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Insights and commentary on legal developments in the Middle East

New EU Sanctions Target Russian Oil Sector, State-Owned Banks and Military Exports

Posted in Banking and Finance, Capital Markets, Oil & Gas, Technology

The European Union (EU) enacted Council Regulation (EU) No 833/2014 (the Regulation), which contains ‘Stage 3’ sanctions against Russia. These sanctions resemble – but in other ways are different – from the latest US sanctions, and they amount to the stiffest anti-Russian actions taken by Europe since the end of the Cold War. Perhaps most significantly, the EU’s new sanctions are targeting sectors in Russia’s economy which are not directly connected to events in Crimea and eastern Ukraine, as seen below:

1. Technology Exports for the Oil Industry. Though the EU will not target Russia’s natural gas sector, it has implemented restrictions on the export to Russia of certain ‘technologies’ used in deep-sea drilling, arctic exploration, and shale oil extraction.

2. Access to EU Capital Markets. Article 5 of the Regulation is restricting access by certain Russian State-owned banks (those which are at least 50 per cent owned by the Russian state), such as Gazprombank, VTB Bank, VEB, Rosselkhozbank and Sberbank, from EU capital markets.

3. Exports to Russia’s Arms Trade. The EU has now barred new contracts for arms imports and exports between the European Union and Russia. Article 2 of the Regulation also prohibits bars exports of dual-use goods and technology to Russia for military-end use.

Further information on the EU’s latest sanctions on Russia can be found here.

You might also be interested in:

Ukraine Crisis Update: US and EU Expand Sanctions, Restrict Certain Energy-Related Exports to Russia (July 30, 2014)

Ukraine Crisis Update: US Imposes New Sanctions on Major Russian Banks and Energy Companies (July 18, 2014)

Ukraine Crisis Update: US and EU Expand Sanction Lists; US Imposes Export Restrictions (April 29, 2014)

Ukraine Crisis: US Expands Sanctions to Target Certain Russian Business Interests, Broadens Framework For Future Sanctions (March 21, 2014)

Ukraine Crisis Update: US and EU Expand Sanctions (March 18, 2014)

Ukraine Crisis: US and EU Respond with Targeted Sanctions (March 7, 2014)

Photo: Latham & Watkins LLP

How Project Bonds Can Release Asset Value

Posted in Capital Markets, Project Development and Finance

Whilst project bonds have for some time been a popular source of financing for projects in the US, they have historically been slow to gain momentum in other parts of the world, including the Middle East.

A number of explanations have been advanced for this – in the Middle East, the deep pool of bank market liquidity for Middle East projects, supplemented by funding from export credit agencies and development banks, has generally been sufficient to meet financing requirements.

However, more recently, project sponsors have become increasingly focused on the need to release bank lending capacity that may be locked up in operational projects, in order to fund the construction of new projects. At the same time, institutional investors (particularly US-based pension funds, asset managers and similar investment funds) have focused on emerging market project bonds as a long-term asset class that matches their long-term liabilities profile, and offers a better yield than can be achieved in the low interest rate environment prevalent in developed markets.

These factors have resulted in a renewed impetus for the project bond market in the Middle East, as highlighted by the recent Shuweihat 2 project bond issuance.

Read more about the development of project bonds in the Middle East here.

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Saudi Opens Market to Foreign Financial Institutions

Posted in Capital Markets, Saudi Arabia

In a long anticipated measure, the Saudi Council of Ministers (which is the highest authority in the Kingdom) issued a resolution on 21 July, 2014 authorizing foreign financial institutions to directly buy and sell stocks listed on the Saudi Stock Exchange (Tadawul). The resolution also authorized the Saudi Capital Market Authority (the “CMA”) to set the timing and rules for such participation. On July 22, 2014, the CMA announced that it will publish draft rules for foreign financial institution participation next month, which shall include a 90 day public consultation period. The CMA plans to implement the final rules before the end of 2014, and open the market for foreign financial institution investment during the first half of 2015. 

Currently, trading of stocks on Tadawul is restricted to Saudi nationals, GCC nationals and foreign expatriates holding valid resident permits in the Kingdom.  At present, foreigner financial institutions may only invest in the Saudi market through total equity return swap agreements with local brokerage firms and mutual funds.

