Qatar’s Islamic banks eye growth abroad

A centralised Shariah supervisory authority should be established to achieve greater market-wide consistency and credibility, says report

By HABHAJAN SINGH

Qatar-based Islamic banks are expected to look beyond their borders in their quest for expansion, while the national regulatory framework may need to establish a centralised Shariah supervising authority.

The nation’s Islamic finance industry, seen as a vital part of its financial system, has exhibited resilience in the face of less favourable economic conditions.

These are some of the findings of the recently released Qatar Islamic Finance Country Report 2017.

Outpacing the growth of conventional assets, the report noted that Qatar’s Islamic finance assets have grown at a compound annual growth rate of 11% over the last five years and 6% in 2016 alone.

The value of these assets reached 386 billion Qatari riyal (RM412.8 billion) in 2016, constituting 23% of the financial system’s assets.

“With enhancements to the further evolution of the Islamic finance ecosystem, particularly in its regulatory framework, Qatar has great potential not only to sustain the industry’s double-digit growth, but also to increase its share of overall financial assets.

“Stronger collaboration between Islamic banks and other Islamic financial institutions will also help the industry,” according to the report launched during the opening session of the fourth Doha Islamic Finance Conference (IFC Doha) in Doha last month.

The report was the 10th in a series of Islamic Finance Country Reports published jointly by Thomson Reuters and Islamic Research and Training Institute, a member of the Islamic Development Bank Group.

It provided an analysis and key insights on the evolution of the Islamic finance industry in Qatar, looking at recent developments across the Islamic finance industry and the broader economy.

On the future prospects of the Islamic banks, the report noted that a saturated domestic mar- ket and regulatory constraints on consumer lending limit prospects for further fast-paced growth in Islamic banking.

“As a result, Islamic banks are looking to expand into nascent Islamic finance markets abroad, where they can leverage their market expertise and resources to maintain growth. So far, this has been a successful strategy for Qatar’s Islamic banks, which have tapped their surplus foreign deposits to meet their liquidity requirements domestically,” it said.

Commenting on the report, Qatar Financial Centre (QFC) CEO Yousuf Mohamed Al Jaida said in order to ensure that Qatar’s economic prosperity and growth continue, it is vital to focus on attracting businesses and investors that will serve Qatar’s goal of diversifying its economy.

Shariah Regulation

On the regulation front, the report noted that efforts to harmonise and enhance financial regulation in Qatar should involve establishing a centralised Shariah supervisory authority to achieve greater market-wide consistency and credibility in Shariah governance, in line with global best practices.

At the moment, Islamic and conventional banking and insurance operations have been segregated in an effort to strengthen the Shariah-compliant proposition of full-fledged Islamic financial institutions.

However, it added that the approach to Shariah governance at these institutions remains decentralised, overseen by individual institutions’ Shariah supervisory boards.

Only a few jurisdictions around the world currently have some form of a centralised Shariah supervising body. Among them are Malaysia, Sudan, Oman and Bahrain.

Malaysia has two such councils — called the Shariah Advisory Council — one for the central bank and another for the Securities Com- mission Malaysia.

A working paper issued by the International Monetary Fund in 2004 noted the “wide dispersion of approaches to the introduction and regulation of Islamic banks and banking”.

In the paper entitled “Islamic Banking Regulation and Supervision: Survey Results and Challenges”, it said that legislation has been passed by a representative assembly in 17 jurisdictions (including Indonesia, Iran, Jordan, Kuwait, Malaysia and Sudan), while a decree/ directive has been issued by a ruling authority in six jurisdictions (including Kazakhstan and Qatar).

The same paper said regulations have been issued by a bank regulatory authority in 17 jurisdictions (including Afghanistan, Bah- rain and Ethiopia), while the legal basis is implicitly set by the bank regulatory and supervisory authority facilitating the presence of Islamic banking in 11 jurisdictions (including Botswana, Kenya and the UK).

Takaful Performance

The report noted that takaful and non-bank financial institutions together accounted for only 2% of the total Islamic finance assets in2016.

“Non-bank financial institutions in Qatar have shown muted growth, limited in both size and number. Assets of the non-bank financial sector were valued at 3.9 billion Qatari riyal. Caps imposed on consumer loans in Qatar have led non-bank finance companies to shift their focus to growth opportunities in small and medium enterprise lending, building on their competitive advantage in small-ticket financing,” it said.

Valued at a mere two billion Qatari riyal in 2016, it noted that the takaful sector in Qatar has underperformed conventional insurance in terms of market penetration as well as growth.

“The major drawbacks for takaful operators are their small size and the lack of differentiation in their products, compared to the conventional insurers that dominate the insurance market.

“Enhancing standardisation, promoting innovation and increasing consumer awareness should be top priorities in the further development and growth of takaful in Qatar,” it said.