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Sep 12 2011

Islamic banks eye Qatar

Islamic banks eye Qatar
September 2011
Islamic banks in the UAE are seeing the market 'greener' on the Qatar side in the wake of the recent directive from the banking regulator in Qatar banning conventional banks from running Shariah windows.

Sources told Banking & Business Review (BBR) that a few Islamic banks from the UAE are seriously weighing the option of applying for banking licence in Qatar where not many Islamic banks are operating currently, but at the same time the economy is said to be heading for big growth.

According to a recent report by Gulf Investment House (GIH), Qatari banks will benefit from strong macroeconomic fundamentals of the economy and the high level of domestic spending. It said strong Government support to the banking sector would ensure low risk.

"We have a positive outlook for Islamic banks due to limited competition in a high growth banking segment (after the Qatar Central Bank move to close Islamic branches of conventional banks by year-end) and possible migration of Islamic loan portfolio of conventional banks by the year end. However, we believe that dampening in retail operations will impact credit growth for both Islamic and conventional banks in the short term," the report mentioned further.

In February 2011 the Central Bank of Qatar issued circular instructing local conventional commercial banks to discontinue their Islamic operations by the end of 2011. The main provisions of this circular were as follows:

Conventional commercial banks should not accept new Islamic deposits, and conventional banks, with immediate effect, and also, they are disallowed from extending new Islamic financing.

They should pay with accrued interest, the existing time deposits during the period until December 2011, while other deposits with maturity post December-2011 are to be segregated until their maturity date.

These institutions can convert their Islamic branches to conventional units by year-end, after informing Central Bank.

According to GIH, this will be a positive move for established Islamic banks in Qatar. "Although the regulation will impact the current operations of commercial banks adversely, established Islamic banks - QIB and Masraf Al Rayan - will gain from this move. It is expected that not only will some amount of Islamic assets/liabilities will move to these banks by year-end but competition too will be reduced in the fast growing Islamic banking industry," it said in its report.

It is in this context, Islamic banks from other GCC countries, especially from the UAE, are eyeing this market, which has developed tremendous potential for growth in the coming decade.

SIB eyes Qatar?

Sharjah Islamic Bank ( SIB ) in its base prospectus released in connection with the recent $400 million sukuk issue has stated that while the bank does not plan to establish an overseas branch network, its management monitors the market landscape closely looking for specific expansion opportunities.

"Any expansion overseas will likely occur through joint ventures and partnerships, with the bank seeking to capitalise on its Islamic credentials and expertise. The Qatari market is one such area in which the bank's management believes that cautious expansion could be feasible as a result of the recent ruling in Qatar prohibiting conventional banks from providing certain Islamic finance products and services," the base prospectus stated.

In the UAE, many conventional banks now have Islamic banking subsidiaries, whereas most remaining lenders have Islamic windows from where Islamic products and services are rolled out. "Islamic window allows our bank offer both options to our valued customers," said Paul Trowbridge, UAB's Chief Executive Officer, during a recent interview with BBR. Though Islamic banks in the UAE have never publicly complained against Islamic subsidiaries and windows of conventional banks for taking away a portion of their business, there are many in the industry who strongly believe that eight full-fledged Islamic banks and several Islamic subsidiaries and numerous Islamic windows render the Islamic banking space of UAE indeed a crowded one.

"Dubai Bank which was established in as early as 2002 and later converted into an Islamic bank in 2007, is now facing the fate of takeover by the Government after the bank has posted a loss for 2009. The shape of things for 2010 is yet to be made public by the management," said financial controller of another Islamic bank.

Emirates Islamic Bank (EIB), the fully owned Islamic subsidiary of Emirates NBD, the largest GCC bank in terms of assets, has ended the first quarter of the current year with a loss of Dh20.068 million against a net profit of Dh66.563 million for the same period last year.

Lending or financing (in the case of Islamic banks) has almost dried up in the UAE with the numbers showing flat growth during the last four quarters. Despite the fact that the liquidity in the system has improved, which is evident from the falling inter-bank rates, the situation has failed to result in credit expansion.

Leaders in the industry though never found UAE over-banked until recently, isolated views are being heard of late about the need for consolidation in the banking sector from certain corners. "In the case of Islamic banks, I think there are a few banks with the same working philosophy and promoted by the same group of people," said another banker. With the economy still going at a slow pace, banks are also bound to find the going tough.

Dubai Islamic Bank (DIB), the first and the largest Islamic bank in the country though has grown by about Dh10 billion during the first quarter to reach an asset base of Dh100.4 billion the Islamic financing has dropped marginally, from Dh57.171 billion to Dh55.570 billion during this period.

The growth was primarily supported by the 'cash and balances with Central Bank', which grew from Dh11.247 billion to Dh18.622 billion during the period. While other banks owe Dh4.654 billion to DIB, customer deposits base improved from Dh63 billion to about Dh73 billion during the quarter. Even Abu Dhabi Islamic Bank (ADBI), which is considered to be an active player in the market, witnessed a drop in its asset base, from Dh75.257 billion to Dh71.448 billion in the quarter ending March 31, 2011.

Qatar banks operate in a booming economy and enjoy high and stable asset quality, but personal lending tightening and Islamic banking regulations will limit bottom-line growth potential for conventional banks, especially those with relatively higher exposure to consumer lending. According to Credit Suisse, the GDP growth for Qatar could be as high as 17 per cent whereas GIH bets on a growth of about 20 per cent for 2011.

"Qatar will be among the fastest growing economies in the world during 2011. A doubling of natural gas production, timely intervention in the banking system, and continuing large public investment in infrastructure have kept growth rates high and resulted in the accumulation of large surpluses in the fiscal and external accounts which have in turn lead to a spurt in asset growth of the local banks," said GIH in its report on Qatar banks.

With investments valued at about $100bn between 2010 and 2015 in various stages of planning and implementation, GIH says, "it's no surprise that public sector spending will continue to drive credit growth in Qatar. The winning of the FIFA world cup bid to host 2022 World Cup is an added boon. We forecast a loan growth of 17.5 per cent for 2011 and a compound average growth rate (CAGR) of 20 per cent during 2010-14 (estimated)."

QCB is laying greater focus on Islamic banks in the new scenario. Qatar's central bank has already said it will launch new capital adequacy rules for Islamic banks, which Islamic bankers say could be based on the guidelines set by Malaysia's standard-setting body Islamic Financial Services Board (IFSB).

© Banking & Business Review 2011


© Copyright Zawya. All Rights Reserved.


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