A Case Study on Qatar Development Banks Journey towards Shariah Compliance

Conventional to Islamic Finance: Trends, Experiences and Transformations 8 SETTING THE CONTEXT – INTRODUCING QDB 8 a.      Historical background of QDB (formerly Qatar Industrial Development Bank). 9 Understanding the Impact of QDB 11 THE SEEDS OF TRANSFORMATION 18 DETERMINANTS OF TRANSFORMATION, THE CHALLENGES/DIFFICULTIES 25 EXPLAINING SUCCESS FACTORS 27 LOOKING BACK, LOOKING FORWARD 31 a. Similar trials in other countries 31 b. Inclusive Development, Financial Sector 31 c. What is even more striking being that this transformation is achieved in less than five years. Given the pace and intensity, the case of QDB necessitates being examined and conveyed more closely in order to showcase the possible lessons that could be driven and policy lessons to be learned by decision makers in the region and in the world. Institutions are understood as sets of social and political relations that contain distributional instruments in allocating power and economic resources.

The transformation of QDB has not been exempt from these dynamics. While transformation is essentially a shift in economic structures alluring to banking and finance according to Shariah, the political and social aspects still exist. b. Islamic Finance and Inclusive Development In the Islamic finance, there is a dynamic execution of the Islamic Law (Shari'a). One of the primary aspects of the Islamic finance is that interest (Riba) is impermissible based on the Quran Al-Baqarah, 2:275 “Allah has permitted trade and has forbidden riba3”. Thus, contrary to conventional banking where predetermined payments are charged on the principal loan, the Islamic loans are not charged. Besides, in Islamic financing, uncertainty and speculation (gharar) are prohibited because the outcomes in a contract are supposed to be done with perfect knowledge.

c. Qatar & Market for Islamic Finance Since Qatar’s independence in 1971, the state has witnessed crucial changes both externally and internally. In 1972, Qatar joined the International Monetary Fund and World Bank for Construction. The Society of Commercial Banks was approved by the Ministry of Finance to operate in Qatar and hence in 1973, there was the establishment of the Qatar Monetary Agency in 19735. The issuing of currency and organization of the economic activities as well as the stability and conversion to other foreign currencies. Qatar has about 18 banks, 7 national, 4 Islamic, and 7 foreign and there has been a remarkable monetary performance, adequate capitalization, and quality assets with governmental support as well as booming net margins7. Qatar stands out in the Islamic finance sector because of the 7.

7% and 23. 5% of the international, and national Islamic banking shares. With many projects such as sporting amenities, housing, light rail system construction of transportation modes, as well as metro and petrochemicals system, there is a great opening for Islamic banks because of the sharia-compliant instruments. QDB started in 1997 when it was established by Emiri Decree as the Qatar Industrial Development Bank that aimed to expand and diversify the economy of the private sector with a capital of 200 million Qatari Riyals9. According to the QDB Report10, the tasks identified by the father of Emiri, his Highness Sheikh Hamad Bin Khalifa Al Thani. In 2006, the government expanded the mission of this bank greatly enabling it to offer subsided loans and take part in private sector-managed tourism, health, agriculture, and health projects.

The paid-in the capital became QR1bn and was promised a yearly growth by QR1bn yearly. The support was because “In Qatar, we are concentrating on the people through investments in education and health. In 2014, the bank shifted away from the conventional business and launched Isteshara program, completed one Al Furjan Markets winning the Best SME Loan Award. The bank became a Qatar’s Business Incubation Center launching embracing 35 organizations, launching over 100 opportunities to Qatar rail and 25 General Authority for Tourism openings13. Furthermore, they had 44 Al Furjan Markets startup of the monthly education/informative program on house construction building. In 2015, QDB launched an internet and phone Housing loan program and Ask Us Service that offered responses for beneficiaries of the housing loans.

