Dust was still billowing from the ashes of a multitude of financial institutions hit by the 2008-09 global crash when Qatar First Investment Bank, as it was known then, burst onto the scene with half-a-billion dollars and 1,500 of the GCC’s wealthiest citizens as its shareholders.
While most other investors scaled back and soaked up perhaps their worst ever losses, the Qatari bank vigorously delved into more than 20 investments across a variety of markets and sectors in less than three years. Despite the global economic doom, it proved to be an opportune time to launch: the firm has earned a return on investment of at least 30 percent for each of the six investments it has exited, says its new CEO Ziad Makkawi, who was appointed in July.
Today, as the world rides yet another turbulent economic period, the bank — now called Qatar First Bank (QFB) — is moving to share its glory with others via two mechanisms: listing on the Qatar Stock Exchange and building its private banking arm.
QFB is due to list on the exchange in March or April; while it will not be a traditional initial public offering to raise funds, it will give the bank’s shareholders the opportunity to liquidate all or part of their holding and allow outsiders to buy in in smaller denominations.
While a market evaluation is still pending, the bank has an authorised share capital of $687m.
Makkawi, who has worked at various Gulf financial firms including Dubai World’s Istithmar World and Shuaa Capital, says the listing would allow the bank to source capital raising in the future, while also enhancing its brand credibility based on the increased transparency and governance required of public companies.
“All of these things will make us a stronger institution. Being listed gives you credibility with clients and even with some of the government or quasi-government institutions in terms of being able to get deposits from them or have them as clients; it’s a big plus,” Makkawi says.
The 54-year-old, who is French Lebanese, is sitting in the bank’s new lounge, inaugurated as part of its strategy to attract prospective clients to the new private banking arm.
“QFB has traditionally been a firm that invests its own money; since 2008-09, when the bank was established, the investments that we’ve done were principally on the private equity side and exclusively the funds of the bank itself,” Makkawi says. “In the strategic shift that’s happening now, we’re moving from being inward focused - dealing with our own money - to being outward focused and offering our expertise and our balance sheet and our other financial services to an outsider investor audience and to clients from a niche, targeted [group] … of high net worth individuals [HNWIs] and ultra-high net worth individuals [UHNWIs], as well as corporate and institutional clients.
“We aim to provide them with a 360-degree service offering, so we will help a HNWI with his portfolio, we will help him and his family in terms of managing their money, the wealth they have, we will look at their businesses, we’ll provide them with financial advice, we’ll lend to those companies, we’ll take deposits. So we have a very one-stop shop type of approach to a specific and very focused audience base.”
The pivot in strategy first took place in 2013 when QFB was granted its private banking licence, although energy has really only been put into it in the past six months. This critical junction in the bank’s history comes amid low global investor confidence but also at a time when managing assets and diversifying income are particularly important to weather the current poor economic forecasts.
“In general, investor confidence is not good anywhere, including Qatar,” Makkawi says. “I think people are worried because there’s that level of uncertainty. At the end of the day, our economies here [the Gulf] are linked to the global economies through oil prices [and] the currencies are pegged to the US dollar and therefore monetary policies get pegged to the US monetary policies. We’ve seen that in bullish environments and we’ve seen it in bearish environments.
“So the uncertainty about US interest rates, about China, the … global uncertainty, clearly impacts investor confidence. At the end of the day though, especially in a market like Qatar, investors are very much driven by dividend yields.
“So I think the reaction is going to be that investors in Qatar are going to look more closely … at Qatar because it’s a market that they’re familiar with, because there’s less uncertainty. In moments of uncertainty you tend to stay closer to home, and I think people are not comfortable at all taking bets on other markets and big markets.”
However, Makkawi says the geo-political uncertainty in the region at large will see an amount of money being moved to safer markets such as Europe and the US.
“This capital outflow has been something that the region has always seen and I think we’ll continue to see some of that flight to safety, but in very specific assets like the real estate sector,” he says.
The majority of QFB’s clients are Qatari, although each of the six GCC states is represented among the shareholders, each of whom have contributed a minimum of $1m.
These shareholders will play a key role in the bank’s strategy to expand out.
“We’re at the beginning of the road right now, but we have a fantastic source to start with because QFB has over 1,500 shareholders and many of those are HNWIs so that will be our first stop, to target the owners of the bank and then to expand that first in Qatar but then we’ll also talk to other GCC investors,” Makkawi says.
The private banking licence also will allow QFB to consider launching sector-specific funds and grow its assets under management, while opening up some of those assets to outside investors.
“There’s lots of things we can do, that’s the beauty of having this licence is that some of the portfolio companies that we own, at an arm’s length basis, we can possibly lend to, so it creates a lot of dynamic and a lot of opportunities for us,” Makkawi says.
Two key features differentiate the bank, he says: its size allows for more nimble decision making, while it is one of few sharia compliant private investment banks.
Islamic finance, bound by the principals of sharia, including prohibition of earning interest on a loan, has been growing at about twice the rate of conventional finance and is now worth more than $2 trillion annually.
Makkawi says it is more than just the growth of Muslim investors that has fuelled the sector.
“The whole notion of ethical banking is what’s really, really growing globally,” he says. “You’ve had multiple global shocks, like 2008, that have been directly as a result of over-leveraging lending without any security. Financial engineering that, ultimately, nobody understood and I think there’s been a systemic thereat to the global banking system, one that we miraculously escaped.
“We continue to have massive amounts of debt in the world, shifting between the public sector and the private sector. We have consumer societies that are based on leverage and people living beyond their means; there’s clearly, in my opinion, a distortion in the way we live and the way we consume and the way we borrow. So the ethical angle to that — and what sharia finance imposes — is a certain discipline [that] prevents you from going overboard on the lending, or having the relationship between a lender and a borrower be usurious.”
