Qatar’s Islamic Banks On A Fast Track To Growth

The Qatari government’s strategy to grow Qatar as an Islamic banking center means that it is highly supportive of this sector. Islamic banks currently represent one-quarter of Qatar’s banking system in terms of assets, up from 13 percent in 2006, and we anticipate that they will continue to gain market share, Standard & Poor’s ratings services said.

For example, in 2011, Qatar Central Bank ( QCB ) banned conventional banks from extending Islamic banking products through what are called “Islamic windows” in the onshore conventional banking system, thereby requiring conventional banks to close or divest their sharia-compliant businesses and not underwrite any new sharia-compliant loans. As a result, Shariah-compliant banking shifted to the Islamic banks. Furthermore, the Qatari government and its related entities are the main sponsors of the country’s four incumbent Islamic banks. The Qatar Investment Authority (QIA), the nation’s sovereign wealth fund, is a key shareholder in three of the Qatari Islamic banks – Masraf Al Rayan, Qatar Islamic Bank, and Qatar International Islamic Bank. In addition, two government-controlled entities – Qatar Holding and Barwa Real Estate – are the principal shareholders of Barwa Bank, the nation’s youngest Islamic bank that started operating in 2010. The key driver of growth in domestic credit in Qatar is government-funded infrastructure and investment projects. We understand that the government ensures that at least a portion of a large project is structured in compliance with sharia law to enable the Islamic banks to participate.

Furthermore, in 2012, the Qatari government embarked on a treasury bill issuance program to help the country’s local conventional and Islamic banks to manage their liquidity. Some of the issuances under this program are structured in the form of sukuk for the country’s Islamic banks. As a result of the government’s supportive actions, the Islamic banking sector in Qatar has grown more quickly than the banking sector as a whole over the past few years. In 2006, the QCB began to report key balance sheet metrics for each of the Islamic banks. These figures show that between 2006 and 2012, Qatar’s Islamic banks grew their domestic loans and resident deposits by an average compound growth rate of 46 percent and 40 percent, respectively, versus 31 percent and 23 percent for the entire banking system. Consequently, the Qatari Islamic banks’ market share in domestic credit increased from 13 percent in 2006, to 25 percent at the end of 2012, while the share in resident deposits increased from 13 percent to 28 percent in the same period. The growth of Qatar’s Islamic banks has had repercussions for the country’s conventional banks. Most conventional banks except Qatar National Bank lost market share to the Islamic players over the past few years, thanks to Qatar National Bank’s key role in financing government infrastructure and investment projects. At the same time, the other large conventional banks have faced significant competition from the Islamic banks, particularly in the area of retail lending. There are currently four Islamic banks in Qatar, with a combined asset base of $54.4 billion as of end-June 2013.

The total asset base of the Qatari banking system reached over $240 billion as of July 31, 2013, and the government’s planned infrastructure projects give us reason to believe that the banking system will continue to grow at a fast pace for several more years.

However, the total population of Qatar is less than two million, and expatriates and foreign workers represent a predominant portion of this figure. In addition, the latter group tends to have relatively limited assets in the Qatari banking system. Therefore, Qatar’s bankable population, as in many other GCC countries, is limited.

Consequently, one of the major questions we have about the Qatari banking system is the whether the pace of growth will slow once the number of government projects falls in future. Over the past 12-18 months, S&P noted that some of Qatar’s most active conventional banks acquiring banking assets in other regional markets, notably Turkey and Egypt.

“We see a possibility of Qatar’s Islamic banks taking a similar approach in the long term, once the credit growth in the country slows to visibly lower levels,” S&P said.

Source : Saudi Gazette