Asset Management

Qatar has identified the asset management industry as a strategic specialist business activity. Consistent with the knowledge-based economy aspirations set out in the Qatar National Vision, this initiative seeks to attract both regional and international asset managers to Qatar. Relationships are being developed with major international institutions to develop both the domestic and international asset management industry, and Qatar has made seed money available to asset managers to establish a presence in Doha, the capital. Long-term incentives may also include partnering with a third party to provide shared back- and middle-office functions to offer cost-efficient incentives to smaller managers to establish operations.

In addition, the country is deploying fiscal surpluses to promote the development of a domestic capital market that will expand the breadth and depth of investment opportunities. This involves encouraging private sector companies to list on the Qatar Exchange, creating greater liquidity in the local equity and increased trading volumes.

The recent inclusion of Qatar in the benchmark index of emerging markets certainly supports the nation's plans to become a regional asset management hub, and the country is expected to attract from US$500 million to US$1 billion annually in new investment.

Tax and Accounting

Qatar has no personal income tax, and, for the most part, corporate tax rates are low. In 2010 a new tax regime was announced, imposing a maximum of 10 percent tax on corporate taxable profits, replacing the previous sliding scale. The exceptions to this rule are oil and gas operations, which still fall under the old tax regime and command a 35 percent tax levy.

All entities are potentially liable for corporate taxation if they have permanent-establishment status in Qatar or derive profits from activities or investments in the country. However, companies in Qatar that are wholly owned by Qatari nationals or citizens of any of the other Gulf Cooperation Council (GCC) member states are exempt from corporate tax.

The new tax regime also introduced withholding tax, which is charged on payments by a Qatari resident entity to a nonresident entity that does not have a permanent establishment in Qatar.

The government offers incentives, including tax holidays and foreign investment capital incentives. Wholly owned foreign companies can be licensed to operate in the country's free trade zone, the Qatar Science and Technology Park, and trade directly without an agent. Companies with a standard license do not pay tax, nor do they have to pay customs duties on imported goods.

Retail Banking and Microfinance

The retail finance sector offers a very competitive range of products and services: transactional banking, personal lending, asset finance, and mortgages.

The industry is regulated by the Qatar Central Bank, which in 2011 issued new regulations separating conventional and Islamic banking, resulting in the closure of the Islamic windows operated by the conventional banks.

Retail credit creation is subject to limitations in the maximum permissible debt-burden ratio (i.e., the relationship between disposable income and debt service). More recently, absolute limitations have been placed on credit exposure, retail credit tenor, the requirement that unsecured credit be supported by formal salary assignment to the lending institution, and the imposition of interest and profit rate ceilings.

Notwithstanding these limitations, the banking sector's contribution to the national economy remains on an upward trajectory, with total assets equating to 127 percent of GDP in June 2013, up from 97 percent in 2008. The average tier 1 capital adequacy ratio at Qatari banks is 18.9 percent, substantially ahead of the 12 percent Basel 3 requirement, underpinned by strong economic fundamentals and government support.

The microfinance market is in its infancy, although the three licensed finance companies all write nonpersonal business. More recently, the Qatar Development Bank established Al-Dhameen, an indirect loan guarantee facility targeted at companies with limited credit history and a lack of collateral to obtain access to funds to establish or to expand their businesses. All core business activities are eligible for Al-Dhameen support except agriculture, fishing, livestock, nonoil mining and quarrying, wholesale and retail trade, financial and insurance activities, and real estate activities.

Takaful and Re-Takaful

Growth rates for Qatar's takaful (insurance) industry have outstripped conventional insurance, although in absolute terms, it remains considerably smaller than its conventional counterpart.

However, the takaful industry has become extremely competitive in recent years, competing directly with traditional insurers on products and pricing and offering a broad range of property and casualty lines for both the retail and corporate market.