Some key issues resulting from such authorization include:

Classification of Qualified Foreign Investors

Both the Council of Ministers resolution and the CMA announcement refer to the authorization being for “foreign financial institutions” to trade on Tadawul, but it is not yet clear what additional requirements will be set for determining which foreign financial institutions will qualify to directly access the market and on what basis.  Presumably, qualification will include evidence that the foreign financial institution is licensed in its home jurisdiction and evidence that the foreign financial institution is otherwise “sophisticated” (which could include a minimum amount of assets under management or minimum length of operating history).  Such qualification criteria is expected to be included in the rules which will be published by the CMA.

Maximum Foreign Ownership

Foreign ownership of shares issued by a Saudi listed company may also be subject to certain limitations and ceilings applicable to (i) each foreign financial institution, and (ii) the overall foreign ownership of such shares.  In addition, certain shares of Saudi companies might also be excluded from foreign investment (e.g. Saudi real estate companies investing in real estate projects in the two holly cities, Makkah Al Mukkaramah and Al Madinah Al Munawarah).

Income Tax

The Saudi Income Tax Law (Art. 10) states that capital gains realized from disposal of securities listed on Tadawul is exempt from income tax.  It is yet to be determined whether the Department of Zakat and Income Tax (DZIT), the regulatory authority responsible for enforcing the Income Tax Law, will extend the said exemption to apply to foreign financial institutions. It is worth noting that at present, capital gains realised by foreign financial institutions through total equity return swap agreements with local brokerage firms are subject to (i) a 20% capital gain tax, and (ii) a 5% withholding tax.

Debt Capital Markets

While still a nascent market, there are a number of publicly listed Islamic debt instruments (sukuk) which trade on Tadawul.  Both the Council of Ministers resolution and the CMA announcement only refer to opening of trading “stocks” listed on Tadawul, and do not refer to other securities traded on Tadawul.  Therefore, it is anticipated that the rules which will be published by the CMA will be limited to regulating the trading of equities by foreign financial institutions on Tadawul and trading of debt instruments will remain limited to Saudi and GCC nationals, unless separate authorization and guidelines are published.

Mergers & Acquisitions Regulations

The CMA issued the Mergers and & Acquisition Regulations which set forth general merger and acquisition provisions applicable to listed companies.  These regulations apply to all mergers and acquisition transactions of companies listed on Tadawul where there is: (a) a restricted purchase of shares; (b) a restricted offer for shares; (c) a takeover offer; or (d) reverse takeover.

It will be interesting to see whether the new CMA rules would enable foreign financial institutions to carry out takeover offers of Saudi listed companies.

Participation in New Subscription of Shares

The Council of Ministers resolution and the CMA announcement are both silent  as to whether foreign financial institutions may participate in Saudi initial public offerings (IPOs), whether taking the form of sale of shares or issuances of new shares.  At present, only Saudi nationals may participate in IPOs.  It will be interesting to see whether the new CMA rules would enable foreign financial institutions to participate in such IPOs.

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Top 4 Innovations Driving Growth in the Global Sukuk Market

Posted in Capital Markets, Islamic Finance, Malaysia, Qatar, Saudi Arabia, United Arab Emirates

The Sukuk Opportunity

Total Sukuk issuances for 2013 stood at approximately US$120 billion and the Sukuk market is likely to sustain double-digit growth in the coming two to three years with assets in Islamic finance expected to reach US$2.8 trillion by 2015.

The growth of the Sukuk market has allowed investors to diversify their portfolio and invest in credit that they would not otherwise have access to, such as Islamic institutions, which only raise funds in a Shari’ah-compliant manner. The future of the Sukuk market is one of innovation, where new assets, structures and markets continue to create new opportunities for investors. Based on our experience and deal flow from 2013 and first half of 2014, we expect to see four main trends continue to develop in the Sukuk market, namely:

