Qatar: New rules for Islamic banking

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 New regulations for Islamic banking in Qatar released by the Central Bank in late August will change the way conventional banks offer sharia-compliant services and likely boost the performance of banks that focus solely on such services.

The new regulations, made public on August 29, prohibit conventional banks from allocating more than 10% of issued capital to Islamic banking operations and from opening additional branches for Islamic banking. There is also a limit on mudaraba (profit-sharing) and musharaka (joint ventures) to 5% of a bank’s total Islamic operations. The message seems to be that banks can either focus on conventional or sharia-compliant banking, but not both. The new rules come into effect immediately but banks have until the end of 2011 to fully comply.

The estimated 15-20% annual growth rate of Islamic services has encouraged conventional banks to open sharia-compliant windows in recent years and the new rules will therefore have a significant impact on their growth. Islamic finance has been an important driver in attracting new customers. Islamic assets among the country’s banks grew at an average of 54.3% between 2003 and 2010, compared to 37.8% in conventional assets over the same period, according to MEED.

The regulations will most directly affect the leading conventional banks for whom Islamic financing has recently constituted a key driver of growth and profits, and those close to the limits established by the Central Bank will likely have to increase deposits elsewhere. Some leading players such as Qatar National Bank (QNB), which had planned to open new dedicated Islamic branches that had already been approved, are waiting for further clarification from the central bank as to how to proceed.

“We’ve received notice from the Central Bank to wind down our operations,” Louis Scotto, the head of retail banking at Doha Bank, told local media. “They have almost stopped our Islamic business.”

Banks that specialise in Islamic finance, however, are set to reap the rewards of the Central Bank’s ruling. Shares in Qatar Islamic Bank (QIB), Qatar International Islamic Bank (QIIB) and Masraf Al Rayan have climbed 5% since the ruling was released.

QIB has been doing very well of late: in September, it was the first Qatari financial institution to launch an international sukuk, or sharia-compliant bond, which was oversubscribed eight times, with demand reaching $6bn. The issue will likely further strengthen QIB’s growth in Islamic finance. The bank also posted net profits of QR907m ($249m) during the first nine months of 2010. Total assets through September reached QR44.8bn ($12.3bn), compared to QR35.6bn ($9.77bn) for the first nine months of 2009.

This growth was reflected by a net profit increase at the end of the third quarter, reaching QR420m ($115.3m) compared to QR397m ($109m) in 2009, an increase of 6%. The bank’s assets stood at QR18.2bn ($4.99bn) at end-September compared to QR14.8bn ($4.06bn) at the same time last year, a growth rate of 23%. Total deposits stood at QR12.2bn ($3.35bn), up 32% from QR9.2bn ($2.5bn) at end-September 2009. In announcing the results on its website, the bank said it would continue to focus on its Qatar operations, where it sees plenty of room for growth, with an increasing focus on risk management.

Masraf Al Rayan announced that its third-quarter 2010 results included net profit of QR601m ($164.5m), gained mainly from core banking activities. Financing activities saw growth of 118% compared to the same period last year, and total operating income increased by 14.6%. Total assets reached QR21.3bn ($5.85bn), an increase of 60.7% over the QR13.28bn ($3.65bn) from the same period of 2009. Customer deposits reached QR15.24bn ($4.18bn) compared to QR7.65bn ($2.1bn) in third-quarter 2009, a rise of 99.3%. Hussain Al Abdulla, the bank’s chairman and managing director, attributed the bank’s growth to a prudent credit and risks policy.

Continued growth is expected for Qatar’s Islamic banks, though the outlook is less clear for its conventional banks. “If you’re only doing conventional banking, you’re at a severe disadvantage,” Scotto said.

While that may be true in the short term, the limits on conventional banks may spur them to increase product offerings in other areas and will likely increase competition among institutions that offer only sharia-compliant services. Though the new regulations put a dampener on competition between conventional and Islamic banks, it may encourage growth within each segment.


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