A rapidly expanding population and a steady supply of hydrocarbons and infrastructure projects have allowed Qatar’s banking sector to maintain the double digit growth it has achieved over recent years. However, while the project pipeline remains full, the increasingly competitive banking environment has encouraged the nation’s lenders to seek revenue in previously untapped segments of the market. The result is new products and services, and an increasing investment in markets beyond Qatar’s borders. This, alongside the beginnings of regulatory change, suggests that the banking industry has interesting years ahead of it.

MARKET STRUCTURE: The Qatar Central Bank (QCB) licenses and regulates 18 banks as of January 2015, a figure which has been steadily growing since Arab Bank became the first QCB-licensed lender in 1957. Seven of these institutions are national, conventional lenders, which between them operated a total of 189 branches as of December 2014, according to central bank data.

Local banks dominate the market in terms of assets and infrastructure, but compete for business with seven foreign banks, which have played an important part in Qatar’s economic life for over half a century. While their presence in the country is limited to 16 branches, their number includes global giants, such as Standard Chartered Bank and BNP Paribas, and regional players like Mashreq Bank and Bank Saderat Iran.

The traditional lenders – both national and foreign – have faced increasing competition in recent years from sharia-compliant lenders, the first of which, Qatar Islamic Bank (QIB), was licensed in 1983. It has been joined in the Islamic segment by three institutions, the most recent entrant being Barwa Bank, which received permission to operate from the QCB in 2009. In addition to QCB-licensed banks, more than 20 institutions operate from the separate regulatory environment of the Qatar Financial Centre (QFC), though their activity is often conducted through small representative offices – an exception being QI nvest, a sharia-compliant investment bank that has authorised capital of over $1bn.

TOP-FIVE BANKS: Despite the varied nature of the market, a small number of local lenders play a dominant role in it. According to a Qatar National Bank (QNB) report published in September 2014, Qatar’s largest five banks accounted for 76.9% of the sector’s assets, making it one of the most concentrated in the region. By far the largest of Qatar’s top-five banks, with total assets of QR486.4bn ($133.3bn) as of December 2014, is QNB. Established in 1965 as the first locally owned commercial bank, QNB is 50% owned by the government via the Qatar Investment Authority (QIA). The bank had a market share of 42.2%, comfortably in advance of the second-largest bank in the sector, the Commercial Bank of Qatar (CBQ), which held assets worth QR115.7bn ($37.1bn) as of December 2014 and had captured around 10% of the market. A notable feature of the sector is the role played by Islamic banks – the next two banks in Qatar’s top five are fully sharia-compliant: QIB was established in 1983, and accounts for around 9.5% of sector assets, while Masraf Al Rayan is a relative newcomer to the market, opening its doors in 2006 and holding 8.2% of banking assets as of December 2014. Rounding out the top five in terms of asset size is another conventional operator, Doha Bank, founded in 1979, which also has about 7% of the market.

Finally, in terms of lending activity, banks in Qatar compete to some extent with three finance firms registered by the QCB: Al Jazeera Finance, First Finance and Qatar Finance House. Their approach to the market, however, differs considerably from full-fledged banking institutions in that they generally source their funding from banks and extend it as loans to clients in order to profit on the margin. In recent years, caps on interest rates and charges on loans extended to retail customers have encouraged finance houses to direct their attention to the small and medium-sized enterprises (SMEs) segment, where no such limits apply. While the interest rates they charge are higher than those levied by banks, they are able to secure business with quick turnaround times; less than a week in some cases.

FOREIGN EXPANSION: Qatar’s population of less than 2.2m, according to the World Bank, means that the bankable population is capped at a small number of highly paid nationals and expatriates. As a result, leading players are active beyond the nation’s borders. Each of the top five banks has a presence abroad. QNB has exported its brand to Kuwait, Oman, Yemen, Lebanon, Syria, France, Switzerland, the UK, China, India, Singapore, Mauritania, Sudan and South Sudan. It has also established representative offices in Libya and Iran, and made significant investments in the form of associates, subsidiaries and affiliates in Egypt (National Societe Generale Bank), Tunisia (Tunisian-Qatari Bank), Indonesia (QNB Kesawan), the UAE (Commercial Bank International), Iraq (Mansour Bank) and Jordan (Housing Bank for Trade & Finance). CBQ, meanwhile, made its first significant foreign purchase in 2013, when it acquired a 70.84% stake in Turkey’s Alternatifbank (AB ank). QIB’s foreign interests include full ownership of QIB Sudan, a 99.99% stake in Lebanon’s Arab Finance House (the first fully fledged Islamic bank in that country) and a 60% interest in Malaysia’s Asian Finance Bank.

