The successful launch of the world’s largest-ever, dollar-denominated Islamic bond is a notable milestone in the rise of Qatar’s sharia-compliant finance industry. An ambitious infrastructure investment programme and growing per capita wealth are supporting the growth of Islamic financial services, as the authorities look to continue regulatory reform.
Qatar’s $4bn sukuk issue on July 11 was more than six times oversubscribed, drawing an order book of more than $24bn. The two-tranche bond was the Qatari government’s first venture into the Islamic debt markets for almost a decade and will be used to supplement public coffers.
Each sukuk was valued at $2bn. The five-year bond sold at a yield of 2.09% and the 10-year at 3.24%, according to international press reports. The low yields are indicative of strong demand for Qatar’s sukuk, due to their perceived stability during a time of international economic uncertainty.
Across the GCC member states, bond spreads have narrowed in recent months, as investors have taken note of the countries’ solid budgetary positions, bolstered by high oil prices. Sukuks have drawn in cash from Islamic investment funds, particularly those based in the Gulf and South-east Asia, as other opportunities for sharia-compliant financing have become less appealing, given the economic climate. International press reports suggested that the yields on Qatar’s sukuks were 18 basis points lower than if they had been conventional bonds – a fact that may be attributable to the strong interest in Islamic funds.
Qatar certainly stands to benefit from its decision to launch a sizeable sukuk at this time. The country is undertaking around $100bn in infrastructure investments over the next five years, both to support continued economic growth and to lay the foundations for the World Cup. While the country’s budget surplus tripled to $12.2bn in the fiscal year ending March 2012, the extra cash provided by the sukuk will help support public investment. The issue was also designed to help cool inflationary pressures by mopping up excess liquidity.
The sukuk is also a vote of confidence in Islamic financial instruments from the government of the world’s richest country, in terms of per-capita GDP. Qatar’s sharia-compliant financial sector has grown strongly in recent years, as it has worldwide. And, as elsewhere, growth brings with it challenges of regulation in an industry that has only reached global prominence relatively recently, and in which definitions of what constitutes sharia compliance sometimes differ.
Islamic banks and sharia-compliant “windows” of conventional institutions accounted for around 30% of all banking assets in 2010, according to the IMF. Since then, the Qatar Central Bank (QCB) has introduced new legislation, implemented at the end of 2011, closing conventional banks’ Islamic windows. The change was designed to prevent the possibility of crossover between non-Islamic and Islamic products, though promoting the growth of fully sharia-compliant institutions may have been another goal.
The ongoing development of infrastructure and private real estate offer substantial scope for growth. “There is a lot of room for growth in the banking sector as a large number of projects are expected to come online, and project financing offers very good opportunities,” Moataz El Rafie, the CEO of Ahli Bank, told OBG.
With sharia-compliant financing such an important force in Qatar and across the world, the authorities and the private sector are keen to ensure that the regulatory infrastructure keeps pace. The ongoing consolidation of financial regulation in Qatar to a single body has been widely welcomed as bringing greater clarity and preventing contradictory or overlapping rules being drawn up.
The Islamic financial service sector is one of the most dynamic in the world at the moment, with growth levels that are particularly impressive given the cloudy international economic outlook. In Qatar, corporations, individuals and now once again the government are turning to sharia-compliant instruments. The state’s wealth, investment plans and its rising importance on the global stage all bode well for the industry.
During the twelfth Bank of Uganda annual Eid party, held at the central bank on September 7, a group of Muslims under their umbrella Contact Group on Islamic Banking, managed to get a word on Islamic Banking in, with bank governor Emmanuel Tumusiime-Mutebile. He assured them that the central bank had already done its homework and submitted the proposed amendments to the Financial Institutions Act.
“We also had a word with Dr Anas Kaliisa, renowned Sharia expert who presided over the closing ceremonies. Dr Kaliisa appreciated the pioneering efforts of Contact Group on Islamic Banking and assured us of his full technical support,” Kalinge Nyago wrote on an Islamic social networking website, Uganda Muslim Brothers and Sisters.
The chief guest, Gen Moses Ali, also called for the introduction of Islamic banking in Uganda.
“The bank should exacerbate the introduction of other forms of banking systems that will entail justice and fairness. BoU should play a leading and encouraging role in the introduction of Islamic banking, which is a banking system that has been embraced by both Muslims and non – Muslims because of its unique characteristics,” said Moses Ali who was minister of Finance in 1976 at the age of 38.
Islamic financing is not centred only on credit worthiness and ability to repay the loans and interest; the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented under profitability.
“In my opinion, perhaps the most crucial feature, which forms part of the basis for the development of Islamic banks, is the relationship with depositors. The banks do not give loans to customers based on pre-fixed interest rates. They consider each case individually and invest depositors’ money in projects that give significantly high return on investments. I need not emphasize that under Islamic banking both profits and losses are shared by both parties,” Moses Ali stressed.
Islamic Banking is growing at a rate of 10-15% per year with signs of consistent future growth. Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles.
It is estimated that over US$822 bn worldwide sharia-compliant assets are managed according to The Economist. According to Kalinge Nyago, banks in Europe are already operating Islamic banking. They have opened up windows for those who wish to bank in an Islamic way.
“When you go for a loan it’s done against the proposal where you share the profits or losses according to the agreed terms. In Islamic banking there are no interest rates and at no time will you find property being confiscated,” said Kalinge Nyago told The Observer on phone.
Islamic teachings are against riba which means excess, increase or addition, which according to Sharia terminology, implies any excess compensation without due consideration.
The definition of riba in classical Islamic jurisprudence was surplus value without counterpart, or to ensure equivalency in real value, and that numerical value was immaterial.
Now a fourth consultative forum on Islamic banking is slated to be held this weekend, September 15, at Hotel Africana, for Ugandans to appreciate the system better, especially in this era when people are losing property to banks and money lenders due to unpaid loans of much less value.
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