  • Longer Term Funding: The financial crisis generated greater awareness in the Middle East on the advantages of longer term funding options. Historically, market perception assumed that getting conventional investors in the US to invest in long-term Sukuk would be time-consuming and a largely unsuccessful endeavour. However, Saudi Electricity Company successfully issued the world’s first international 30-year Sukuk in April 2013, which was issued to investors in the US pursuant to Rule 144A of the Securities Act 1933, as amended, which has provided assurance to the market that US investors are becoming increasingly willing to invest in longer term Sukuk. The success and volume of interest shown by global investors in the inaugural 30-year international Sukuk of Saudi Electricity Company and the subsequent 144A Sukuk issuance by the company in April 2014, means that these issuances will no doubt be replicated by other companies in the Middle East and Asia seeking to obtain longer term financing.
  • Issuance of Innovative Sukuk Instruments: Abu Dhabi Islamic Bank kick-started this innovation when it issued US$1 billion worth of additional Tier 1 capital certificates in 2012, representing the world’s first Basel III compliant Tier 1 Sukuk issuance. This ground-breaking issuance has paved the way for other banks in the Middle East and Asia, both Islamic and conventional, to follow their lead and has shown that Sukuk issued for the purposes of capital raising can generate significant investor demand among both conventional and Islamic investors. Most recently, Latham advised Banque Saudi Fransi on its SAR2 billion Tier II Sukuk issuance through a private placement in the Kingdom of Saudi Arabia.
  • Increased Use of Intangible Assets: Ooredoo successfully issued US$1.25 billion Shari’ah-compliant Sukuk under its US$2 billion trust certificate issuance program, the first Sukuk issued in the Middle East that utilized an innovative “airtime” Sukuk structure. The transaction signifies the market’s increasing acceptance of intangible assets as the basis for Shari’ah-compliant Sukuk issuances and signifies a rapidly evolving market for Shari’ah-compliant products in the Middle East. The increased use of intangible assets in Sukuk structures should serve to widen both the base of issuers, and the frequency with which they can access the Sukuk market.
  • Growth in Cross-Border Sukuk: Gulf issuers are beginning to tap into Malaysia’s highly liquid Sukuk market, the world’s biggest Sukuk market which accounts for appropriately 65% of all Sukuk issuances. Al Bayan Group Holding Company was the first Saudi issuer to issue a Ringgit denominated Sukuk, with the issuance of RM200 million Sukuk Wakalah due 2016 under a RM1 billion Malaysian Ringgit Sukuk Programme. The ringgit is fast becoming a growing, credible alternative to the US dollar for non-Malaysian issuers. This trend is facilitating more interdependence between the Asian and GCC Sukuk markets as GCC issuers look to benefit from Malaysia’s large and diversified pool of investors and available liquidity.

Click here to read more about the future of the Sukuk market and the development and management of an Islamic debt portfolio.

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How the GCC Can Boost Confidence in its Local Exchanges

Posted in Capital Markets, Qatar, Saudi Arabia, United Arab Emirates

GCC ExchangesThe Gulf Cooperation Council (GCC) countries accounted for IPO issuances valued at US$1.1 billion in 2013, according to Bloomberg. Notably, Qatar Exchange bounced back this year with the successful IPO and listing of Mesaieed Petrochemical Holding company Q.S.C. (a Qatar Petroleum Subsidiary), the first IPO in Qatar since 2010 and the first under the current listing rules of the Qatar Financial Markets Authority.

With momentum returning to local exchanges combined with increasingly favourable market conditions, the GCC IPO market is expected to post strong growth in 2014.

Top 3 Drivers of Middle East IPO Growth

  1. Increased investor confidence in GCC IPO markets.  Given the lull experienced in regional IPO activity, companies have adopted a cautious approach when considering listing shares. A demonstrable track-record of successful listings on the local exchanges will entice potential issuers who are seeking access to capital.
  2. MSCI upgrade. Both the UAE and Qatar were recently upgraded from “frontier” to “emerging” market status by MSCI, which is among the criteria used by a large number of institutional investors and private equity funds to identify markets in which they can invest. It has been reported that the upgrade may draw as much as US$500 million of new investment into Qatari and UAE securities with the entry of foreign institutional investors and passive or index-tracking investors. The anticipated impact of the MSCI upgrade on local exchanges is yet to materialize however it is expected to end the GCC’s reliance on retail investors by creating a more attractive investment environment for institutional investors. The upgrade, which took place in May 2014, may encourage regulators, companies and banks in the UAE and Qatar to revise their foreign ownership restrictions, which will in turn attract more institutional capital to IPO markets.
  3. Improved disclosure mechanisms. GCC local exchanges are seeking to match the disclosure standards of their European and US counterparts. Currently, the enforcement of disclosure mechanisms, transparency and corporate governance in the GCC is developing in line with the more mature bourses. Best practices are set to emerge in the region as the exchanges mature and MSCI inclusion imposes best practices onto the market.

