Islamic banks more resilient than conventional banks
Islamic banks more resilient than conventional banks
Islamic banks in qatar have also demonstrated healthy growth in profits of 8.5% during 2018 compared to 2017. In addition in 2018, the Qatar stock exchange listed the world’s largest single-country Islamic exchange traded fund (EFT) in Qatar. Mahmood Zelaikh Audit Director KPMG Qatar.
A study conducted by the International Monetary Fund (IMF) way back in 2010, which Compared the performance of Islamic banks with that of conventional banks during the financial crisis, revealed that Islamic banks on average demonstrated stronger reliance during the crisis, says Mahmood Zelaikh, audit director with KPMG in Qatar.
One of the key differences between Islamic banks and conventional banks is that the former did not allow investments in the kind of instruments that have adversely affected conventional banks and triggered the global financial crisis. “Most of the Islamic banking products are asset-backed primarily by real estate and tangible assets and this also contributed to the Islamic banks being more resilient. This analysis remains true because if another crisis does occur in the near future Islamic banks will still remain more resilient than their conventional counterparts,” he said. Despite their resilience, Islamic banks are not immune from the impacts of the financial crisis since its occurrence will ultimately affect the real economy, and as a result it remains crucial for these banks to develop innovative products, diversify their asset base and reduce their sectoral concentration to weather the effects of a potential global recession. Shariah compliant banks in Qatar, like others in the region, are still clearly dominated by realestate at $20.7 billion as at the end of 2018, followed by construction at $4.24 billion which cumulatively forms 38.5% of the total assets (excluding the interbank financings) of Islamic banks as of 31 December 2018. This may pose a challenge to Islamic banks with the indicators of an economic downturn flashing and the decline in real estate prices not only in Qatar but in the region as a whole, he said.
The Islamic finance industry is a vital part of Qatar’s financial system, and it has exhibited resilience in the face of less favourable economic conditions. Outpacing the growth of conventional assets, Islamic finance assets have grown at a CAGR of 11% over the last five years and 13% in 2017 alone. According to Zelaikh, Islamic banks in Qatar also enjoy a healthy liquidity situation, especially with the Qatar Central Bank (QCB) having injected funds into local banks. The average capital adequacy ratio of still accounts for a negligible share of the global fintech start-ups, which means that there remains a lot of potential to be realized particularly by Islamic finance fintech startups, he noted.
MORE SUKUK ISSUANCE LIKELY
The global sukuk market experienced aslowdown during 2018 as compared to the previous year due to several reasons:the financing needs declined in the GCC as liquidity conditions improved thanks to higher oil prices which hovered around the $60 per barrel range during the year; the political instability in the region; the tightening of global liquidity; and the measures taken by the countries in the GCC
Qatar’s Islamic banks stands between 17.5% and 18.2%, well above the minimum ratio of capital to risk-weighted assets of 10.5% under the Basel III framework which means that Islamic banks have a cushion to increase their exposures or absorb any potential future losses. They have also demonstrated healthy growth in profits of 8.5% during 2018 compared to 2017. In addition, in 2018, the Qatar Stock Exchange listed the world’s largest single-country Islamic exchange traded fund (ETF) in Qatar.
Islamic finance is well established as an alternative finance offering in global markets; however, there are a number of areas requiring attention in order to sustain and accelerate this growth. These include regulatory reforms, standardisation and innovation. Developments in these areas would unlock the full potential of Islamic finance and encourage adoption within both Islamic and non-Islamic nations. Regulators in Qatar, including the QCB and the Qatar Financial Centre (QFC) have taken initiatives recently to develop the regulatory environment in an effort to standardise and centralise the regulations for the entire Islamic banking and finance industry in order to align the sector with the best global practices. One of the boosts received by Islamic banks was the fact that, back in 2011, the QCB banned conventional banks from offering Islamic products or operating Islamic windows locally which further allowed Islamic banks in Qatar to grow over the last decade and enabled them to complete with their Islamic counterparts. The QCB has indicated that there are measures in place to establish a centralized Shariah supervisory body and create Shariah standards to govern Islamic banking products and transactions. During 2019, the QFC has expanded the number of fintech activities to be licensed and conducted by companies listed on the QFC platform, in a move which reaffirms its commitment to strengthening the fintech ecosystem in Qatar. Despite the global growth in the fintech space, the Middle East to reduce expenditure, he said.
During the first half of 2019, however, with reducing oil prices the total sukuk volumes grew to $87.4 billion in the first half of the year, from $64 billion in the same period of 2018. The increase was driven by the GCC, where issuance rose by 9% to $26.5 billion; Southeast Asia, where it grew by 41% to $53 billion; and Turkey, where sukuk issuance grew by 300% to $7.9 billion, he pointed out. “The credit rating agencies expect GCC countries to continue issuing sukuk for the rest of the year as lower oil prices and expansionary budgets mean governments are tapping debt markets for funding. They are also issuing more sukuk to diversify their funding mix and develop the Islamic debt markets,” he pointed out. A prerequisite for faster growth with Islamic finance is inclusive standardisation, the standardisation of Shariah interpretation and legal documentation that factors in the requirements of all the stakeholders. Standardised Sharia interpretation and legal documents would boost the industry’s growth by clarifying risks for investors, streamlining the sukuk issuance process and creating extra scope for innovation. Standard-setting bodies have made significant efforts to drive forward the standardisation of sukuk, but there is still work to be done, he added.
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© 2021 KPMG Qatar Branch is registered with the Ministry of Commerce and Industry, State of Qatar and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
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