Qatar’s four Islamic Banks are on a roll as their growth rate, attributed to the government support and also their increased participation in capital expenditure programmes, has outpaced that of conventional banks in the country; but the moot question: Will these banks sustain the momentum once the projects are completed a decade later?
The four Sharia-compliant Qatari-centric banks – Masraf Al Rayan, Barwa, Qatar International Islamic Bank (QIIB) and Qatar Islamic Bank (QIB) – need to expand their operations beyond the country’s borders, as retail banking opportunities here may be restricted due to the limited bankable population in Qatar, in order to stay afloat in the business.
At present only QIB, which has pioneered Islamic banking in the country, has set up branches and offices in the United Kingdom, Sudan, Malaysia and Lebanon and is planning to increase overseas business activities further, while the remaining three Islamic banks have yet to take the call. These banks’ credit outside Qatar is limited to 6.3% of their total credit stock, or 4% of the Islamic banks’ asset base, as of July 2013.
Additionally, the Islamic banks’ gross foreign asset position is limited to about 8.3% of the total balance sheet as against about 20% for the overall sector. This is because a significantly larger portion of the Islamic banks’ interbank and investment exposure is within Qatar.
In a report titled “Qatar’s Islamic Banks Are On A Fast Track To Growth”, Associate Director (CEEMEA Financial Services Ratings) of the Dubai-based Standard & Poor’s Ratings Services Fevzi Timucin Engin says the small bankable population in Qatar could hinder the growth prospects of the Islamic Banks, and they have to launch offshore operations in the long run, like the conventional banks, and acquire assets in emerging markets like Egypt and Turkey, once the credit growth in the country slows to visibly lower levels and also to conform with the Basel III norms.
“Islamic banks have not been very active in the debt capital markets, with only Qatar Islamic Bank and Qatar International Islamic Bank having issued sukuk. In addition, the contractual maturity of the deposits collected by the Islamic Banks is very short-term, whereas the lending tenors are substantially longer. However, we believe the funding and liquidity requirements of the incoming Basel III regulatory standards will move the Qatari Islamic banks to tap the debt capital markets more actively over the next few years and raise longer-term funding,” Engin says.
By accessing the debt capital markets more frequently, the funding profiles of the Islamic banks would diversify as about 65% of their total balance sheet is funded by customer deposits and another 18% is shareholders’ equity. At the same time, the gross interbank funding on their balance sheet is limited, at about 12%.
These four banks have prospered in the past few years due to the rising demand for local credit for project finance for the government’s infrastructure and investment projects. As the government has announced more development activities in the next decade, they are set to grow along with their contribution to the country’s banking system.
“The balance sheets of these four banks will touch QR364 billion (USD100 billion) by 2017, up from QR196.56 billion (USD54 billion) at the end of 2012, assuming that they grow by an average of 15% per year over the next five years. This will make Qatar’s Islamic banking markets the third largest, after Saudi Arabia and the UAE, in the GCC region,” Engin says. With the Qatar Central Bank (QCB) already taking steps to implement the Basel III norms, the Islamic banks, which have not traditionally been active in the debt capital markets, will have to change their strategy because of funding and liquidity requirements. According to Engin, the four banks currently represent one-quarter of Qatar’s banking system in terms of assets of QR198 billion ($54.4 billion) and are likely to grow further, as the QCB has banned the domestic commercial banks from offering Islamic banking products through what are called “Islamic windows” in the onshore conventional banking system.
Due to this the conventional banks, barring Qatar National Bank, have not only conceded part of their market share to the Islamic banks but also had to face competition from the latter, especially in retail lending.
Further, the Qatari government and its related entities are the main sponsors of these four Islamic banks. The Qatar Investment Authority (QIA), the nation’s sovereign wealth fund, is a key shareholder in three of the Qatari Islamic banks – Masraf Al Rayan, Qatar Islamic Bank, and Qatar International Islamic Bank. In addition, two government-controlled entities – Qatar Holding and Barwa Real Estate – are the principal shareholders of Barwa Bank, the nation’s youngest Islamic bank that started operating in 2010. Statistically speaking, between 2006 and 2012 Qatar’s Islamic banks grew their domestic loans and resident deposits by an average compound growth rate of 46% and 40% respectively, as against 31% and 23% for the entire banking system.
Engin says the foreign liabilities of the Islamic banks are similarly limited, representing about 11% of total liabilities as of July 31, 2013. Unlike the conventional banks, they enjoy a net foreign asset position, albeit a limited one, because they self-fund predominantly from the local deposit market. The domestic credit-to-resident deposits ratio of the Qatari banking system stood at 109% as of July 31, 2013, whereas the ratio is lower for the country’s Islamic banks, at 96%.
Qatar Islamic Bank: Established in 1982, Qatar Islamic Bank is the oldest Islamic bank in Qatar and the largest in terms of assets. It had a balance sheet of $20.3 billion on June 30, 2013. QIA, the country’s sovereign wealth fund, currently holds 16.7% of the bank’s capital. Individuals, including members of the Qatari royal family, hold about 50% of the shares, and the bank’s shares are listed on the Qatar Stock Exchange.
Qatar Islamic Bank is a corporate bank, with retail lending limited to about 16% of the bank’s lending book. It is also highly active in real estate lending and contracting, which together constitute about 36% of its gross lending book as of year-end 2012.
Masraf Al Rayan
Established in 2006, Masraf Al Rayan is the Qatari government’s main Islamic bank, lending about 63% of total funds to government and public sector entities at year-end 2012. Masraf Al Rayan’s lending relationship with the government enabled the bank to report 55% compound annual growth in lending between 2007 and 2012, which was well above the average sector growth rate. Consequently, the bank is now the second-largest Qatari Islamic bank in terms of its asset base ($17.7 billion as of the first half of 2013), and the largest in terms of its lending book of $12.1 billion. According to publicly-available data, QIA and the Qatar Armed forces are the largest shareholders in Masraf Al Rayan.
Qatar International Islamic Bank
Established in 1991, Qatar International Islamic Bank is the third-largest Islamic bank in the country, with total assets of $8.6 billion and lending of $4.6 billion as of the first half of 2013. Like the other Islamic banks, Qatar International Islamic is largely a corporate bank, with real estate and service sectors constituting 26% and 27% of its gross lending respectively at year-end 2012. QIA is one of the key shareholders of the bank.
Barwa Bank is the youngest Islamic Bank in Qatar, and although its first full year of operations was in 2011, the bank operates with a balance sheet of $7.8 billion as of March 31, 2013. Barwa Bank has the highest concentration of lending to contractors among the Islamic banks, and at about 15% as of year-end 2012 also has the highest exposure to non-bank financial institutions. Barwa Real Estate Company is the largest shareholder of the bank, followed by Qatar Holding.