This, plus support from the government in the form of awareness campaigns as well as the introduction of mandatory insurance policies for certain activities, has seen gross written premiums increase at a compound annual growth rate of 51.13 percent between 2007 and 2011 to reach US$273.8 million, and it is predicted to reach US$585.2 million by 2016.

Takaful insurers have seen rapid growth in the personal accident and health insurance sectors, and the growing number of automobiles in Qatar has led to the growth of takaful motor insurance premiums.

The re-takaful market in Qatar is small but growing, thanks in part to the Qatar Financial Centre promoting the country as a regional hub for reinsurance. The nation's young population, enormous infrastructure program, and near absence of natural disasters are seen as attractive propositions for the re-takaful industry.

The industry is regulated by the Qatar Financial Centre Regulatory Authority, which oversees the registration of both takaful and re-takaful companies in the Qatar Financial Centre. Takaful companies are required to provide a capital of base of US$10 million, whereas re-takaful businesses need US$20 million.

Sovereign Sukuk

As a member of the GCC, Qatar has made a concerted effort to establish an open and competitive economy that respects the rule of law, focuses on stability, encourages the development of private enterprise, and promotes foreign investment.

The country's credit rating of A2 reflects the economic muscle stemming from its possession of one-third of the world's proven gas reserves. This resource wealth continues to generate a material current-account surplus as well as significant capital accumulation, and it is supporting the country's unprecedented infrastructural program.

Qatar is committed to a strategy for the development of a vibrant regional and domestic capital market, part of which includes sovereign debt issues, both conventional bonds and international sukuk, designed to develop the yield curve. Last year's 5- and 10-year dual tranche US$4 billion issue, a Reg S sukuk, attracted global investor interest and was seen as a high point in what was a busy year for sukuk issuance worldwide.

Qatar has a prominent reputation externally as a global investor. Established in 2005, the Qatar Investment Authority, the country's sovereign wealth fund, has a global portfolio across most asset classes, industries, and geographies. Its investment subsidiary, Qatar Holding, has shareholdings in Barclays, Sainsbury, Royal Dutch Shell, Total, and Credit Suisse, among others. In total, Qatar's foreign assets, largely held by the Qatar Investment Authority, were valued at US$210 billion in 2012.

Sukuk

Qatar's bid to become one of the leading managers of sukuk is driving the popularity of the instrument, with yields outperforming those on conventional bonds in the GCC. In the first half of 2013 alone, US$3.1 billion was raised by 11 sukuk issuances involving Qatar, helped by a strong domestic demand for Islamic finance products and the government-driven infrastructure program.

Before 2012, long-term bond issues were held to maturity, which prompted the Qatar Central Bank to introduce Qatari riyal-denominated sukuk with short-term maturities to provide liquidity management instruments for Islamic banks.

Some of the Qatari banks have also issued sukuk debt and are expected to continue to be active issuers, principally as a source of longer-dated funding. The substantial investment in infrastructure, and the government's encouragement of private sector involvement in the program, will also drive sukuk issuance.

Debt Capital Markets

The establishment of a domestic debt capital market is a strategic objective of the Qatari government. Currently, the local market is limited, given the limited number of genuinely qualified issuers, and the buying side is still small, with few of the institutional investors normally associated with debt markets such as pension funds and life companies.

To date, the principal players in the debt capital markets have been the domestic banks. The banking sector is, and will continue to be, central to Qatar's expansion program, and it has gone to the international debt capital markets to raise long-term funding.

The government's plan to stimulate secondary bond markets by creating a benchmark yield curve from bonds of various types and maturities is seen as a prerequisite for the development of an efficient domestic bond market. It will also lay the foundation for bonds to be issued, long-term, by entities associated with major infrastructural projects.

An additional refinement of debt strategy took effect in March 2013, with the launch of Qatar Central Bank's quarterly bond sales to enhance the bank's policy arsenal and to help the banks manage their liquidity positions.

The overall national strategy regarding the debt capital markets has been augmented by the establishment of a debt management office within the Ministry of Economy and Finance, a move that the IMF believes will modernize policies and financing strategies.

