What’s Next for Qatar’s Banks?
06 Mar 09:12 AMSector : Banking & Finance Country : Qatar
By: Andrew Cunningham
The Qatari banking system is displaying capital ratios well in excess of international norms, low levels of non-performing loans and profitability that is comparable to that reported by the most successful global banks. Qatar’s banks are also operating in one of the world’s fastest growing economies and they enjoy the support of a government determined to have Qatari institutions – political, financial and social – punching above their weight in regional and international affairs.
The authorities have made clear that they want the nation’s banking and financial system to become a global financial center with a reputation and scale to match Qatar’s global ambitions – and with the ability to overtake other regional financial centres such as Bahrain and Dubai.
Over the last two years, the authorities have been putting in place the regulatory framework needed to meet the demands and requirements of global financial markets.
In March 2012, the Central Bank of Qatar (CBQ) was designated the “Supreme Authority” for financial regulation, giving it precedence over the Qatar Financial Center Regulatory Authority (QFCRA) and the Qatar Financial Markets Authority (QFMA). In December 2012, Law 13 further strengthened the position of the Central Bank, making its Governor the Chairman of a newly-created Financial Stability Committee and extending the remit of the Central Bank to include supervision of insurance companies and insurance agents. In December 2013, the CBQ, QFCRA and QFMA jointly issued a Strategic Plan for the future of financial sector regulation.
Rising to the challenge?
But what of the banks themselves? Will Qatari banks be able to rise to the challenges that are being set for them and seize opportunities that come with being based in one of the world’s most dynamic economies?
First impressions are promising. Over the last eight years, the CBQ has licensed three new domestic banks: Masraf al-Rayan, which was established in 2006, Al-Khaliji, established in 2008, and Barwa Bank in 2009. Three banks in eight years may not sound like much but it compares well to many of the region’s other banking systems where new banking licenses are often even harder to get.
There are now 10 domestic commercial banks in Qatar of which six conduct conventional banking business and four operate as Shari’a-compliant banks. (In February 2011, the Central Bank banned conventional banks from offering Shari’a-compliant products through Islamic “windows,” creating a clear distinction between conventional and Islamic banks.)
Foreign banks wanting to open offices in Qatar have been pointed towards the Qatar Financial Center (QFC) which now licenses a large number of banks, all of which are permitted to conduct business in Qatar, albeit on a slightly more limited scale than those licensed by the Central Bank. (QFC banks conduct wholesale business and high-end retail banking like their peers operating under the CBQ, but may not engage in mass-market retail business.)
The size of the domestic banking system, taken as a whole, compares well to other regional systems. Total assets at the end of September 2013 were $242 bn – equivalent to about 125 percent of 2013 gross domestic product (GDP). The Qatari banking system is therefore larger than that of Saudi Arabia, Kuwait, and Oman in relation to their national economies – those three banking systems range between 80 percent and 100 percent of their national GDP – but smaller than that of the UAE, which supplements its domestic banking sector with an off-shore banking system in the Dubai International Financial Center. The Qatari banking system is also smaller, relative to local GDP, than that of Bahrain – a country that combines a small national economy with a large and well-developed international financial centre.
Credit extended by Qatari banks to the local private sector currently stands at around 40 percent of GDP, well within levels that would be considered prudent by international standards.
Yet the Qatari banking system does contain anomalies. Most obvious is the dominance of Qatar National Bank (QNB), which accounts for half of the combined assets of the 10 commercial banks, and an even greater percentage of loans and deposits.
QNB’s close relationship with the government was confirmed last year when the bank’s Chief Executive Officer, Ali Sherif al-Emadi, was appointed Finance Minister, and then took over the Chairmanship of the bank. Emadi’s predecessor as Finance Minister, Youssef Kamal, had also been chairman of the bank. The Qatar Investment Authority (the sovereign wealth fund) owns 50 percent of the bank’s shares.
With an inside track to government business and government deposits, QNB looks set to retain its dominant position, and with capital funds more than three times larger than the next biggest bank (Commercial Bank), it is the only local institution capable of handling some of the country’s larger financial requirements.
More fundamentally, there is the question of rapid credit growth. Bank credit to the private sector grew by an annual average of 13 percent in the three years to the end of 2012, and preliminary figures suggest a similar rate of growth for 2013. That is roughly twice the rate of economic growth.
Real estate lending has been growing by nearly 30 percent per year and now accounts for nearly one third of all private sector lending, compared to a little over a fifth four years ago.
In nearly any other country in the world, such rapid credit growth would indicate that the banking system was heading for crisis. Yet Qatar does have some advantages that are absent elsewhere.
The increase in bank lending is being driven primarily by real economic activity rather than by speculation. The expansion of industrial projects has created a genuine need for more housing and office space. The health of government finances (and with them, liquidity in the economy as a whole) is underpinned by revenues from the country’s exports of oil and gas. This is not an economy that surfs on the economic waves created by others in the region: it has its own revenues, and those revenues are considerable.
It is also important to note that the growth in credit, both to the private sector and to the government and state-owned companies, is being financed primarily from increases in deposits. The loans to deposit ratio of the banking system as a whole has remained fairly stable in recent years at around 100-110 percent. Reliance on foreign bank funding has increased in absolute terms but it remains at around 15 percent of the banks’ total balance sheet.
The banks will continue to benefit from the State of Qatar’s high credit ratings. The government has AA ratings from both Moody’s and Standard & Poors, enabling the larger individual commercial banks to command ratings of at least single A.
The Qatari authorities have also shown that they will stand behind their banks if they face problems. During the global financial crisis of 2007-2009, state-owned institutions bought troubled real estate assets from some of the commercial banks and offered to make equity injections.
Over the next few years, the world will be watching as Qatar builds the infrastructure needed to host the 2022 World Cup, and the financial industry will be focussing in particular on the development of financial market infrastructure and regulation. It is inconceivable that at this crucial juncture in Qatar’s development, the local authorities could relax their commitment to local banks.