In early 2014 Masraf Al Rayan announced that it had completed its acquisition of QIB’s majority stake in the Islamic Bank of Britain (IBB), marking its first entrance into a foreign market. Finally, Doha Bank has a well-established network of branches and offices in Kuwait, the UAE, India, Japan, Singapore, South Korea, Australia, Turkey, the UK, Germany, Hong Kong and Canada.

A case of foreign assets being brought under Qatari branding is that of Ahlibank, which Qatar Foundation acquired in 2013. The bank had total assets of QR31.4bn ($8.6m) as of the end of 2014, and finished the year with a net profit of QR601.3m ($164.8m).

MARKET CHARACTERISTICS: While the increasing foreign exposure of Qatar’s banks is a growing challenge for those tasked with overseeing the financial soundness of the sector, which is broadly characterised by its stability and efficiency. Thanks to their robust capital adequacy ratios and strong support from the sovereign, Qatar’s banks have enjoyed high credit ratings from the major ratings agencies, with the top five all placing in high-investment grade: “Aa3” to “A2” for Moody’s, and “A+” to “A-” for Fitch and Standard & Poor’s. The high degree of government support is noteworthy in the industry: most of the boards of the domestic lenders contain Qataris – government officials or members of prominent wealthy families – and the government maintains ownership stakes in banks either through QIA or another quasi-governmental body.

State support for the sector was most clearly demonstrated in recent years by its reaction to the 2008 global financial crisis, which saw it guarantee all Qatari bank deposits, purchase potentially troubled equity and real estate portfolios, and utilise QIA to increase the capital of local banks. Standard & Poor’s also rated the Qatari banking sector as the most efficient in the GCC, largely as a result of QNB’s ratio of non-interest expenses to total revenues of 20.4% in 2013. Also, despite a drop in net interest margins (NIMs) in the wake of new personal lending regulations introduced in 2011, the NIMs of Qatari banks are wider than most of their GCC peers thanks to their profitable retail and private corporate segments and a relatively low cost of funding.

PERFORMANCE: The Qatari banking sector has shown robust growth in recent years, despite regional unrest and the slow recovery of the global economy. “In 2014, the key growth drivers of the Qatar economy have been in the non-hydrocarbons sector,” George Bell, head of finance at QNB, told OBG. “The sector expanded by close to 12% driven by large investments in infrastructure, real estate and transportation in preparation for the 2022 FIFA World Cup. The sizeable expansion of the population, which grew by just over 10% on the large inflow of expatriate workers, also drove increased demand for government and private sector services, including in the financial sector.” According to QNB, credit facilities in Qatar grew at a compound annual growth rate (CAGR) of 17.8% between 2009 and June 2014, while deposit growth grew at a similarly impressive rate of 21.4% over the same period. Importantly, this expansion has not come to cost the sector its financial stability, and banking activity continues to take place in a relatively conservative arena based on quality assets: capital adequacy ratios have remained above 16% between 2009 and 2013, and while it dropped to 12.8% in 2014, it still exceeded the Basel III guideline of 8% for 2019, while non-performing loans have not risen above 2% of aggregate sector lending – a figure that is considered low for the region.

Qatar’s banks were profitable over this period, showing a sector CAGR of 12.5% between 2009 and 2013. This strong, sustainable performance continued in 2014. According to the QCB, the top five banks’ experienced aggregate total asset growth of 11.2% year-on-year in 2014. Looking at individual performances, QNB showed the greatest expansion of assets and profit in absolute terms, which rose to QR486.4bn ($133.3bn) and QR10.5bn ($2.9bn), respectively. In terms of percentage gains, QIB grew its profits most rapidly, with 15.9% growth to QR1.6bn ($438.6m). The strong showing of Qatar’s largest lenders helped to propel the sector to the top of the GCC in terms of asset growth by September 2014, with aggregate sector assets passing the QR1trn ($274bn) mark for the first time, while the local industry’s net profit results placed Qatar in second place in the regional ranking.

LENDING: The extension of credit by Qatar’s banks has been greatly aided by the strength of the economy and the high-grade risk ratings that grant them favourable access to international bond markets. As is often the case in the region, the government plays a role in lending – since 2009 credit directed to the public sector was the single biggest component in the aggregate sector portfolio, accounting for 39.1% of the total in the first six months in 2014. However, the first half of the year also saw the private sector claim a larger proportion of the total as the government began to rely more heavily on its fiscal surplus to advance infrastructure projects. Banks have succeeded in increasing their exposure to a range of economic sectors over recent years, including real estate (which behind lending to the public sector accounted for the second-largest component of the national credit mix, at 18.1% of the total), services (10.1%) and trade (6.3%).

