Qatar: Central bank imposes new rules on lenders

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New regulations introduced by the Qatar Central Bank (QCB) in mid-June will curb local banks’ investment options, potentially making sovereign bonds more appealing at the expense of some private sector options. The move is taking place as the government prepares to set its infrastructure development programme into overdrive.

Under the new regulations, with which lenders must comply within six months, equities and bonds can account for up to 25% of a bank’s capital and reserves, although debt issued by the government and national banks are exempt from the limit. The cap had been previously set at 30%.

The new regulations also limit the amount banks can place with individual companies and unlisted securities, establishing a maximum of 5% of capital and reserves for foreign investments and 10% domestically. The cap for total foreign equities is set at 15%.

These new rules will apply to both conventional and Islamic lenders, while the latter will also see the limit on the amount they can invest in real estate lowered from 30% to 10% of their capital and reserves.

In a note to clients issued soon after the QCB’s move, Arqaam Capital said the changes to the rules would likely prompt Qatar’s banks to strengthen their holdings of government debt.

“The new regulations may push banks to transfer their excess liquidity out of the public capital markets into additional positions with the government and the other exempt entities, adding to their already sizeable positions,” the Dubai-based investment bank said.

Chiradeep Ghosh, a research analyst at Bahrain’s SICO Investment Bank, agreed, telling English-language daily The Peninsula on June 20 that he expected the new regulations to compel Qatar’s seven main banks to shift their investment mix towards domestic equities and government bonds.

“The new regulations would increase the country concentration risk of banks’ investment portfolios,” he said.

Though the central bank did not explain its move, many analysts and commentators believe it is connected to the extensive investment programme being undertaken by the government, in part linked to Qatar’s hosting of the 2022 FIFA World Cup but also to other large-scale infrastructure projects. By restricting the amount that banks can invest in the private sector, the government appears to be deepening the capital pool from which it can borrow.

The QCB’s amended regulations will affect some Qatari lenders more than others, with a report issued by Arqaam Capital in mid-June stating that Qatar Islamic Bank (QIB) had 32% of its capital in equity and bonds, while 19% was in unlisted securities. The report also indicated that QIB was above the limit for overseas investment, as were other lenders including Qatar National Bank (QNB), Commercial Bank of Qatar and Al Khalij Commercial Bank.

Some investors have been critical of the change, noting that it comes at a time when the local stock market is starting to revive, particularly in the wake of the decision by the MSCI to grant Qatar emerging market status. According to Nasser Al Mansouri, CEO of the Qatar and Oman Investment Company, the move by the central bank was “not a well-thought out decision” and could have a negative impact on the profitability of banks and other financial institutions.

State borrowing is already on the rise, with bank lending to the public sector climbing by 47% in 2012 and averaging annual growth of 43% over the past three years, according to a report by QNB Financial Services released at the end of May. This increased volume, which totalled $60bn in 2012, was mainly a result of the government and state enterprises looking to fund infrastructure and investment developments through locally sourced short- to medium-term loans, the research note said.

While banks are lending more to the state, banks appear to have the funds to meet the demand. There is ample liquidity in the banking system, with deposits from the private sector rising 15.9% year-on-year as of the end of May, according to another QNB Financial Services report issued on June 19.

Still, Qatar’s banks could turn to global capital markets in response to a continued increase in demand for funds from the state. In that case, the central bank’s recently announced rules could reassure global investors of the soundness of the Qatari banking system, even if it comes at the expense of local firms looking for equity investors.

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