Over the course of 2018 Qatar’s banking industry has demonstrated its resilience in the face of the economic blockade placed upon the country by a number of governments. Credit ratings agencies Moody’s and Fitch both upgraded Qatar’s sovereign credit ratings outlook to stable in the summer of 2018, recognising the improving macroeconomic scenario and the largely successful resolution of the challenges associated with the economic embargo. This action was accompanied by a number of individual bank upgrades, and in October 2018 Moody’s upgraded the entire banking sector from negative to stable, noting that banking sector profitability will remain stable with strong capital buffers.
Confidence in the industry is also shared by its participants. More than 90% of respondents to the “Risk Perception Survey” conducted by Qatar Central Bank (QCB) in 2018 stated that their confidence in the sector’s financial stability had increased from the previous year. The industry’s focus has therefore returned to the growth prospects associated with economic development and, in the shorter term, the momentum generated by the 2022 FIFA World Cup.
History
Commercial banking in Qatar dates back to the mid-20th century. The first locally owned bank, Qatar National Bank (QNB), opened its doors in 1965, marking the beginning of a period of increased autonomy that culminated in the country’s independence in 1971 and the creation of the Qatar Monetary Agency – now the QCB – in 1973. In the same year Qatar also launched its own currency, retiring the Qatar-Dubai riyal that had been pegged to the pound sterling.
Over the following four decades the sector steadily increased in size, and in 1975 Commercial Bank of Qatar (CBQ), the country’s first privately owned banking institution, was established. The 1980s saw the beginning of sharia-compliant banking in the country, starting with the founding of Qatar Islamic Bank in 1983. The emergence of Qatar as a major gas exporter from the mid-1990s triggered a surge in the balance sheets of lending institutions. Total commercial banking assets doubled between 1991 and 2000, from QR25.5bn ($7bn) to QR50.2bn ($13.8bn), and then tripled to reach QR189.5bn ($52bn) by end-2006.
Local banks have continued to fund the largest development projects and have also expanded into the retail segment, offering a range of financial services to the local and expatriate population. According to the QCB, demographic financial inclusion, as measured by the number of bank branches per 100,000 people, increased by nearly 60% between 2009 and 2017, while geographic financial inclusion, or the number of bank branches per 1000 sq km, increased by approximately 10% in the same period.
Market Structure
As of January 2019 the QCB licensed and regulated 18 banks, seven of which are national, conventional lenders. These institutions dominate the market in terms of assets and infrastructure. The biggest of them, with assets worth QR862bn ($237bn) as of September 2018, is QNB, which is one of the largest banks in the MENA region across all financial metrics and has a presence in over 31 countries. QNB is the most significant player within Qatar’s “big five” banks, which also comprises: CBQ, which held total assets worth QR135.1bn ($37.1bn) as of December 2018; Qatar Islamic Bank, with QR153.2bn ($42.1bn); Masraf Al Rayan, with QR97.2bn ($29.7bn); and Doha Bank with QR96.1bn ($26.4bn).
The local conventional and Islamic banks compete for business with seven foreign banks, which have played an important part in the economy for over half a century. They include global giants such as Standard Chartered Bank and HSBC, and regional players such as Mashreq Bank and Bank Saderat Iran. A number of banks also operate from within the distinct regulatory environment of the Qatar Financial Centre, although their activity is generally conducted through relatively small representative offices. Lastly, in some segments of the market, banks compete with three financers registered by the QCB: Qatar Finance House, First Finance Company and Al Jazeera Finance. These institutions generally source their funding from domestic banks and therefore are not able to compete with them on interest rates. Instead, they attract business by offering quick turnaround times; in some cases credit can be extended in a week or less.
Qatar’s domestic market is relatively small and therefore ripe for consolidation. In August 2018 Barwa Bank and International Bank of Qatar signed a final merger agreement that established a combined group with total assets valued at around QR80bn ($22bn). The new sharia-compliant institution is the result of a series of industry talks which originally included Masraf Al Rayan as a third potential partner. In February 2019 it was reported that the combined lender would be rebranded as Lusail Bank, and that the integration of the founding institutions would be carried out towards the end of the first quarter of the year.
Performance
The decline in oil prices which began in 2014 resulted in a challenging environment for banks, with in slower asset growth and tighter margins. As oil prices stabilised and recovered in 2017, the sector was faced with the economic fallout of regional politics. In June 2017 Saudi Arabia, the UAE, Bahrain, Egypt, the Maldives, Mauritania, Senegal, Djibouti, the Comoros and Jordan announced an economic blockade of the country. In the initial weeks and months of the embargo Qatar’s banking sector experienced significant outflow of deposit from non-resident customers. However, the size of the government’s reserves meant that it was well positioned to defend the sector during this period.
“The QCB acted very quickly to address the pressures on liquidity triggered by the blockade, and the banking sector overall has performed strongly, with new government initiatives to promote private sector growth offering new corporate financing opportunities,” Abdulla Abdulrazaq Bukhowa, CEO of Standard Chartered Qatar, told OBG.
