Finance

Sharia-Compliant, Convention-Defying

Islamic Banking

Serving both the growing demand for sharia-compliant financial products in their home market and expanding their presence abroad, Qatar's Islamic banks are increasing their footprint at a rapid pace.

Interest is the main concept around which conventional banking services are constructed. Sharia law, however, prohibits the charge or payment of interest, or riba, as it is deemed immoral to make profits from loans to one another. Moreover, it prohibits investing in goods and practices that are haram, such as alcohol, pork, and gambling. Conventional derivatives, such as futures and options, are too considered to involve excessive risks and are therefore inconsistent with sharia.

Islamic finance provides alternative instruments and banking models that adhere to religious norms, without undermining the capacity of banks to earn profits or to protect themselves against risks. Sharia-compliant bonds, known as sukuk, and insurance policies, known as takaful, have made an impact in the financial sector in countries throughout the world. They have grown to a status where they are no longer merely the Islamic alternatives, but interesting financial instruments in their own right.

This does not save Islamic finance from occasional headwinds. The sukuk and takaful markets shrunk in 2015 and 2016, losing market share to conventional products. The conviction that low prices for oil and gas would lead to growing governmental demand for funding and high sukuk issuance has not proven to be a buoyant force, as Qatar’s government has pursued a strategy of cutting expenses rather than issuing debt. For the year to come, however, there is a consensus among analysts that the volume of the sukuk market will rise again.
The fact that Islamic banks today account for over 25% of total financing in Qatar is rather astonishing in light of its short history. The emergence of Islamic banking services in Qatar started with the market entry of Qatar Islamic Bank in 1982. Paving the way for the sector, it is still by far Qatar’s largest Islamic bank. This leading position is under pressure by the reported three-way merger talks between Masraf Al Rayan, Barwa Bank, and International Bank of Qatar. Although the merger talks have not been confirmed yet, the three banks would create Qatar’s largest Islamic financial institution.

The 2011 Central Bank of Qatar directive to prohibit conventional banks from offering Islamic products has shaped a clearer distinction within the sector. It has given Islamic banks the opportunity to secure a customer base that would otherwise have been more dispersed. In order to widen their reach to customers, Islamic banks in Qatar are working hard to improve their image. The sector has made efforts to bridge the perceived gap in service level with conventional banks. In particular, the introduction of mobile banking applications has helped Islamic banks to grow their customer base in retail banking, both domestically and abroad. The growth rate of Islamic banks in Qatar in the first half of 2016 was 7.2%, outperforming their conventional counterparts. The expansion of operations to new countries offers immense growth opportunities for Qatari Islamic banks.
The introduction of the QE Al Rayan Islamic Index, in January 2013, has been a milestone for Islamic finance in Qatar, and indeed the region. Realizing the first exchange-sponsored Islamic index in the region, it has further enabled investors to buy into Qatar’s growth story in a way that is consistent with sharia. The prospects of Islamic asset management in Qatar are to be further underscored with the expected launch of an exchange traded fund (ETF) tracking the QE Al Rayan Islamic Index.

Overcoming two challenging years, 2017 will be interesting. A possible merger that would create Qatar’s largest Islamic bank, further geographic expansion, and the expected growth of Islamic financial markets worldwide provide ingredients for Islamic banks to accelerate again and add yet another milestone year to their brief history.

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