Likewise, there were the Microbusiness national home-based business development program, an entrance into the capital fund, the launching if Jahiz 1 Project. Understanding the Impact of QDB The QDB has had a great impact on the GDP of Qatar. A keen analysis of the GDP’s from 2011 to 2017 shows that there is a flow from 4,584 to about 7,264 billion. In terms of value, QDB has been growing from 2011 to 2013 before the slow-down of the global economy as a result of the fall in the prices of oil after 2013. The growth went down up to 2017 where it resumed and increased in spite of the blockade of certain states. See the graph below: Source: QDB Analysis p. Similarly, the technical and assistance amenities rose up to 26 percentage share in 2017.

In consideration with the direct Lending, QDB offers long-term business and project financing loans in construction, working capital, financial solutions, and plant equipment, credit insurance for exporters sectors. Currently, the bank has 5. 3 billion outstanding loans to more than 690 active clients. Besides, the quantity of the approved financing reached QR 1. The results of a joint survey by the World Bank and the Union of Arab Banks show that bank lending to SMEs in the GCC region accounts for as low as 2% of the overall loans. That means Qatari banks have principally ignored the SMEs recording a mere 0. 5% of the entire lending case as equated with the GCC average of 2% and the non-GCC MENA average of 14%. As a national development bank, QDB introduced the Al- Dhameen Partial Loan Guarantee Program in 2010.

In 2017, the bank increased the portfolio size YoY by 87 % with 317M overall approvals for 214 SMEs. Ultimately, the importer database provides data on importers in principal target markets to the appropriate exporting community via a database16. The final product is the exporter publicity program in TASDEER and it enables the designing and producing of appropriate public material for exporters who target particular markets. Furthermore, in the Advisory business support service, the bank stood out for it provided business people with business knowledge, entrepreneurship education, techniques, and facilities that enhance competitive levels in the global and local markets. As such, the six organizations incubated, rating 21 SMEs, executing about 500 feasibility studies. Among the financed activities are the 53 in the initial 3 quarters in 2017 and more than 1100 amenities that were granted were worth QR 30m for Isteshara amenities.

In the benchmarking, the leaders state that QDB started Suhaib in 2008 with a housing loan. Between 2011 – 2012 – Issa Al Kuwari got necessary approvals hence asset or non-asset loans were based on the client type. With the absence of ijara (purchase and lease back, the bank can have tawarruq as long as they conduct asset cost inspection and estimation in construction and engineering departments through an external audit of financial statements. QDB began operating Islamic way in 2012 after clients asked for it, the Shariah board provided gaps while QDB give business case. Contrarily, from the interview with the CEO indicated that the organization saw asset-based financing as more demanding and had a prioritization of QDB manufacturing, agriculture, education, and health. The first occurs through purchase and leaseback otherwise referred to as Ijara ending with ownership.

In this provision, the customer can sell an asset for the current project to the bank. Such a purchase and leaseback demands the assessment and approval from the EPD or technical expert team. As such, the client might continue using the asset, nevertheless, in the course of time, Ijara rentals are paid to the bank that has owned the asset. QDB could finance new isolated Tawarruq pact under relations founded in the Sharia laws. Organizational aspects too place the need for transformation. The banking sector of Qatar plays a crucial role in the economy especially following the exploration and exportation of oil since the year 1949. By 1954, Qatar had the Eastern Bank which is currently known as Standard Chartered Bank as the only banking amenity20.

However, more banks emerged among which are the British Bank of the Middle East, the Othman Bank, the Arab Bank, and the Lebanese Bank. Banks expanded services but the government needs kept rising. Since, the Qatari community is more religious and expecting Islamic products, the conversion based on 2011-2. In the interview, the CEO mentioned every 2/3 were expecting Islamic processes and walk out without financing the organization begun seeing the need to have this facility. The Qatari customers wanted the housing loan and 90 percent were interested in Islamic but after implementation, they moved to SME. Giving the option to customers and gradually target more portfolios. Looking at what the future holds for QDB one understands why it has to transform. The organization will target anyone or a group with active Qatari membership of individuals above 18 in seed funding program.

