As reported here earlier this week, Sunday’s surprise announcement by Qatar’s central bank that it was to require conventional banks to get out of Islamic banking immediately sparked a surge in the price of shares in Islamic banks. It also prompted speculation that the central banks in some other countries with a high proportion of Muslim citizens could follow suit.
Some 18 banking companies with a total of 263 branches were registered in Qatar at the end of September, according to the QCB’s website. Of these, seven companies are categorised as "traditional foreign banks", including HSBC Bank Middle East, Standard Chartered Bank, United Bank, Arab Bank and BNP Paribas, of which only two — Jordan-based Arab Bank and London-based HSBC — are shown as having dedicated Islamic branches, of which each has only one. In total, the seven foreign banks operate only 20 branches in Qatar, including the two Islamic ones.
Last month, New York-based JPMorgan Chase also received a licence to operate in Qatar.
‘Difficult to manage risk’
In a statement on its website dated 10 Feb, the banking regulator noted that the “recent phenomenon” of Islamic branches of conventional banks had led to a “co-mingling of their assets and liabilities”, which it said, given the “overlapping nature of non-Islamic and Islamic activities” at the conventional banks, had “made it difficult to properly manage the risks encountered by these banks”.
Applying oversight instruments and prudent ratios and indexes for risk management is complicated when you have such different banking systems, it noted, while financial reporting was also being strained, “since each type has different international standards”.
Then too, guidelines issued by the Malaysia-based Islamic Financial Services Board (IFSB), which Qatar is in the process of adopting for its Islamic banking sector, are different from those applicable to commercial banks under Basel II and III, the QCB statement pointed out.
“On practical and legal levels, the Islamic branch capital cannot be separated from the bank’s capital for independent risk weighting, especially in the next phase, since banks are preparing for the implementation of Basel III requirements.”
Separately, the QCB noted that there were also monetary policy concerns as well, since the “current overlap between non-Islamic and Islamic activities of conventional banks operating within the State” created challenges for the QCB’s ability to make use of monetary policy instruments in the way that it needed to, in order to maintain an effective and efficient monetary policy.
By segregating the two types of banking, the QCB will be able “to hae a systematic framework of liquidity management and improve the efficiency of open market operations,” the QCB statement concluded.
“This will also open new prospects for the monetary policy to develop new instruments targeted at these two types of banking activities, according to the size and relative weight in the market, in addition to [their] degree of influence on money supply.”
Questions for banks
The statement does not say whether conventional banks would be able to continue to offer Islamic banking services if they obtained separate banking licences for them, and operated the two businesses as separate entities.
It does say that it has issued "specific directives to each of the conventional banks that have Islamic branches, directing them to stop opening new Islamic branches, accepting Islamic deposits and granting new Islamic finance operations", and that a time frame of "up to December 31, 2011" had been given for such banks to wind down their Islamic branches’ operations.
A spokesman for HSBC Holdings, which has had operations in Qatar since 1954, told International Adviser on Tuesday that the bank was “communicating with the Qatar Central Bank to seek clarification on this issue".
Qatar, which is located on a Connecticut-sized penninsula adjacent to Saudi Arabia in the Persian Gulf, has a population of around 1.63 million people. It is the world’s largest producer of liquified natural gas, and in part for this reason its population is among the world’s wealthiest, when measured on a per capita GDP basis.
The country is due to host the tenth Gulf Cooperation Council Banking Conference on 23 and 24 March, when the topic "GCC banking and its role in development in light of current updates — reality and ambition" will be addressed.
For more on Qatar, see the February issue of International Adviser magazine, which may be read and downloaded in pdf form here.
