prime locations, are mostly stable with some still rising. The overall property market in Qatar is much more robust than that of Dubai, reflecting the underlying strength of its resource-based economy.
Much of the import finance by QNB Al Islami is based on Murabahah; the bank opens a letter of credit to import the goods in the name of, and for the benefit of, the applicant. The bank then takes responsibility for the shipment of the goods from the exporter and sells it to the client, who pays for the imported goods, in installments. These installments cover purchase costs, shipping charges and the bank’s profits on the transaction, which will be agreed on in the initial contract.
To finance domestic purchases QNB Al Islami prefers the Musawwamah contract where the bank negotiates the selling price with the supplier but does not reveal this price to the client. Although at first glance, this may seem unfair, it can actually result in the client getting substantial discounts on the goods. Suppliers are willing to pay a premium to keep their prices confidential. So clients may actually fork out less for Musawwamah than for Murabahah.
Unlike QIB, Al Islami’s international presence is relatively low key. The bank’s conventional arm has branches in London and Paris but Al-Islami only opened a branch in Sudan on the 16th November 2008. This branch made sense because there are many Sudanese working in Qatar whocan benefit from the 24-hour money transfers between Doha and Khartoum. QNB Al Islami is licensed to offer a full range of Islamic banking services in Sudan.
Islamic finance competition and development strategy
The others in Qatar’s crowded Islamic banking market include Masraf Al Rayan, the Qatar International Islamic Bank (QIIB) as well as the Islamic banking subsidiaries of the Commercial Bank of Qatar and Doha Bank.
QIIB has been around since 1991 with 12 branches and assets worth over QAR12.8 billion (US$3.5 billion) at the end of 2008.That figure represents 40% of QIB’s or 85% of Al Islami’s total assets. QIIB has some QAR6.8 billion (US$1.9 billion) in unrestricted Mudarabah investment accounts and these depositors received a profit share of over QAR204 million (US$56 million) in 2008 against the QAR501 million (US$138 million) paid to shareholders. Despite its name, QIIB is mainly a domestic bank providing both retail and commercial banking services.
By contrast, Masraf Al Rayan, which has only been around for one and a half years, has more of an international presence. It has established a consumer financing operation in Saudi Arabia and is seeking the necessary approvals to open a branch in Libya, a Muslim country with no Islamic banks as yet.
One of the issues facing Islamic banks in Qatar is how much they should focus on domestic expansion and how quickly they should expand overseas. Qatar, unlike Bahrain, has an abundance of Shariah compliant capital, so the pressure is towards outwards expansion. That does not, however, mean that it discourages new entrants to the market. Unlike Dubai, which has no specific law or regulation governing Islamic finance, the Qatar Financial Centre (QFC) has a detailed rulebook for players in the market.
Nevertheless, most Islamic banks are regulated by the central bank rather than the QFC, given their retail banking focus. The Qatar central bank has much experience in regulating Islamic banks and has been very much involved in the work of the Islamic Financial Services Board.
Shariah compliant asset management
While Qatar has come a long way towards the establishment of an Islamic finance market, there are still some obvious gaps in the picture. For instance, despite its considerable public and private wealth, there is still a lack of Shariah compliant asset and fund management in the country.
At present there are only three Islamic funds operating in Qatar, the Al Sanabil Funds (A and B) and Al-Beit Al-Mali Fund. The Al Sanabil Funds were established by QIB in 2007, which proved to be unfortunate timing given that both have lost about half their value since then, reflecting the dismal performance of stocks listed on the Doha Securities Market (DSM). The A fund is designed for Qataris and the B fund for non-Qataris, but each has an identical remit covering listed stock, private equity and Sukuk.
In practice, however, much of the investment has been in equities. Looking forward, it is likely that the DSM has bottomed out and will perform much better than it has in the last two years so it may be sensible to be over-weighted in equity.
Al-Beit Al-Mali, founded in 2006 by the Investment House (IH), a Doha-based Shariah compliant firm, has only lost 28% of its value since inception and 45% of its value since April 2008, thanks to its earlier start date. This fund, managed by international asset manager Ansbacher, focuses on investments in the DSM.
Although none of the funds seems to have done very well, it is important not to be discouraged. Indeed, now may be the perfect time to launch a fund to catch the DSM on the upswing, capitalizing on the recovery of global financial markets.
Another noteworthy recent development has been the emergence of Islamic investment banks in Qatar, all of which are registered with, and regulated by, the QFC. Most of the existing Islamic banks are regulated by the central bank because they focus on retail banking. These QFC-regulated institutions — QInvest, Qatar First Investment Bank (QFIB) and Al Mal — focus on asset management.
QInvest was licensed in April 2007 with a paid-up capital of US$500 million, a quarter of which was subscribed by QIB. It has its own Shariah board that complies with QFC directives. QFIB was launched in March this year. With some US$430 billion in paid up capital subscribed by 1,000 investors, mostly Qatar citizens, it focuses on private equity investments in the Middle East and North Africa (MENA) region. The Al Mal Bank, which was licensed by the QFC in December 2008, also focuses on the MENA region.
As the GCC and wider MENA region recover from the global financial crisis and as oil and gas prices rebound, these QFC-regulated Islamic institutions should be well placed to take advantage of new opportunities.
Takaful in Qatar
The other area of Islamic finance with much growth potential in Qatar is Takaful. The local market is dominated by the Qatar Islamic Insurance Company (QIIC) which was founded in 1995 and provides a full range of Takaful products including vehicle, marine, fire, medical and life insurance, the latter being referred to as Family Takaful. Dr Ali Moehi El Din Al-Quarradaghi, the head of Qatar University’s faculty of Shariah, law and religious studies, chairs the Shariah board.
QIIC’s total assets exceeded QAR584 million (US$160 million) as at December 2008, of which QAR294 million (US$81 million) were shareholder assets and QAR290 million (US$80 million), policyholder assets. Policyholder assets constitute the Takaful pool.
QIIC distributed surpluses of over QAR11 million (US$3 million) to Takaful participants and paid out QAR83 million (US$23 million) in claims. This represented a substantial increase over what it paid out in claims the previous year, but fortunately over a quarter of the claims were covered by re-Takaful proceeds.
On the bright side, the Takaful fund’s investment income increased to QAR11.7 million (US$3.2 million) in 2008 from QAR8.5 million (US$2.3 million) in 2007 despite the difficult market conditions, although impairment losses more than doubled during this time.
While it is difficult to turn a profit in vehicle Takaful in Qatar given its high accident rate, the prospects for medical and family Takaful are promising. Medical Takaful, especially, is benefitting from Qatar’s enormous investment in hospitals, including a teaching hospital, the first of its kind in the GCC.