The organization still maintains the vision of the pioneer and aims at developing the people rather than making profits. Besides, the program will follow a sector agnostic tactic focusing on the innovative sustainable and scalable entrepreneurs. The seed funding will observe the Shariah through a convertible Musharaka base where it merges its capital with the client’s while aiming to make a profit before conversion into equity. In the process, there will be profit and loss distribution with initial conversion agreement. According to Sindi, the bank aims at boosting the society within which it exists. In one seminar that was held in Tunisia Sindi said, “We are definitely looking to be sustainable, looking to have an impact on communities. The whole mindset is different, refined, visionary, aligned with the mission of bank and all sectors of the bank24.

” Currently, it can be seen that QDB has a lot of business initiatives that can be seen through the direct and indirect financing, exporting and development programs and related packages that they offer to citizens. The bank facilitates the economic development and growth of Qatari through its financing services for small and medium-sized industrial projects in Qatar. The complication issues within conversion, regulations, and external partners section that will have a lot of paperwork. Moreover, the bank experiences challenges in the customer, target customer, customer service sector due to perception to practice and values therein27. Then the financing cost pauses expenses, QRB rate, service fee, and admission fee challenges. Besides, there might be challenges in designing of new products and the relationship between workforce and managers due to resistance.

On the other hand, the unforeseen challenges in the market of Qatar relies more on the oil exportation. The bank is led by an executive board, the Shariah board, as well as the CEO who is on the top. It has the key executives who include the CEO Mr. Abdulaziz Bin Nasser Al-Khalifa, the business financing director, Mr. Amre Ahlar, the head of banking operations, Mr. Hassan Khalifa Al-Mansoori, the head of Internal Audit, Mr. The organization is fixed in many aspects by the experts in the banking knowledge and the Shariah law, the problem solving and relationship managers. LOOKING BACK, LOOKING FORWARD a. Similar trials in other countries As stated earlier in the Islamic Finance, many states have put into consideration Islamic banking since the financial products and value of the Islamic banks30.

There are banks like Saudi National Commercial Banks in the Arabian Gulf, Kuwait and UAE’s National Banks and Saudi Arabia’s Aljazerah bank are conventional banks yet they have incorporated Islamic products in their operation31. The World Islamic Banking Conference indicates that Qatar International Islamic Bank and Qatar-based Masraf Al Rayan with the incomes of 24. d.      Circular Economy Economic Diversification the key commendable role that QDB has in Qatari because of the support the bank gives to the SME’s. According to H E Sheikh Abdullah bin Saoud Al Thani, the chairman of the QDB bank, “the bank has focused on redoubling its efforts to support entrepreneurs through various initiatives that create opportunities for local industries despite the many regional and international economic challenges33”.

Through unique models, best practices, modern innovative techniques, and strategic collaborate techniques, QDB finances many projects and adds value to the local economy. Such programs include the Al Dhameen that totaled QR303m in 2017, 300 guarantees, 185 exporters development of more incubation centers, launching awards, conferences and Jahiz projects34. Work Cited A al-Ghorairi, A. "The evolution of Qatar banking sector: A short history. " Gulf Times (20, March 2016). <http://www. gulf-times. Conventional Banks: An Empirical Study on The GCC & MENA Region. <http://www. bue. edu. eg/pdfs/BAEPS/Manar%20Mahmood%20Al-Gazzar. <https://www. forbesmiddleeast. com/en/in-conversation-with-qdbs-ceo-abdulaziz-bin-nasser-al-khalifa/>. Bloomberg. "Qatar Development Bank. "Qatar Development Bank (QDB) Signs MoU With Islamic Corporation For The Development Of The Private Sector (ICD) To Bolster Development And Growth Of SMEs In Qatar.