Islamic banks better prepared to face crunch

 10 Jan 2018 - 0:00

Islamic banks better prepared to face crunch

By Satish Kanady / The Peninsula

DOHA: Qatar’s Islamic finance industry’s combined assets totalled QR386.5bn by the end of 2016, constituting 23 percent of Qatar’s total financial system assets, which are under the supervision of Qatar Central Bank (QCB).
In the past five years, the growth of Islamic finance industry assets slightly outpaced that of the overall banking industry, growing at a CAGR of 11 percent from 2012 to 2016, while CAGR for the overall financial system stood at 9 percent. “The Qatar Islamic Finance Report”, released at the 4th Doha Islamic Finance Conference has revealed.
The report, jointly prepared by Qatar Financial Centre (QFC), Thomson Reuters and the Islamic Research and training Institue (IRTI), noted that as with the overall financial system in Qatar, the Islamic banking sector is the biggest driver of industry asset growth given its 83.5 percent share of total Islamic finance assets. It grew at a CAGR of 13 percent between 2012 and 2016, while the overall banking industry grew at 11 percent.
“This proves that Shariah-compliant lenders are better positioned to withstand unfavourable economic conditions. Islamic banks benefitted from higher growth in foreign credit, which was a principal driver of impressive performances in the past five years,” the report noted.
Unlike Qatar’s other financial sectors, the Islamic segment in asset management is larger than the conventional segment. Shariah-compliant investment funds make up more than half the asset management sector in Qatar, with QR541m in assets under management. However, the sector remain relatively underdeveloped compared to other Islamic finance sectors; it is currently limited to mutual funds. With over QR600bn in investable domestic assets, the Qatar Financial centre (QFC) is in a position to differentiate its investment offerings from other regional financial hubs. A unique proposition focused on alternative investments would likely attract new players to the region to set up in QFC and pursue opportunities in regional markets.
Sukuk is the second largest Islamic finance asset class, representing 15 percent of total Islamic finance assets, with a total of QR57bn in outstanding issuances. Sovereign sukuk dominate the market, contributing 87 percent of issuances, while the corporate segment remains underdeveloped. With 44 percent of outstanding sukuk scheduled to mature in 2018, increased issuances will reduce the likelihood investors will reinvest their redeemed capital in other markets or asset classes. This presents an opportunity for more quasi-sovereign and corporate sukuk, which could also develop the issuer and investor bases for the sukuk market. The introduction of new tax incentives should aid this process by attracting foreign corporate issuers to Qatar.
The value of sukuk in Qatar has maintained a CAGR of 1.6 percent from 2012 to 2016, compared to the CAGR of total fixed income of 0.9 percent. The difference is the result of increased corporate sukuk issuance, amounting to QR4.82bn in 2016, compared to QR2bn in 2015. Prior to this, no corporate sukuk were issued since 2006.
Other players in Qatar’s Islamic finance industry include takaful operators, investment and non-bank financing companies, but they contribute a mere 1.7 percent of assets, along with Islamic funds.
The report noted that local banking landscape in Qatar could change considerably with the planned merger of three Qatari banks, Masraf Al Rayan, Barwa Bank and International Bank of Qatar. This would form a new bank operating in line with Islamic banking principles with total assets worth more than QR163bn, becoming Qatar’s second largest bank.
Qatar’s 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.