Fitch Ratings-Dubai/London: Qatar Central Bank’s (QCB) launch of Treasury sukuk is a structural improvement, says Fitch Ratings, as it provides domestic Islamic banks a venue to invest their excess liquidity. In the past, such short-term liquiditymanagement tools – in the form of Treasury bills (T-bills) – were only available to conventional banks, placing Qatari Islamic banks at a disadvantage as they couldn’t invest due to sharia restrictions. Qatari Islamic banks’ funding and liquidity profiles continue to be stable and Islamic banks’ market share continues to grow, reaching 27% at end-1H22. QCB issued QAR6 billion (USD1.6 billion) of T-bills and sukuk on 4 October 2022.
Qatari Islamic banks use Islamic liquidity-management tools including interbank placements, Islamic repurchase agreement, Qatar Money Market Rate Standing Facility, and maintaining reserves with QCB. Islamic banks also invest in Qatar government sukuk. However, the government sukuk has limited effectiveness as a liquidity-management tool due to its medium-to-long maturity, and the general buy-and-hold nature of sukuk investors.
The issuance is part of the first auction conducted under the enhanced auction procedures introduced in September 2022. QCB increased the number of Treasury instruments, including Islamic instruments, and launched shorter-tenor T-bills and sukuk, of one week and one month. T-bills and sukuk yields are expected to be consistent with headline interest rates and to help further develop the domestic yield curve, provide a debt pricing reference, and expand domestic debt capital markets (DCM).
Government T-bills are usually issued as monetary policy tools, to develop capital markets, diversify funding and provide an investment tool for banks. Short-term government sukuk are already present in core Islamic finance markets, such as Malaysia, Bahrain, Indonesia, Turkey and Pakistan. It is yet to be assessed if QCB’s Treasury sukuk are tradable; non-tradability could affect its liquidity characteristic.
The Qatari authorities have a strong propensity to support all domestic banks should there be liquidity pressures. For instance, the authorities placed significant deposits with the banks to support sector liquidity in 2H17 following the start of the blockade between Qatar and some of its neighbours; and between 2009 and 2011, some banks received capital injections to enhance their capital buffers, and the government purchased some problem assets from the banks. High hydrocarbon prices are supporting the strong economic rebound in operating environment conditions for Qatari banks. The 2022 FIFA World Cup and higher private-sector demand from improving business sentiment also underpin this trend.
The offering of T-bills and sukuk could open the path for domestic corporates and banks to issue riyal bonds and sukuk and diversify funding. Domestic DCM development benefits smaller Qatari issuers as international issuance has greater complexities, higher issuance cost, additional disclosure requirements, with difficulty in raising smaller amounts in the international market.
It could also help domestic, regional and international investors expand their investment options. The riyal’s peg to the US dollar supports asset-liability management, avoiding additional currency-risk exposure, and hedging. It could allow investors access to smaller-sized or lower-rated domestic issuers unable to issue debt in the international market. However, investing in the broader corporate debt market could entail additional credit risk. A key hindrance to the domestic DCM growth is a corporate funding culture in Qatar and the GCC, which are geared towards bank financing rather than bonds or sukuk.
In Qatar, the volume of the outstanding bonds and sukuk, in all currencies, reached USD133.9 billion at end-3Q22, based on Bloomberg data. Outstanding riyal bonds and sukuk equalled USD34.4 billion or 25.6% of the total, with issuance mainly from the government and the central bank. Outstanding riyal sukuk reached USD11.1 billion at end-3Q22.