Qatar: Boosting Islamic finance

The first sale of an Islamic finance portfolio since Qatar’s decision to ban conventional lenders from conducting sharia-compliant banking operations is a harbinger of what’s to come as the Islamic finance sector begins to benefit from the ruling. The domestic segment, however, may have to contend with greater competition from foreign Islamic banks keen to enter the lucrative market.

In August the International Bank of Qatar (IBQ) sold its Islamic banking retail operations to Barwa Bank in a sale that included IBQ’s Al Yusr retail loans and deposit account portfolios, the two Al Yusr branches and a transfer of employees to Barwa Bank.

Several of Qatar’s other conventional lenders have already begun talking about what to do with their sharia-compliant operations. Ahli Bank is also considering selling off its Islamic banking arm, according to its chief executive, Salah Murad.

“The bank has received interest from Islamic lenders to buy its sharia-compliant unit and the bank will take a decision by the end of this year,” he told the Bloomberg news agency in late July.

Commercialbank’s group CEO, Andy Stevens, told media recently that the bank had stopped taking customers’ Islamic banking deposits to prepare to close down its sharia-based operations. “We will not have an Islamic banking proposition in 2012,” Stevens said.

In explaining its decision to ban conventional banks from conducting Islamic financial services, the Qatar Central Bank (QCB) said that conventional banks’ crossover activities were prejudicial to the competitive neutrality between conventional and Islamic banks and also impacted transparency and objective disclosure. This presented a difficult challenge for Islamic banks in terms of maintaining their stability and growth rates, and negatively impacted the stability of the entire system, the bank said.

The central bank also said that a clear demarcation on activities in the sector would enable it to have a systematic framework of liquidity management and improve the efficiency of open market operations to best utilise all available monetary policy instruments.

Though the new regulations may make the QCB’s job easier, there are concerns that they will also cause a slump in returns for conventional lenders. Islamic banking activities at non-Islamic banks represent a significant slice of their market, with some lenders seeing 15% or more of their net profits coming from their sharia-compliant arm last year.

In a recent note on Qatar National Bank (QNB), international credit ratings agency Fitch assessed the conventional lender as being in good health, with the country’s largest bank having “performed extremely well, with improving core earnings, good cost control and low impairment charges supporting strong profitability”.

To date Qatar’s other conventional lenders have been logging solid earnings performances for the first half of the year. QNB reported a 31% jump in profits, Commercialbank a rise of 17% and Ahli Bank an increase of 28% over the same period last year. To what extent these results will be impacted by the new banking regulations will become apparent a year down the track.

Three of Qatar’s sharia-compliant banks have also had a good opening six months to the year, with Qatar International Islamic Bank (QIIB) posting an 18% rise in net profits over the first half of 2010, totalling QR322m ($88.4m); Qatar Islamic Bank’s profits reaching QR703m ($193m), a 17% increase, and Masraf Al Rayan (MAR) seeing profits rise by 14%, booking $189.7m in black ink.

It is difficult to decipher how much of the strong performance by these three Islamic lenders was related to the QCB’s policy decision, or whether or not clients from conventional banks have started to close their interest-bearing accounts and make the move into sharia-compliant banks. Results from the first half of 2012 should help give the sector a better picture of the impact of the regulation.

That image may be clouded somewhat if banking regulators allow more foreign competition into the market. On August 4, Abu Dhabi Islamic Bank (ADIB) issued a statement saying it had been granted permission to open a branch in Qatar. Under authorisation given by the Qatar Financial Centre Regulatory Authority, ADIB will be able to carry on regulated activities related to deposit taking, providing and arranging financing facilities and managing investments.

According to Ibrahim Masood, a senior investment officer at UAE lender Mashreq Bank, others may be tempted to follow ADIB’s lead. “Qatar is seen as an attractive market by most players in the region,” he told media. “The growth in banking is strong in the Islamic space so I would not be surprised to see standalone Islamic banks being more aggressive.”

There is some suggestion that Qatar’s banks may be hoping for the QCB to rescind or defer the implementation of its decision or to amend it in a way to allow conventional banks to retain some of their Islamic financial activities. To date, there has been little to suggest that these hopes will be met, meaning that the whole sector will soon have a very clear delineation between Islamic and conventional banking.

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