Qatar’s government is actively encouraging Islamic banking and finance to support the country’s infrastructure projects and provide an additional source of funding. Boosted by these initiatives, local sharia banks have been increasing their loan books and gaining market share.

Although 2013 saw a slowdown across Qatar’s entire banking sector due to delays in signing contracts for infrastructure projects, credit growth among both Islamic and conventional banks is expected to continue to rebound in the coming years.

Key market

An October report from US ratings agency Standard & Poor’s (S&P) says Qatar’s credit growth will “accelerate” in 2015.

“We expect growth to rise again and Qatar will remain a key market to watch,” Timucin Engin, a Dubai-based director at S&P told MEED earlier this year.

According to Qatar Central Bank (QCB), Islamic banks’ assets stood at QR251.1bn ($69bn) at the end of September 2014, representing more than 25 per cent of total Qatari banking assets of QR945.9bn.

The combined assets of Qatar’s Islamic banks were up 22 per cent at end of September compared with the same month last year. This is a faster pace of growth compared with the almost 12 per cent increase in conventional Qatari banking assets recorded over the same time period.

State initiatives

The strong growth of the Islamic banking industry is largely the result of a series of government initiatives to develop the sector.

Strengthening the provision of Islamic finance and the regulatory framework supporting the industry are aims of both Qatar’s National Vision 2030 and its National Development Strategy 2011-16.

The most significant policy change took place in 2011, when the QCB made the unexpected decision to order conventional banks to close their Islamic banking windows. The central bank said all lenders must set up separate branches for sharia products rather than selling them through “Islamic windows” on their premises.

The QCB had previously taken steps to limit Islamic lending by conventional banks, but the market had not expected the move to completely ban their involvement in sharia-compliant banking.

Sector performance

Despite concerns about the impact of the ruling on conventional lenders, the sector has continued to perform well since 2011 thanks to a robust economy and accelerated government spending.

Conventional lender Qatar National Bank (QNB) is the largest bank by assets, both in Qatar and the wider Middle East region, and the Islamic banking sector is unlikely to acquire too much market share from this banking giant.

The Islamic finance sector has certainly benefited from the decision. Free from having to compete with the larger, more established conventional players, sharia banks have been able to launch new products, build up their asset base and increase their lending volumes.

Between 2009 and 2013, Qatar’s Islamic banks grew their balance sheets by 28 per cent, according to S&P.

In 2012 – the year after the ruling – the balance sheets of Qatar’s Islamic lenders grew 21 per cent year-on-year, the second-highest rate in the Gulf, coming just behind Saudi Arabia, which saw a 26 per cent expansion. Growth decelerated to 12 per cent in 2013, reflecting a similar slowdown seen in the conventional bank market.

Bank results

Individual banks are also recording healthy results. Assets of the country’s largest Islamic bank, Qatar Islamic Bank (QIB) reached QR93.3bn at of the end of September, marking a 20.7 per cent increase on 2013.

QIB’s profits have also been rising. The bank recorded nine-month net profit of QR1.19bn, an increase of 23.9 per cent on profit recorded in the same period in 2013.

Analysts expect the bank to grow further. In a November report, Kuwait’s NBK Capital forecasts net profit growth of more than 20 per cent in 2015, fuelled by increasing operating income and less drag from investment provisioning.

It forecasts year-on-year profit growth for 2014 of 8 per cent per cent and 23 per cent in 2015.

Qatar International Islamic Bank (QIIB) has expanded significantly since 2011. Total assets reached QR34.4bn at the end of 2013, an increase of 20.4 per cent from 2012.

Masraf al-Rayan, for its part, saw its assets grow by 8 per cent in 2013 to reach QR66.5bn. 

New institutions

The Qatari government has further encouraged the development of the sector by granting licences to new Islamic lenders.

Barwa Bank was set up in 2009. It is currently a private bank, and although an initial public offering (IPO) has been much talked about, it has yet to take place.

The bank’s assets have grown steadily since its establishment, rising by 33 per cent in 2013 to QR33.6bn.

Barwa Bank has continued to grow in 2014, with assets reaching QR35.6bn by the end of the first half of the year.

The bank also reported a 35 per cent jump in net profit in the first six months of the year to QR411m.

Qatar First Bank (QFB) iss another relatively new player in the Islamic finance market, having launched five years ago. The independent lender has posted healthy financial results in recent years, with net income rising by 24 per cent to QR140.5m in 2013. 

QFB’s assets reached $837.8m in 2013, compared with $602.8m the previous year.

Building on its investment banking foundations, the firm began to expand into commercial banking in 2013.

It has also been mulling an IPO on the Qatar Exchange since 2012. QFB submitted the required paperwork for the offering in the first half of this year, the firm’s acting CEO Ahmad Meshari told MEED earlier this year.

The IPO is pending regulatory approval and there is no clear timetable as to when it will be launched.

Supporting infrastructure

Armed with strong asset bases and healthy balance sheets, Qatar’s Islamic banks are playing a bigger role in supporting infrastructure developments.

The use of Islamic structures, such as sukuk (Islamic bonds) is also becoming more prevalent.

“The Qatar government is encouraging sukuk-raising for infrastructure projects. And there is an understanding that a certain proportion of infrastructure financing should feature Islamic finance,” says Engin.

Recent deals with Islamic tranches include a $500m sharia-compliant syndicated loan for local developer Ezdan Holding Group, which closed in early 2014 and was arranged by Barwa Bank and the UAE’s Mashreq.

Significant milestone

The clearest sign of the strength of the local banking system, both conventional and Islamic, came with the financial close of the $500m Ras Abu Fontas A2 independent power and water project (IWPP) last year.

The deal was entirely funded by local banks, a first for Qatar’s project finance market. The debt was split between a conventional term loan, a larger Islamic tranche and the $18m standby facility. Coordinating bank QNB provided a $162m conventional debt tranche and an $18m conventional standby facility, while Barwa Bank, Masraf al-Rayan and Qatar Islamic Bank each provided $90m under an Islamic facility tranche totalling $270m.

At the time of the document signing, Qatar Electricity & Water Company business development manager, Khalid Jolo, said: “The transaction represents a significant milestone in Qatar’ss history of project financing as, for the first time, a Qatari developer, a Qatari offtaker and four Qatari banks are joining forces to make this strategic project happen without any financing support from foreign banks.” 

With many more projects in the pipeline and strong government support, the Islamic banking sector is primed to play an even bigger role in Qatar’s growing economy and booming infrastructure sector.