Found this interesting? Related posts about capital markets trends in the UAE can be found here, here and here.

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Qatar Amends Regulations and Issues Rules as MSCI Upgrade Comes Into Effect

Posted in Capital Markets, Qatar, Regulatory

Qatar ExchangeQatar, along with the UAE, has been upgraded from “frontier” to “emerging” market status by MSCI (an upgrade that is now in effect), which is among the criteria used by a large number of institutional investors and private equity funds to identify markets in which they can invest.

It has been reported that the upgrade may draw as much as US$500 million of new investment into Qatari and UAE securities with the entry of foreign institutional investors and passive or index-tracking investors.

In response to its upgrade, Qatar announced that it proposes to amend foreign ownership restriction rules imposed on companies listed on the Qatar Exchange.

Amendments to the foreign ownership restriction rules imposed on companies listed on the Qatar Exchange

On 27 May 2014, an Emiri direction was announced approving the amendment to existing regulation in connection with restrictions on foreign ownership in companies listed on the Qatar Exchange. Pursuant to the direction, the ceiling for non-Qatari ownership in companies listed on the Qatar Exchange was increased from 25% to 49%, subject to each company amending its memorandum and articles of association approving any proposed increase up to 49%. This replaces the requirement to obtain an exemption from the Council of Minister in connection with any increase above the 25% ownership threshold as set out under applicable laws in Qatar. The percentage of non-Qatari ownership will be calculated based on the total share capital and not the free float. Furthermore, it was announced that citizens of the countries comprising the Gulf Cooperation Council will be treated equally to Qatari citizens in connection with ownership of shares in companies listed on the Qatar Exchange. The announcement of this increase comes before the much anticipated MSCI Inc. upgrade for Qatar to an emerging market.

The QFMA issues its own rules on Mergers & Acquisitions

The Qatar Financial Markets Authority (QFMA) has issued five new regulations including its own set of rules in relation to the merger and acquisitions of companies listed on the Qatar Exchange (“M&A Rules”). It appears that the new M&A Rules are intended to complement existing merger and acquisitions regulations set out in Law No. (5) of 2002 Promulgating the Commercial Companies Law.

To find out more about Qatar’s MSCI upgrade and the impact on regional capital markets, click here.

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An Introduction to Non-Profit Incorporated Organisations in the DIFC

Posted in United Arab Emirates

DIFCWhile the Dubai International Financial Centre (the DIFC) remains primarily focused on the financial services industry, its stable and sophisticated legal and regulatory regimes have increasingly attracted organisations in the culture and arts, retail, leisure and — more recently — the non-profit sectors.

To date, only a handful of non-profit entities have been established in the DIFC.  Yet, the more recently introduced regulations allowing the creation of the Non-Profit Incorporated Organisations (NPIOs) may lead to increased interest. Nonetheless it remains unclear how the NPIO will fare as an alternative to pre-existing entities in the DIFC such as the company limited by shares (Ltd.) and limited liability company (LLC).

Sector Diversification in the DIFC

While the majority of entities based in the DIFC are commercial companies, a number of non-profit organisations maintain a presence in the centre. These are non-profit industry bodies rather than charities in the conventional sense. The DIFC’s focus on financial services most appropriately caters to this class of organisation, but the recently introduced NPIO model is not limited in sector and could fit any non-profit purpose permitted under DIFC and UAE laws.

Ltd./LLC vs. the NPIO

The DIFC NPIO entity — introduced in 2012 pursuant to the NPIO Law and the NPIO Regulations — is specifically designed for entities operating in the non-profit sector.

