Qatar is a vignette of what a robust dollar Sukuk market would look like, but from a non-dollar vantage point, the space is still largely undeveloped. Optimism is running high that the Qatari riyal Sukuk market could be on the cusp of transformational change, but market participants tell VINEETA TAN that certain challenges remain, and the journey may still be a long one.
Shy corporates
In Qatar, two main types of issuers drive the Sukuk market: financial institutions and the government. Together they’ve been propping up the Sukuk sector, more than doubling issuance volume in H1 2024 (122%) to US$500 million.
While Islamic structures account for only about 10% of its total debt capital market, the State has established itself as a formidable dollar Sukuk issuer, which has aided its debt capital market’s ascendency to become the third largest in the GCC after Saudi Arabia and the UAE.
But the gaps are glaring. The riyal Sukuk market is nowhere as successful as its dollar counterpart. Corporates have stayed away from Sukuk, preferring to turn to banks to plug their funding needs.
For a while, it looked like Qatar’s Sukuk issuer base would remain undiversified and the riyal market shallow, until local conglomerate Estithmar Holding came to market about six months ago with a Qatari riyal offering that experts believe has laid the foundation for others to follow (see Page 4 for a case study on the landmark transaction).
“It was a very promising transaction for the future of Islamic instruments in Qatar and we hope this will lead to many other issuances; but it is a gradual process – we have to be patient,” thinks Hadi El Kadi, a senior associate of deal advisory at Al Rayan Investment.
Estithmar’s QAR500 million (US$137.36 million) Sukuk – which was so sought after that a subsequent tap issuance was made to meet demand, interestingly, mainly from retail investors – may be a good indicator of the strong appetite for Islamic investment opportunities, but the indications were plenty, even before this offering.
Half of the banks in Qatar are fully Islamic – a rarity in dual-banking jurisdictions where Islamic outfits are usually outnumbered – and about a third of total banking assets are Shariah compliant. This also means that the potential investor base for Sukuk – which has traditionally been non-corporate investors – is substantial and more often than not, would favor Sukuk over bonds, according to dealmakers.
Promising pipeline
All it takes is one… and that one was Estithmar’s Sukuk for several reasons. Firstly, individual investors were snapping up the paper – underscoring the immense demand for riyal Sukuk.
“Given the fact that this was the first issuance where retail investors were targeted, we have seen a great deal of interest from them and this is growing,” confirms Tahir Hayat Pirzada, the general manager of group treasury and financial institutions of Masraf Al Rayan. “The market is now gearing for more issuances, whether it’s from financial institutions or from the corporate sector.”
Secondly, and rather significantly, it showed Qatari businesses that a Qatari riyal Sukuk can be listed internationally – on the London Stock Exchange specifically – a feat never achieved by any local corporate before, thereby widening the investor base even further.
But apart from this deal clearing the path and assuring Qatari companies that there are merits to raising riyal Sukuk, market conditions are also favorable. Falling interest rates are likely going to push investors to the more lucrative Sukuk market – whether it be in Qatari riyal or dollar.
“The fact that we’ve moved to a benchmark size of QAR350-500 million as opposed to US$350-500 million, means that the [riyal] Sukuk or bond path makes financial sense for medium-sized companies,” opines Akber Khan, the acting CEO of Al Rayan Investment, who revealed to IFN that the firm is in talks with several corporates keen to raise domestic Sukuk.
“There’s a lot of interest… we’re trying to channel it toward the end result where people are actually going to market,” Akber explains. “There’s a lot of activity; I think we will be kept busy for many quarters to come.”
The market has indeed signaled its interest: Gulf Warehousing Company, for example, recently greenlit a QAR2 billion (US$549.45 million) Sukuk program to vary its funding sources. Telecommunications giant Ooredoo and Qatar Energy are also understood to be preparing their entry to the debt capital market this year.
“We have further issuances in the pipeline that have the momentum to carry us into summer,” echoes Lee Irvine, a partner at Simmons & Simmons, who added: “We’re starting to see now with this Sukuk, the broadening of that issuer base to beyond financial institutions and outside of government entities.”
Regulatory impetus needed
Having said that, hurdles remain. Mainly, the listing process is lengthy and documentation cumbersome and these have indeed deterred corporates from going to list in London.
“What would be helpful would be [for the regulator] to facilitate the listing on the Qatar Stock Exchange – that would give a platform for a lot of issuers to list one going forward, and it would be welcomed by a lot of marketplaces,” believes Lee.
IFN understands that the Qatar Financial Markets Authority is working on ironing out the kinks.
“The regulator has been working on this and is near implementing a primary dealer framework for banks to be more active not only in primary issuance but also in the secondary market,” shares Tahir.
A deeper, broader and generally more developed domestic debt capital market will benefit Qatari issuers with smaller balance sheets, saving them from more expensive issuance costs and more complex additional disclosure requirements as demanded by international offerings – hassles that may not be worthwhile considering that smaller firms tend to have smaller funding needs.
A more robust local market would also enable investors – domestic and regional or international – to have more investment options, particularly as the Qatari riyal is pegged to the US dollar. This would support investors in managing their assets and liabilities as they would avoid additional currency risk exposure.
Of course, according to Akber, the onus is nonetheless on the Islamic finance industry to continue to innovate to remain relevant and to continue “to find ways to give investors and customers the products and services they want and not take that for granted”.
But at least, the groundwork has been set – it will be faster and potentially cheaper for Qatari businesses – medium-sized and larger ones – to tap the Qatari riyal market now.
“The hard work is already done, and we are going to reap the benefits but it’s going to be done gradually,” Tahir says realistically. “We’re not going to see a flurry of issuances right away – it’s a gradual process and we will continue to work on that.”