While government initiatives remain a central pillar of banking activity in Qatar, more private sector lending opportunities are arising from the large hydrocarbons and infrastructural projects that it commissions. This virtuous relationship will continue to be driven over the coming years by the sizeable project pipeline established by Qatar National Vision 2030 – the strategy document by which the economic development of the country is guided. Moreover, the government has formulated comprehensive development plans in view of the nation’s hosting of the 2022 FIFA World Cup, with project activity anticipated to accelerate between 2015 and 2018. Major developments include the $11.5bn Doha Metro Project (which forms part of the wider Qatar Rail Development Programme that will consist of a light rail network, Lusail Light Rail Transit; a passenger and freight railway linking Saudi Arabia and Qatar via Mesaieed and Doha City Centre; and a high-speed rail link to Bahrain connecting to Al Rayan); new, air-conditioned stadiums and the New Doha Port (a five-phase mega-project scheduled for completion in 2030).

SME FINANCING: Qatar’s lending environment is also evolving in terms of the size of the company being serviced by it. Traditionally Qatari lenders have sought easy returns from the plentiful supply of low-risk, big-ticket corporate lending opportunities that Qatar’s expanding economy has provided. While data on lending to smaller firms is scarce, in 2013 economic researcher Ashoor A Ashoor asserted that bank lending to SMEs formed just 0.5% of the total – a low figure even by regional standards.

While the government has made efforts to address this funding gap, principally through Qatar Development Bank’s Al Dhameen loan guarantee programme, the market is crowded and Qatari lenders are adopting a more proactive stance on smaller ticket lending. The market’s heightened competitiveness is the principal driver behind this phenomenon and banks that historically built their loan books on corporate lending have begun to seek opportunities with smaller businesses. As a result, lenders have begun adopting SME-friendly measures like dedicated branches and products, and specially trained SME teams. This segment of the market is therefore expected to assume a more prominent position within the overall credit mix in coming years.

Finally, while lending to businesses is the primary concern of many of Qatar’s banks, personal lending has been claiming a larger share of domestic credit in recent years. In 2010 it accounted for 19.3% of aggregate bank lending, according to QCB data, while by 2013 some 23.6% of the credit mix was claimed by personal loans.

RETAIL OPPORTUNITIES: As with the fresh interest in SMEs, the increasingly competitive market is encouraging lenders to approach the retail segment with greater enthusiasm. The efforts to capture new retail customers extends across new products and enhanced service levels, and is therefore looking to fulfil the demands of customers who are increasingly financially adept and tech-savvy, as they have become a major priority in the sector. “Not everyone succeeds at retail banking in this market given the size of the population. We think it is a niche that we can target and have invested a lot in this segment. The days of open relationship banking of the old are not so relevant in an open market. Technology will be the defining factor for business and perceptions are already starting to change,” Salah Murad, CEO of Ahlibank, told OBG.

NEW OVERSIGHT: Currently, financial institutions operating in the country do so according to one of two distinct regimes. Banks operating in the domestic sector, including the top five, are directly supervised by the QCB. Banks licensed by the QFC, meanwhile, are subject to the rules and standards, based on common law, which have been implemented by the QFC Regulatory Authority (QFCRA), established in 2005.

While banks that operate from the QFC cannot engage in retail banking or finance business, some banks operating under the QCB’s jurisdiction have interests which require them to work with both of the regulators, such as QIB’s 49% ownership of QI nvest, a QFC-based investment bank. The Qatar Financial Markets Authority (QFMA) is a third source of regulation that Qatar’s banks must be mindful of when undertaking some of their activities. For example, banks that wish to engage in brokerage activities on the Qatar Stock Exchange, which they have been entitled to do since 2010, must first obtain a licence from the QFMA in order to do so.

Recently, Qatar has moved toward creating a more unified regulatory system in which the QCB plays the leading role. Law No 13 of 2012 establishes the QCB as the supreme authority for all financial service providers in Qatar, including banks, Islamic financial services institutions, insurance and reinsurance companies, investment and finance firms, exchange houses and firms licensed by the QFC and the QFMA. While the QFMA remain in place and QFC companies are still directly supervised by the QFCRA, the positioning of the QCB as the apex institution for the regulation of the financial sector has been widely interpreted as a step towards creating a single financial regulatory body.