  • As with an Ltd. or a DIFC LLC, an NPIO is a legal entity with a personality separate from that of its members. However, unlike an Ltd. or an LLC, an NPIO does not have a share capital or membership interest, and therefore no individual or entity is required to serve as its shareholder or owner, and the minimum share capital requirements do not apply.
  • A degree of uncertainty remains as to how NPIOs will be used and regulated. Whereas the Ltd. and LLC are similar to their equivalents in more established jurisdictions, the NPIO is a more sui generis entity without significant international precedent.
  • NPIOs are subject to a number of drawbacks and restrictions which potential new entrants or existing non-profit entities currently established in the DIFC under alternative structures may find unattractive, including various restrictions in relation to the functions that an NPIO may conduct, such as a prohibition from conducting “financial services” subject to DFSA regulation and ancillary requirements specific to NPIOs as opposed an Ltd/LLC. As such, it remains to be seen whether the vehicle will take off and become the entity of choice for the non-profit sector in the Middle East.

For a more in-depth analysis of setting up an NPIO in the DIFC, click here.

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Iran’s Nuclear Agreement Negotiations Ease Certain US and EU Sanctions

Posted in Export Controls

Earlier this year, the International Atomic Energy Agency confirmed that Iran had met its initial obligations under the Joint Plan of Action (Joint Plan) with the “P5+1” (the United States, the United Kingdom, France, Russia, China and Germany). Iran’s suspension of sensitive nuclear activities triggered temporary relaxation of certain sanctions, but most restrictions and an aggressive enforcement climate remain in place. The US government has cautioned that the sanctions relief is “limited, temporary, targeted, and reversible.”

Limited Impact on Direct US Sanctions Against Iran

Comprehensive US trade and economic sanctions have prohibited US persons and US companies from engaging in or supporting virtually all forms of business involving Iran. These sanctions generally remain in place.

Limited Exceptions to the Rule

Targeted Impact on Secondary US Sanctions Against Iran

The US Congress and the Obama Administration have added various extraterritorial sanctions measures that target trade and financial activities between non-US parties and Iran, even if the non-US parties have little or no connection to the US. While the Joint Plan eases certain of these “secondary” sanctions, the relief is subject to significant limitations, both in terms of timing and substance.

  • Time Limitations – Activities pre-dating January 20, 2014 and activities not completed between January 20, 2014 and July 20, 2014
  • Substantive Limitations – Exports of Iran’s petrochemical products and associated services, purchase from and sale to Iran of gold and other precious metals and associated services and the sale, supply or transfer to Iran of goods and services used in connection with the automotive sector and associated services

First Installment of US$4.2 billion in Oil Funds Received

The White House estimates that the limited easing of the secondary sanctions identified above may result in approximately US$1.5 billion in revenue for Iran.

Impact on EU Regulations

The temporary suspension of certain US secondary sanctions benefits parties located in the EU and elsewhere that are not US persons or US companies, or that are not owned or controlled by US persons or US companies. In addition and in accord with the Joint Plan, the EU, by enacting Council Regulation (EU) No 2014/42 (the Regulation) on January 20, 2014, has amended its main regulation prohibiting activities related to Iran, Council Regulation (EU) No 267/2012, to authorize for the Joint Plan Period the following activities:

  • Transport of crude oil and petroleum products originating in or exported from Iran
  • Import, purchase, and transport of Iranian petrochemical products, and the related provision of insurance, reinsurance and financial assistance
  • Sale, supply, transfer or export of gold, silver, and specified base metals to, or purchase, import or transport of gold, silver, and such metals from, the Government of Iran or any person acting on its behalf
  • Provision of vessels for the transport or storage of Iranian oil and petrochemical products
  • Relaxed restrictions on the transfer of funds to or from Iran

While the implementation of the Joint Plan reflects continued progress in negotiations between the P5+1 and Iran, the sanctions relief afforded to date is limited and temporary, and does not meaningfully affect most US persons, US companies and their foreign affiliates, or multinational corporations. Indeed, the core of US and EU sanctions on Iran remain in full force, and they continue to create significant legal, reputational, and practical risks for any persons or entities seeking to do any form of business with Iran.

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How LIBOR Administration Change will Impact Financial Contracts

Posted in Banking and Finance, Regulatory

This month, the UK Financial Conduct Authority formally authorised ICE Benchmark Administration Limited (IBA) to assume responsibility for the administration of the London Interbank Offered Rate (LIBOR).

IBA is a subsidiary of the Intercontinental Exchange Group, a leading global network of exchanges and clearing houses that administers other benchmarks such as the French CAC40 and the Dutch AEX.

