Tuesday, Feb 08, 2011
By Nicolas Parasie
Of ZAWYA DOW JONES
DUBAI (Zawya Dow Jones)--Qatar's decision to prohibit conventional banks in the gas-rich Gulf state from operating an Islamic business from next year could bring more clarity and standardization to an industry that is often criticized for lacking both, and inspire other regulators across the region to implement similar measures.
Senior bankers in Qatar said they were taken by surprise by a central bank directive issued earlier in February ordering conventional banks to shut down their Islamic operations by the end of 2011, only six years after receiving the watchdog's approval to introduce them.
"This decision may have certain non-desirable short-term effects for conventional banks but in the long term this may be the first step towards enhancing consistency and standards across Islamic products that are offered in Qatar," said Samer Eido, Middle East head of banking and finance at law firm Simmons & Simmons.
Qatar Central Bank said it issued the directive for the purpose of regulating the risks surrounding the banking sector but didn't provide further explanations, according to one lender's translation of the central bank circular seen by Zawya Dow Jones.
Both Qatari and international lenders have invested heavily in building up a presence in Islamic finance, a fast-growing global industry that some value at as much as $1 trillion.
Qatar's largest lender, Qatar National Bank, derives 9% of its profits from Islamic banking, while Doha Bank sees 13% of its profits arising from its shariah-compliant business, according to figures from AlembicHC research. Affected local banks, but also U.K. giant HSBC PLC, are now seeking clarification from the central bank, possibly resulting in a longer-term transition period and certain readjustments to the directive.
"It is early days for us to assess...whether it is feasible to actually stop the business from now to the end of the year because the lending that you have is not normally short term in nature, it can span, on average, three to five years," said the chief financial officer of one Qatari bank, who declined to be named.
An HSBC spokesperson said on Sunday in reaction to news reports on the central bank decision that the lender is "communicating with the Qatar Central Bank to seek clarification on this issue."
NEGATIVE IMPACT
Shares in Qatar's conventional banks with Islamic offerings fell in the past two sessions, while Islamic lenders largely rose.
Masraf Al Rayan shares closed 3.6% higher at QAR23.92 Monday. The Islamic bank was limit up 10% Sunday. Qatar Islamic Bank closed 0.8% lower at QAR87.60 Monday after rising 1.3% to QAR89.40 a day earlier. Qatar National Bank, a conventional bank that offers Islamic services, fell 1.9% to QAR136.40 Monday, after slumping 4.8% in the previous session.
"As the conventional Qatari banks already represent a decent share of the total Islamic banking sector in Qatar, we feel that this new regulation will have a negative impact on the future growth of those institutions," said analysts at NBK Capital in a note.
The note added that the central bank decision comes only a few years after conventional Qatari banks were allowed to have Islamic operations, namely 2005, and only a few months after directives were issued imposing some limits on the Islamic banking businesses of conventional Qatari banks.
"It's a decision to allow Islamic Banks to grow faster, to give them segregation," said Rami Sidani, head of investment at Schroders Investment Management in Dubai.
Qatar's move may inspire other regulators across the region to adopt a similar approach, if it proves satisfactory.
"In the short term, other regional regulators will be looking closely to the effects of this decision on the Qatari market and if this experience proves to be successful, others are likely to follow suit," Simmons & Simmons' Eido said.
Qatar's banking sector, considered by some experts as overcrowded and ripe for consolidation, may also witness some acquisitions as a result of the central bank's move.
"In any event, I do not expect that conventional banks will give up on Islamic banking business which has proven to be very profitable," said Eido. "I expect some banks may seek to set up standalone Islamic banks through which they would conduct Islamic banking activities or alternatively seek to acquire existing Islamic banks through which to conduct their operations," he added.
Conventional banks could apply for a licence to set up separate banks with its own capital and balance sheets to conduct Islamic banking, in effect easing regulators' concerns that the lenders' sharia- and non-sharia assets were not completely split.
Qatar's central bank more than a month ago issued a circular to conventional banks inviting them to apply for separate licences if they wanted to continue doing Islamic banking.
"By pushing this decision through the central bank may be indirectly pushing the conventional banks in that direction," Eido said.
-By Nicolas Parasie, Dow Jones Newswires; +9714 446-1681; nicolas.parasie@dowjones.com
(Alex Delmar-Morgan in Doha contributed to this report.)
Copyright (c) 2011 Dow Jones & Co.
(END) Dow Jones Newswires
08-02-11 0604GMT