In the shorter term, the law has already brought more oversight to the system through the creation of a Financial Stability and Risk Control Committee ( FSRCC). The stated purpose of this newly created body is to reduce regulatory overlap among the various sectoral institutions, as well as to remove opportunities for regulatory arbitrage, and to these ends it includes the heads of the three financial regulatory agencies, with the governor of the QCB acting as chairman.

CREDIT BUREAU: The creation of a credit bureau and its steady expansion into new areas of economic activity is also providing banks another means of better monitoring risk. Sheikh Bandar bin Mohammed bin Saud Al Thani, CEO of the Qatar Credit Bureau, told OBG, “Banks can now assess risk more thoroughly. They can see which customers have been taking on loans from multiple institutions and they can be notified when their customers are defaulting in other places. This is reducing the number of NPLs in the market, as banks are more careful about extending loans and more insistent that customers settle their liabilities at other institutions before giving them credit from their bank.”

REGULATORY DIRECTION: What the new regulatory framework means for Qatar’s banks remains to be seen. In general terms, a strategic plan for the financial sector released jointly by the QCB, the QFCRA and the QFMA in December 2013, and which runs to 2016, establishes six major goals: enhancing regulation by developing a consistent risk-based micro-prudential framework, expanding macro-prudential oversight, strengthening financial market infrastructure, enhancing consumer and investor protection, promoting regulatory cooperation, and building human capital. In more particular terms, much of the regulatory activity required to support the banking sector’s sustainable development in the post-global crisis era has already been carried out. This effort included the 2011 introduction of a new range of limits on loan and interest charges for retail lending, which followed a previous credit-tightening exercise in 2008, when a limit of QR2.5m ($685,300) was imposed on the amount of credit that could be extended to a Qatari national.

Under the new regime, the upper limit for Qatari nationals has been changed to QR2m ($500,000), while expatriates are limited to loans of QR400,000 ($109,000) or less. Maximum payment periods have also been established, while the ratio of monthly repayment to monthly salary (or, the equated monthly instalment, EMI) was fixed at 75% for nationals and 50% for foreigners. Finally, the QCB introduced a maximum rate of interest for all personal lending of the QCB lending rate plus 1.5 percentage points and placed limits to credit card withdrawal of double net total salary, with a maximum interest rate of 1% per month, and 0.25% on arrears of credit card debts. The other major regulatory shift of recent years also came in 2011, when the QCB instructed conventional banks to cease taking deposits through their Islamic windows and to close their sharia-compliant operations (windows or subsidiaries) by the end of the year. The decision has left the sharia-compliant segment entirely to the nation’s four Islamic lenders, some of which have acquired entire portfolios from conventional lenders. The International Bank of Qatar, for example, sold its retail portfolio to Barwa Bank and its corporate portfolio to QIB. In other cases, conventional banks have managed to retain their Islamic banking customers by transferring them to ordinary accounts.

While the financial sector awaits the potential evolution to a unified regulatory structure, the QCB continues its refinement of the banking sector’s regulatory framework. In January 2014 it issued its final Basel III circular, which introduced a minimum capital adequacy ratio of 12.5% and a new capital charge that will be implemented in 2016 for systemically important banks. Also in 2014, the QCB announced it intends to set up a deposit insurance framework that will include a sharia-compliant component. Both developments reflect the macroprudential and consumer protection goals of the strategic plan being applied to the sector.

OUTLOOK: Downside risks, such as low revenue diversification and interest margins vulnerable to a US monetary policy shift, are always present in a market like Qatar. However, according to some, the forward outlook for the sector is positive. “Double-digit growth for the sector is not necessarily over. There is still a large amount of project work – if the government decides to use the financial system to build it as a result of lowering surpluses then there is a possibility for very rapid growth in the short term,” Edward Wong, the chief financial officer of International Islamic Bank, told OBG.

In a 2014 report, QNB cited rapid population growth and large fiscal surpluses as the principal drivers behind their expectation that annualised growth in deposits would reach 12.5% during the 2015-16 period. Large infrastructure spending and the expansion of the non-hydrocarbons sector, meanwhile, is also expected to underpin the growth of the banking sector’s assets in the short term. Certainly, with a GDP growth forecast range of between 6.8% and 7.8% over 2015 and 2016, the optimism that surrounds the sector is well placed.

Challenges remain, in particular the difficulty faced by banks in sourcing qualified staff. While this is an issue faced across the region, in Qatar it has been mitigated by the establishment of the Qatar Finance and Business Academy, which is likely to play an important role in covering Qatar’s skills gap in the coming years.