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Unprecedented growth of Islamic banking as it looks to enter world stage

Article - July 14, 2017

Business leaders in Qatar and around the world say Islamic banking and finance is set for continued growth that may last until the end of the decade

The Sharia-compliant financial system is worth some $1.88 trillion, according to recent figures released in May by industry monitor, the Islamic Finance Services Board (IFSB). The organization was bullish in its growth estimates, stating that the number could increase to $3.4 trillion by 2018.

Observers at the World Bank have noted what they called the industry’s “rapid” growth. The group chalked Islamic finance’s rise up to a “heightened interest in financial instruments that emphasize risk sharing” in the wake of the most recent financial crisis.

Other reports show Islamic banking has also performed well in recent years, valuing the industry at $1.34 trillion in 2014 – a year in which the sector grew by 12%.

“Over the years we have seen faster and consistent growth of Islamic finance assets as infrastructure development and the general economy as a whole continues to grow together. In addition, the widening of our customer base as Islamic finance becomes more understood and appreciated across the mainstream segment provides a major boost to support growth. We project that the demand for Islamic finance will continue on a positive growth trajectory going forward into the next decade,” says Adel Mustafawi, Group Chief Executive Officer at Masraf Al Rayan, a Qatar-based Islamic bank.

“Islamic banks are now targeting all segments by competing and acquiring not only sharia-compliant sensitive customers but also value-seeking customers who find the Islamic products pricing and offerings comparable to that of conventional banks”

Bassel Gamal, Group CEO, Qatar Islamic Bank

Industry insiders say Islamic finance enjoys crucial “advantages over conventional financial products.” Mahmoud Mohieldin, a Senior Vice President at the World Bank and former Egypt investment minister, wrote in a recent column that, “[Islamic finance]’s prohibition of interest and requirement that investments be linked to the real economy, together with its approach to profit- and loss-sharing, add stability to the financial sector.” Mr. Mohieldin added that Islamic finance can promote financial inclusion for those who, for cultural or religious reasons, are excluded from the traditional financial system.

“This is perhaps one reason why Islamic finance has been expanding at 10-12% per year over the last decade or so,” he wrote.

Although a study by the International Islamic Financial Market showed the issuances of Islamic bonds, known as sukuks, have dropped significantly since 2013, the mood around the industry remains positive.

“Islamic banks are now targeting all segments by competing and acquiring not only Sharia-compliant sensitive customers but also value-seeking customers who find the Islamic products pricing and offerings comparable to that of conventional banks,” says Bassel Gamal, Group Chief Executive Officer at Qatar Islamic Bank (QIB).
Qatari banks find Western Allies
Much of that value has been found in the ongoing internationalization of Islamic finance. The industry maintains increasingly strong ties to not just world centers of Islamic culture, but also powerful financial hubs like London or New York. Indeed, the UK government issued a GBP £200 million sovereign sukuk in 2014—a relatively small amount, but still one a BBC commentator claimed was “a signal of intent.”

In Qatar, business leaders say the country’s ties with the United States have also strengthened.

“The U.S.-Qatar bilateral relationship is an important one. The U.S. plays a very important role in supporting the strategic mission of Qatar, in terms of trade, investments, banking and finance, in addition to defense, education, as well as political and social responsible executions,” said Dr. Ragharan Seetharaman, CEO at Doha Bank in Qatar.

“The surge in trade and other bilateral relationships between Qatar and U.S. is going to improve synergies between them and thereby contribute to investment flows between them. Bilateral investments and trade can go in the right direction thereby banking can play a bigger role.”

Other Qatar-based executives found the tighter connections to the West to be a demonstration of the quickening evolution of Islamic finance.

 “When we first started to invest, it took a lot longer to do any Islamic financing, be it sukuk or bank financing. Today it is much more accepted and the documentation is more standardized,” says Tamim Al-Kawari, Chief Executive Officer at QInvest, a Qatari investment firm (QInvest’s varied international dealings include a serviced apartment redevelopment project in the City of London).

“We do not really think of the Islamic finance market being different from any other market (…) The way we look at things and the way we would hope other treasurers, companies and actually anybody looking for funding or capital, is to look at Islamic finance as a different source of funding.”

