The Islamic finance program is the most recent sign that, a year and a half into a blockade imposed by Qatar’s neighbors, the embargo has been something of a blessing in disguise—an incentive for the Gulf state to diversify its economy away from oil and gas and tap into new markets.
The risk-eschewing philosophy upon which sharia-compliant models are based has seen Islamic finance demonstrate rapid growth over the last decade. Between 2008 and 2014, Islamic banks based within the Gulf Cooperation Council (GCC) swelled their coffers by almost double the rate of their conventional counterparts (15.2% to 8.8%). As a result, the sector was estimated at $2 trillion by Standard & Poor in 2015, while its value was projected to balloon up to $3 trillion over the coming years.
According to Ernst & Young, 93% of those assets can be found in just nine countries, of which Qatar is one of the foremost. Indeed, the four largest Qatari banks increased their holdings of Islamic bonds by 37.7% over the last year to shore up the country’s position. Meanwhile, Malaysian banks are already established as among the biggest issuers of sukuk (sharia-compliant bonds) anywhere in the world, with 34% of the global market in 2017. Working alongside Turkey to meet European needs, the pair could pose a real threat to Dubai’s current stranglehold on the sector.
Cognizant of that potential, and of the growing attraction of sharia-compliant banking in non-Muslim majority countries, Qatar has made a concerted effort to raise its international profile. There are now Qatari banks or their subsidiaries operating in such diverse locations as the UK, Lebanon, Sudan, Oman, Ireland and Morocco, in addition to Malaysia. Meanwhile, Qatar International Islamic Bank (QIIB) signed a Memorandum of Understanding with the Chinese outfit Southwest Securities in 2015, as a precursor to accessing the lucrative and as yet untapped Chinese market.
In parallel with these financial moves, Qatar has endeavored to expand its circle of international allies and elevate its global standing. At the aforementioned Doha Forum, Qatar pledged to donate $500 million to the UN, $75 million of which has been earmarked to fight terrorism over a five-year period—a commitment in contrast with the alleged support for terrorism which the blockading countries used as a pretext for their restrictions.
Elsewhere, Qatar has fought off the worst effects of its isolation from its neighbors through rebalancing its economy and refocusing its domestic policy. With the highest GDP per capita in the world, the emirate is believed to have reserves in excess of $340 billion in its sovereign wealth fund (SWF). $50 billion of that has been redirected into propping up the country’s banks and protecting its exchange rate, including $5 billion earmarked for attracting foreign direct investment (FDI) into free zones and finance centers.
A great deal of that wealth was built on liquefied natural gas (LNG), exports of which are expected to increase by 40% in 2019. However, the country is also looking to diversify its domestic portfolio and spur growth through other means. Current projects include the Qatar Integrated Railway Project, the smart city of Lusail and the expansion of the Hamad Port, as well as its role of host of the FIFA World Cup in 2022. Meanwhile, the blockade has also forced Qatar to become more self-sufficient with regards to its food, drink and commodities sector, which was until recently dominated by imports. Due to the constrictions of the blockade, the government has sponsored initiatives to remodel the agricultural and manufacturing industries, leading to a current abundance of Qatari-made products on store shelves.
In this manner, Qatar has managed to turn its isolation into an advantage – and the year-end balance sheets are testaments to these efforts. Despite being the blockaded party, Qatari assets have outperformed its competitors in a number of metrics. The reputational hits incurred by the killing of journalist Jamal Khashoggi and the uncorroborated conviction of British student Matthew Hedges for espionage shook international faith in Saudi Arabia and the UAE, respectively, while Qatari stock has risen.
Its improving international reputation and resilient economy led Moody’s to upgrade Qatar’s outlook rating from “negative” to “stable” in July 2018, prompting a flurry of overseas investment. This was only aided by a relaxation of property ownership laws, which now promise to allow 100% foreign ownership in most sectors apart from insurance and banking. Indeed, foreign inflows into national stocks were where Qatar shone most in comparison to its neighbors, recording $2.47 billion in comparison to $794 million (Saudi Arabia) and $506 million (Abu Dhabi) respectively.
Of course, not everything has been bright. According to economic assessments cited by the New York Times, the blockade has harmed the country’s economy by forcing it to fly in supplies and prop up banks. Additionally, income from tourism and real estate transactions has decreased and consumer prices have increased since the blockade, hitting the country’s foreign workers in the wallet.
Nonetheless, when Qatar’s four neighbors initiated the blockade 18 months ago, few would have predicted how well the emirate would cope. At the close of 2018, Qatar has expressed a willingness to reopen the diplomatic dialogue – but the emirate is no longer desperate to do so. A mixture of prudent fiscal policy, industrial reforms and simultaneous missteps from their rivals have ensured Qatar hold a relatively strong position going into the new year.
With a possible alliance with Turkey and Malaysia in the offing, Qatar is now looking to use those solid foundations as a springboard for future success. Harnessing the promise of the Islamic banking sector could ensure their ongoing prosperity for the foreseeable future, as well as – perhaps – exert some pressure on blockading forces to call for an eventual truce.
The views expressed in this article are the author’s own and do not necessarily reflect Saray Consultancy’s editorial stance.