According to the central bank, government bodies deposited around $30bn in locally licensed banks between June and December 2017. As depositors became convinced of the government’s ability to establish new trade routes and maintain economic development, the problematic outflow of deposits ceased, and government support was no longer necessary. Banks had little difficulty raising funds in foreign markets in the first half of 2018, issuing a combined $7.4bn worth of bonds denominated in foreign currencies ranging from the Chinese yuan to the Australian dollar – their highest aggregate debt issuance on a year-to-year basis.
Global professional services company KPMG reported positive results for the sector in 2017, posting a combined 5% expansion of net profit and aggregate growth in total assets of 8.1% – the highest recorded in the region. This positive trend carried through to 2018. In the first nine months of the year the aggregate assets of the “big five” banks expanded by 5.4%, from QR1.27trn ($348.8bn) to QR1.33trn ($365.3bn). Their combined loans and advances – or financing, in the case of Islamic lenders – increased by 4.4% over the same period, while their aggregate net profit increased by 10.9%.
New Opportunities
One potentially useful result of the economic blockade is the opening up of new funding opportunities, particularly at the corporate end of the lending spectrum. While infrastructure development, energy projects and staples such as health and education continue to be of interest to banks, investment in food sufficiency and logistics have been granted a higher priority by the government and are therefore generating new lending potential. Qatar’s banks have also become more creative in their hunt for loan growth, for example by cooperating with the credit agencies of trading partners to make loans more attractive to prospective clients. Export credit agencies (ECAs) have tended to overlook the wealthier states of the GCC in the past, but with tighter access to funding as a result of lower oil prices in recent years, ECA-assisted funding has become a more attractive prospect for banks, which have begun to actively court them. The large expatriate population and broad trading base means that this effort has been a geographically dispersed one. In 2018 Standard Chartered Qatar was working with ECAs in Italy, South Korea and the UK, for example. ECAs can be of use to domestic banks as they offer loans that in turn are lent to the importing entity. ECAs also offer interest-equalisation services, which enable a commercial lender to provide a loan to the importing entity at below-market interest rates. In such cases, the commercial bank is compensated by the ECA for the difference between its below-market rate and the commercial rate. In both cases, the effect of an arrangement between Qatari lenders and an ECA is to lower the cost of funding for borrowers, thereby acting as an incentive for borrowing.
Small & Medium-Sized Enterprises
As the government continues to empower the private sector, small and medium-sized enterprises (SMEs) are expected to feature more prominently in banks’ loan books. The entrepreneurial nature of many SMEs and the higher risk associated with lending to them means that specific processes and structures are needed. Most larger banks offer SME packages, which usually include technological solutions such as point-of-sale machines and specific cards, as well as practical assistance in the form of dedicated relationship managers and access to guaranteed loans for start-ups offered by Qatar Development Bank (QDB). According to industry stakeholders, small businesses are becoming more appreciative of the need to maintain comprehensive financial records, the lack of which has been a block to SME credit growth across the region.
“SMEs play a fundamental role in achieving economic diversification and self-suffiency under Qatar National Vision 2030,” Joseph Abraham, group CEO of CBQ, told OBG. “This segment is a high-growth area for local banking institutions, and increasingly seen as an opportunity to expand our footprint and tap new industries. Smaller companies have now matured, and their financial competency has become much stronger; entrepreneurs and business managers now understand the financing processes as well as the risk parameters and responsibilities of banks.”
A credit bureau could also help small businesses access funding, in addition to increasing foreign investor confidence. “An effective credit bureau provides comfort to foreign investors, as it helps to demonstrate that the country’s financial system is soluble and that consumers are not living beyond their means, regardless of external shocks to the economy,” Sheikha Maryam bint Khalifa Al Thani, CEO of Qatar Credit Bureau, told OBG. “At the same time, we can provide a reliable credit score for budding entrepreneurs and small businesses who might otherwise struggle to access funding.”
Regulation
Financial institutions operating in Qatar do so according to one of two distinct frameworks. Law No. 13 of 2012 establishes the QCB as the main authority for all financial service providers, and all banks operating in the domestic sector are directly supervised by it. Banks licensed by the Qatar Financial Centre (QFC), meanwhile, are subject to the rules and standards of the QFC Regulatory Authority, which are based on common law. However, they are not permitted to engage in retail banking or finance. “The fact that there is a clear vision and strategy is a very positive aspect that guarantees long-term growth in the financial industry,” Fahad Al Khalifa, group CEO of Al Khaliji Bank, told OBG.
Banks have been operating under an increasingly stringent regulatory framework as a result of the introduction of global standards. The regulator has been gradually implementing Basel II and III standards since 2012, and by January 2018 all local banks were required to implement the framework in its entirety. Under Basel III, banks around the world are required to retain 4.5% of their risk-weighted assets – capital and retained earnings – and 2.5% of their common equity, for a total 7% of common equity retainment designed to defend them against future shocks. Qatari banks are also fully compliant with Basel III’s liquidity requirements: the liquidity coverage ratio, which increases local institutions’ short-term resilience; and the net stable funding ratio, which strengthens resilience over a longer period.