Many Muslim countries also remain more accustomed to sharia-compliant finance because their formal banking systems are relatively young, less than 100 years old, he says.
“[The finance industry] is still something new and people really live by the precepts of Islam and the religion, and so if given the choice between a sharia compliant financial institution and a conventional institution they will opt for the sharia compliant one. What’s changed dramatically over the last few years is that, whereas 10-15 years ago there were very few things that you could do in a sharia compliant fashion, today there are very few things that you cannot do and probably the things you cannot do you shouldn’t be doing anyway,” Makkawi says.
“So this new technology and the increased level of sophistication in finance products that are sharia compliant is … growing everywhere and there’s huge potential for it.
“This is why QFB, I believe, is extremely well positioned because our intent is to deliver a quality service offering quality products as sophisticated as any conventional one but within the guidelines of sharia, and I think that’s a great strategy and a very strong story.”
Islamic finance is penetrating almost the entire globe, from Malaysia and Indonesia, which has the world’s largest Muslim population, to India (200 million Muslims), the Middle East, countries in Africa such as Nigeria and Sudan, and London.
But the infancy of the sector has left it lacking in regulation, particularly any kind of global coherence. Malaysia, which has the largest and most liquid Islamic finance sector in the world, is attempting to establish sharia standards and individual Gulf states, as well as Dubai, have announced intentions to create sovereign-wide regulations.
“Clearly that’s one of the big issues in sharia compliant finance — there’s no standard, it’s not even at the country level, it’s at the company level,” Makkawi says. “Homogenising the regulatory environment will go a long way to increase and facilitate and create growth in the sharia compliant finance industry. But I think we’re moving in the right direction because there’s more communication, even amongst the Sharia scholars … [around] some kind of consensus as to what is sharia compliant and what is not.”
Makkawi also is positive about the “tremendous progress” that has been made in financial regulation across the industry in general in the Gulf post the financial crisis. Integration into more developed markets and the UAE and Qatar’s inclusion in the MSCI index has brought benefits but there is still room for improvement, he says.
“It’s always a work in progress and its almost better to be four to five years behind because things are changing so rapidly globally from a regulatory point of view that sometimes they do things and reverse them,” he says. “Because of the last global financial crisis, the regulators in Europe and the US are the ones who are driving the developments in the industry … there’s a lot of issues that haven’t come here yet because we haven’t made the same mistakes, if you will, that some of these more global, large institutions have done and we can learn from those mistakes. And the regulatory changes, by the time they get here have been tested, they’ve been improved.”
In Qatar, Makkawi says there has been “a lot of talk” in recent months about streamlining regulations between the country’s various regulators, including the Qatar Financial Centre Regulatory Authority, the Qatar Financial Markets Authority and the Central Bank.
“It’s going to be very good news for us to at least have more clarity and transparency,” Makkawi says.
While QFB has been primarily focused on assets and established companies to date, Makkawi is also interested in backing entrepreneurs. Having himself set-up several financial companies — including Lebanon Invest and Algebra Capital — Makkawi is passionate about supporting start-ups, who he says are the “engines of growth”.
He has previously considered personally launching venture capital funds to invest in young entrepreneurs in the region, but says while support in the GCC — particularly in Qatar and the UAE — has grown in recent years, it has not always been efficient. Public-private partnerships in which the government acts as guarantor for an entrepreneur seeking a bank loan “worked very well” but a prosperous start-up environment requires far more than funding, he says.
“Money in itself is not enough, you need to create mentorship programs, eco-systems. Just giving out money to young Qataris or young Emiratis just to say ‘we’re doing it’ is not enough, there’s a lot of background that needs to be prepared and I think that knowledge and skill set is beginning to seep through and is beginning to happen,” he says.
“Certainly, as Qatar First Bank we’d like very much to be engaged and involved in that because even from our core business, which is dealing with HNWIs, we also want to deal with their children and provide them with some kind of framework, because some of those people will also become entrepreneurs; they don’t want to go work in an aluminium factory or they don’t want to go into a car dealership business or a construction business, they want to do something in social media or whatever it is. So we would love to find a program in terms of finding ways of contributing in some way to this effort.”
Makkawi also is considering the $60bn art industry as an alternative investment for QFB.
“I do believe that art has been and continues to be a very good investment. Art has become a recognised asset class globally,” he says. “You don’t get the same level of volatility but you do need to know what you’re doing because it’s a big market.”
Makkawi started his career with JP Morgan on Wall Street but he has spent the past two decades in the Middle East, including in Dubai between 2000 and 2015. Prior to joining QFB, he led Istithmar World, the private equity arm of Dubai World, the emirate’s investment company. The parent firm was famously forced to restructure about $25bn of debt to avoid bankruptcy in 2011 but Makkawi says Istithmar’s multi-billion dollar portfolio was a strong business in its own right.
“When I went to Istithmar it had a very interesting and good private equity portfolio, however, Istithmar was part of Dubai World and Dubai World underwent a debt restructuring with many, many, many banks and the Istithmar portfolio was earmarked for exit, so my job was very clear: to rationalise and exit the private equity portfolio so that the funds would go to repay some of the Dubai World debt, so that’s what we did,” Makkawi explains. “But the portfolio itself was not having a bad time at all, it was actually a good portfolio when I got there,” he adds, declining to comment on which investments had been exited at the time of his departure mid-last year, other than to say that the firm still had several assets.
Makkawi says he also will be exiting several of QFB’s investments as it turns over old stock for new between now and 2020. Armed with new investors, a more powerful licence and a publicly listed name within the coming weeks, the bank will be high on the watch list.