Qatar growing into an Islamic banking powerhouse
Currently, the top markets for Islamic banking and finance in the world are in Iraq, Saudi Arabia and Malaysia. Together they account for almost $800 billion of the industry’s total worth. But as Islamic banking and finance’s global influence has spread, other nations are starting to benefit from its Sharia-compliant banking system.

That has led to increased calls for government reforms of Islamic financial instruments. The World Bank’s Mr. Mohieldin wrote in his column that new sets of standards and regulations need to be implemented if countries inside the Organization of Islamic Cooperation (OIC) want to use Islamic finance for economic diversification.

“Topping the list is the need for stronger legal institutions that protect property rights and ensure that contracts are enforced. If people are to have full confidence in Islamic financial products, moreover, the industry will need to be standardized and regulated. National tax policies will also need to be tweaked, to prevent discrimination against Islamic financial instruments,” Mr. Mohieldin wrote.

In Qatar, statistics show that Islamic banking has become one of the country’s primary manners of handling finances. Islamic banking now makes up 26% of the nation’s overall banking sector, according to the IFSB report.

“Islamic finance has gained significant ground in Qatar and the Gulf Cooperation Council (GCC). Islamic finance continues to play a major role in shaping the future of our economy through advancing direct and indirect finance in support of infrastructure and projects; corporate and small and medium-sized enterprises; retail and private banking needs; and business development,” says Mr. Mustafawi.

Some financial analysts in the country have said that much of the success of Islamic banking in Qatar can be pinned to recent reforms put in place by regulators.

For instance, Qatari officials have established arbitration centers to resolve problems with conflicts stemming from the perceived complexity of Islamic financial instruments. The IFSB report noted that these types of measures have led to the increased strength of the sukuk in Qatar. The paper also stated that corporate sukuk issuance in the country had risen by $1.30 billion since 2014.

Additionally, the Qatar Stock Exchange has reportedly said that it will make Islamic financing a central part of its recent plans to diversify its offerings.

This all comes as Qatari officials are making a concerted effort to steer the country’s economy toward new sectors.

“Qatar [is in the ongoing process of] economic diversification away from its traditional role as a hydrocarbon exporter. In recent year’s growth has been mainly driven by the large-scale projects set by the government as part of the Qatar National Vision 2030,” says Mr. Gamal of QIB.

International recognition for Qatar banks
Banks in Qatar are now starting to gain international recognition for their business acumen. Doha-based Masraf Al Rayan was dubbed the world’s most efficient Islamic bank on the 2015 World Islamic Bank Conference cost-to-income ratio leader board, a global ranking of sharia-compliant financial institutions. Masraf Al Rayan’s cost-to-income ratio was 20.6%, a number that demonstrates how successfully the bank kept costs low while increasing income streams in 2015.
“Our vision is to build a bank that is strategically positioned and aligned to support our clients and their businesses across the globe,” adds Mr. Mustafawi.

“We do not really think of the Islamic finance market being different from any other market (…) The way we look at things and the way we would hope other treasurers, companies and actually anybody looking for funding or capital, is to look at Islamic finance as a different source of funding”

Tamim Al-Kawari, CEO, QInvest

Also coming in the top five of the rankings were the Qatar International Islamic Bank (QIIB) and the Qatar Islamic Bank (QIB), who garnered cost-to-income ratios of 24.47% and 31.78%, respectively.

“QIB’s strategy is to target all banking sectors covering their financial needs in a comprehensive way. Both our corporate and personal portfolios have been posting healthy growth, while our local and international subsidiaries and associates contributed positively to QIB’s Group results,” says Mr. Gamal.

According to him, QIB controls more  than 43.5% of the Islamic banking market share in Qatar and 11.5% of the overall market, as per the latest figures published by the Qatar Central Bank.
Mr. Gamal is now starting to plan for a prosperous future not just for his bank, but for Qatar as a whole.

“We are continuously adding economic value and trying to improve the society as a whole as well as the lives of each individual living in Qatar,” he says. “There is no doubt that the Qatari economy will keep on expanding and diversifying in line with the ‘Qatar National Vision 2030’ and our Bank is in a strong position to support and benefit from the expected growth.”