Domestic banks have also had to adjust to another global standard in 2018. The accountancy framework International Financial Reporting Standard 9 (IFRS 9) was rolled out across global markets in January 2018 and has been fully implemented in Qatar. The standard significantly alters the way banking institutions calculate their potential impairments, or bad loans, changing the process from a backward-looking one – whereby banks review historical performance to determine provisions against impairments – to a forward-looking one, in which the losses from an impaired asset are projected over the next year. If there is a significant increase in credit risk, the credit losses are projected over the instrument’s full lifetime.
The new standard increases sector stability by making it more difficult for banks to delay recognition of their impaired assets. However, in the Middle East region – where in some jurisdictions it has become common for banks not to charge interest on late payments, and provide loans to related parties with low or no interest – the implementation of IFRS 9 is particularly challenging. The new standard has led banks to increase their provisions against impaired asset by an average of 1.5% of total loans, according to ratings agency S&P Global, at a time when provisioning needs have been pushed upwards by the economic blockade and the associated pressures on the real estate and hospitality sectors.
Digital Trend
As in other markets in the region, much of the regulator’s focus over recent years has been on accommodating the trend of financial digitisation. Banks have retained their branch networks for operational issues where personal interaction remains preferable, but lenders are lowering costs and increasing their reach by shifting transactional processes to smart ATMs or online platforms. CBQ has launched a service that allows remote cheque disposal for companies, whereby a customer need only scan or photograph a cheque and upload it through the bank’s mobile app. Local banks began to issue contactless cards in 2016, and most of the larger players now offer them to their customers. Mobile money wallets are also spreading throughout the industry, with banks teaming up with telecoms operators such as Ooredoo to provide customer-to-merchant payment services.
Financial technology (fintech) is becoming more prominent in industry discussion. The relationship between banks and the fintech providers that are helping to power digital banking services is a complex and evolving one. In some cases fintech companies are rivals to traditional lending institutions, while in others they are partners. Qatar signalled its intention to participate in the fintech revolution that has been sweeping global markets, though the country had yet to develop a regulatory sandbox in which companies can trial new products and services on a limited basis. However, in October 2018 the central bank announced that it was establishing the necessary framework to create a sandbox. In the meantime, it has been permitting banks to introduce fintech products which they have created or purchased themselves. The QFC is also working to develop fintech products and in 2018 formed an agreement to partner with European fintech platform B-Hive to promote business opportunities and share knowledge.
The QDB is playing a leading role in the drive to foster a culture of technological innovation on a local level. The publicly owned financial institution operates the mixed-used Qatar Business Incubation Centre, and in 2018 revealed its intentions to launch two incubation centres focused on fintech and sports technology to support innovative ideas and start-ups.
“Qatar’s financial sector is extremely competitive, and although there is increasing interest in fintech, most SMEs currently perceive digital banking services as an additional cost rather than a means of achieving cost and time efficiency,” Nebil Ben Aissa, CEO of fintech provider QPAY, told OBG. “The central bank’s continuous efforts to digitise salary payments has helped QPAY raise awareness about the value of fintech and electronic banking products in the SME sector. We see electronic banking for SMEs as an essential component to achieving Qatar National Vision 2030’s goal of a digital society.”
Awareness campaigns have also been rolled out by other financial institutions to support the growth of local businesses in other sectors of the economy. “Qatar Credit Bureau started expanding its reach by opening up to companies in different sectors, such as telecoms and automobiles, and by raising awareness among the local population,” Al Thani told OBG.
Outlook
Qatar’s banks have overcome the effects of the economic blockade without any significant deterioration in financial stability indicators and with their profitability intact. Moody’s anticipates that bank profitability will remain stable over 2019, after the sector showed a return on assets of approximately 1.6% in 2018. The narrowing of the gap between credit growth and deposit growth will allow for unfluctuating interest rate margins over the period.
“There is an opportunity for the local banking sector to act as an engine for Qatar’s economic development,” Al Khalifa told OBG. “In anticipation of a significant increase in LNG production capacity and favourable prices, banks may channel greater liquidity in the market, acting as a catalyst for businesses to improve their competitiveness. While the country’s overall performance is solid, local companies must continue to invest in building efficiencies, increase productivity and raise quality standards.”
However, downside risks remain. The majority of respondents to the QCB’s “Risk Perception Survey” in 2018 believed that risk would decrease or remain the same in 2019, identifying real estate developers and contractors as the principal cause of concern in term of asset quality. From a regulatory standpoint, the amendments to Basel III outlined in December 2017 – which have come to be known as Basel IV – represent another challenge to the sector. The changes aim to increase the level of capital held by banks and require them to conduct periodic assessments of collateral received from customers for loans in order to calculate potential risks. While these measures are expected to shield the industry from future shocks, concerns have been raised across the world regarding their effect on credit extension and profitability.
Qatari lenders, nonetheless, are well positioned to take advantage of the anticipated expansion of the country’s economy. The World Bank predicted that GDP growth will reach 2.3% in 2018 and 2.7% and 3% in 2019 and 2020, respectively. Meanwhile, the IMF forecast GDP growth would hit 2.8% in 2019, compared to an estimated 2.7% in 2018 and 1.6% in 2017.
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