The Qatar Central Bank (the "QCB") stated in its recent Financial Stability Review for 2018* that efforts were in place to harmonise the Shariah regulatory framework for the Islamic banking sector in Qatar. We take a closer look at some of these initiatives and what they mean for the Islamic finance market.
The recently announced initiatives include establishing a centralised Shariah supervisory body and preparing Shariah standards to govern various Islamic banking products and transactions. Such efforts by the QCB illustrate a maturing Islamic finance industry in Qatar. They are also in line with various steps taken in other countries such as Malaysia and Indonesia and elsewhere in the GCC to harmonise Shariah products and practices and to ensure a higher level of supervision. Centralised supervision is of increasing importance in the region given past controversies surrounding non-standard structures adopted by certain Sukuk issuers.
As the market awaits further details on how the centralised Shariah supervisory body will operate, lessons from other jurisdictions will be relevant. For example, clarifying how the rulings of such a body would sit with the judicial apparatus in Qatar would be essential given the experiences in Malaysia. This would be important where the rights and remedies of parties would differ depending on whether a transaction was governed by secular law or subject to rulings from a Shariah supervisory authority. The Federal Court of Malaysia however confirmed in a recent case1 that rulings of Bank Negara Malaysia's Shariah Advisory Council were binding on the Civil Courts of Malaysia.
Shariah standards and the Qatar Financial Centre
The Islamic finance market in Qatar is generally aligned with the Shariah standards published by AAOIFI2. It would therefore be important that any Shariah standards published by the QCB maintain consistency with these standards, particularly for international financial institutions looking to do Shariah compliant business with Qatari institutions.
It is also important to recall the distinction between the State of Qatar and the Qatar Financial Centre (the"QFC"), whereby the latter is a separate platform through which to conduct financial business in and from Qatar. The QFC has its own framework for regulating banking and finance in Qatar, although the QFC supports the centralisation of Shariah supervision at a national level3. Further clarity will be required as to whether the QCB's new framework would apply to QFC-incorporated institutions. In any event, even if QFC-incorporated institutions are not required to comply with the QCB's new Shariah standards, we would expect QFC-incorporated institutions to comply with the standards informally given the way the inter-bank market in Qatar operates.
We will be publishing further insights on these developments once further information becomes available.
1 JRI Resources Sdn Bhd v Kuwait Finance House (Malaysia) Bhd (2019)
2 Accounting and Auditing Organization for Islamic Financial Institutions