Regulatory Issues

Qatar has a parallel system for financial services companies based on an English common law framework, making it arguably superior to free zones in other parts of the GCC because the Qatar Financial Centre's presence gives foreign banks and financial institutions access to Qatar's domestic market. The Qatar Financial Centre permits 100 percent ownership by foreign companies, and all profits can be repatriated.

The Qatar Financial Centre has authority over tax, immigration and employment law, and financial regulations, and it offers a jurisdiction for global and regional financial services firms that wish to capitalize on the opportunities offered by the region.

The domestic banks are governed by the Qatar Central Bank, while other regulated sectors within financial services fall under the authority of the Qatar Financial Centre. The Qatar Financial Centre Authority, which is the commercial and strategic arm of the centre, has a mandate to develop three key hubs: asset management, captive insurance, and reinsurance.

The Qatar Financial Centre has an independent financial regulator, the Qatar Financial Centre Regulatory Authority, and an independent judiciary comprising a civil and commercial court and a regulatory tribunal.

The Qatar Financial Centre Regulatory Authority is tasked with promoting and maintaining efficiency, transparency, integrity, and confidence in the Qatar Financial Centre as well as maintaining financial stability and managing systemic risk. It is responsible for preventing financial crime and other misconduct and for providing appropriate protection to firms for the conduct of their business with clients and customers. The Qatar Financial Centre Tribunal, an independent appeals body, hears appeals against the Qatar Financial Centre Regulatory Authority's rulings.

The Qatar Exchange is regulated by the Qatar Financial Markets Authority, which oversees the equity and investment markets.

Currently, the Qatar Financial Centre and its subsidiary bodies, as well as the Qatar Financial Markets Authority, are in the process of transitioning into an integrated structure under common management by the Qatar Central Bank.

Cross-Border Financing

Qatar has a significant profile as an international investor, with cross-border activity dominated by the sovereign wealth fund, the Qatar Investment Authority.

The banks too have looked beyond Qatar's borders for new investment opportunities, driven by the need to grow. This is problematical, given the size of the bankable population in Qatar—estimated at 400,000 out of a population of 2 million.

Countries like Egypt and Turkey have particular appeal, thanks to their large populations and the opportunities for financial services.

Qatari banks now have operations—branches and representative offices, or affiliates, associates, and subsidiaries—in more than 20 countries in the GCC region, Africa, Asia, Europe, and the Middle East.

The banks without an international presence are, nonetheless, internationally minded, and bilateral extension of credit (as well as participation in club deals and syndications) for customers outside Qatar is permitted by the Qatar Central Bank, the industry's regulator, subject to limitations on tenor and prudential country-limit caps.

Conclusion

The growth and development of Qatar's financial services sector is a key part of the Qatari government's strategy to create a modern, sustainable knowledge-based economy. The success of this strategy is becoming increasingly evident because the value of the hydrocarbon sector is expected to fall to a little more than half of the country's GDP in 2015.

In 2014, the prospects for the Qatari banks are very good, given the increasing focus on infrastructural development, including railway projects, major highway construction, power generation, desalination plants, schools, stadiums, and hospitals and clinics.

Within the sector, growth rates for Islamic finance continue to outstrip those for conventional finance, with Shari'ah-compliant assets now accounting for 25 percent of system-level aggregates in Qatar.

About the Author

Steve Troop is the Group CEO of Barwa Bank.

After graduating from Cambridge University in 1979, Steve joined HSBC and worked extensively in the Asia Pacific region, most of the Gulf Cooperation Council countries, South America, and Europe. In 2007 he was appointed chief operating officer of Saudi Hollandi Bank. He joined Barwa Bank in September 2010.

Steve has spent more than three decades in leadership roles in the financial services industry and has far-reaching international experience in retail and branch banking, corporate lending and relationship management, investment banking, insurance, operations, and support services.