Guided by the Wheatley Review

The authorisation of IBA to administer LIBOR reflects one of the key recommendations of the Wheatley Review.  The review was published in late 2012 following allegations that a number of major financial institutions had been involved in the manipulation of the benchmark.  Click here to find out more.

IBA, as the regulated entity, will have the ultimate responsibility for all aspects of governance and administration relating to LIBOR.  However, as recommended by the Wheatley Review, it will convene an oversight committee that will take responsibility for many decision-making and technical matters.  This committee is expected to comprise benchmark submitters and users, as well as other experts, to ensure that a wide pool of stakeholders takes responsibility for LIBOR’s transparency and credibility.

The Impact on Financial Contracts

This change in the administration of LIBOR may impact financial contracts that reference LIBOR as a benchmark.

Post-Wheatley Review Financial Contracts:

Many financial contracts entered into following the publication of the Wheatley Review already contemplate the replacement of the British Bankers’ Association as the administrator for LIBOR – in these cases, there should be minimal risk of confusion created by the change of administrator or label for LIBOR.

Pre-Wheatley Review Financial Contracts:

The definition of LIBOR in older financial contracts, however, will need to be construed on a case by case basis.

Helpfully, the Loan Market Association (LMA) has obtained an opinion confirming that, for LIBOR definitions that followed the definition in the LMA recommended form primary documentation, an English court would interpret a reference to “BBA LIBOR” as a reference to the renamed LIBOR administered by IBA. This will no doubt provide considerable comfort to banks and borrowers that continue to have outstanding debts based on such loan agreements.

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How Greater Regulation Will Lead to Islamic Finance Growth in Qatar

Posted in Islamic Finance, Qatar, Regulatory

Qatar is set to further enhance financial markets regulation by developing a consistent risk-based regulatory framework.  Governor H.E. Abdulla bin Saoud al Thani has announced a three-year strategic plan, which was jointly drafted by the Qatar Central Bank, the Qatar Financial Markets Authority and the Qatar Financial Centre Regulatory Authority.

The goals of this plan include:

• Strengthening the financial market infrastructure

• Enhancing consumer and investor protection

• Promoting regulatory cooperation

• Building human capital

The Islamic financial services industry in Qatar is expected to benefit from the development of an enhanced risk-based regulatory framework by:

Creating consistent regulations for Islamic finance. With the recent closing of Islamic windows of conventional banks operating in Qatar, a risk-based regulatory approach helps to develop a level playing field in the form of consistent regulations for Islamic finance. These regulations should be aligned with the regulation of conventional financing to the extent consistent with Shari’ah requirements.

Strengthening the financial market infrastructure. With international prudential standards aligned to the core principles and standards adopted by the Basel Committee, the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO), Qatar could minimise the opportunity for regulatory arbitrage arising from cross-sectoral and cross-border differences. The financial market infrastructure could further be strengthened by ensuring the regulatory requirements distinct for Islamic finance are effectively addressed.

Improving compliance systems and controls. Rather than focussing on regulating the religious features of Islamic products, a risk-based regulatory framework typically focus on the adequacy of the systems and controls that firms maintain for all their compliance obligations, be they conventional or Shari’ah compliant.

Developing greater public confidence in Islamic financial services. Enhancing governance requirements for Islamic finance institutions should assist in developing greater public confidence in the Islamic financial services industry and allow investors a clear and enforceable measure against which to assess performance. For example, enhancing governance would ensure that suitably qualified scholars are represented on Shari’ah Supervisory Boards. These boards would then operate under approved policies and procedures and have in place systems to disseminate their rulings.

Improving the efficiency of the supervisory processes. Information-sharing and effective coordination among regulators will enable a complete understanding of the entire risk spectrum of the risk taking activities undertaken by Islamic financial institutions operating both within and outside of Qatar. This should improve the efficiency of supervisory processes and allow for early detection and management of cross-border transmission of risks arising from group-wide activities. The resulting public confidence should facilitate growth in the Islamic financial services industry in Qatar.

Creating an Islamic economy of scale. Globally, Islamic finance standards lack enforcement and standardization which impacts market confidence. A strong, standardised and transparent regulatory framework would help create economies of scale in the Islamic financial services industry. Qatar would be well placed to drive this growth both within Qatar and in the wider GCC and MENA region.

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