Conventional banks in Doha have begun lobbying the Qatar Central Bank (QCB) to revoke a set of rules that would force them to close down their Islamic banking operations.

The lobbying effort follows the surprise release of a circular on 2 February that instructs conventional banks to wind down and close their Islamic banking operations.

Sources in Doha say banks are now seeking clarifications on how they are meant to comply with the circular and lobbying for a change in the rules. One lawyer adds that he even has clients exploring whether it would be possible to start a legal challenge to the ruling. The UK’s HSBC has said it is talks with the QCB about finding a solution to the problems created by the ruling.

“A lot of banks have invested heavily in developing Islamic branches in Qatar, and they will not just let that all go to waste,” says one Doha-based lawyer. “We have some clients who have already started asking us to look at whether a legal challenge to the ruling is possible.”

The circular is the latest in several issued by the QCB to limit the Islamic activities of conventional banks. The QCB has already issued a ruling that banks set up separate branches for Islamic services, this forced many to invest in new real estate to build new branches for customers looking for sharia-compliant products.

This was followed in late August 2010 by regulations that limited how much lending conventional banks could do through their Islamic windows (MEED 29:09:10).

“We knew that the order to limit Islamic lending was coming last year, but this came as a total surprise,” says a banker at one of Qatar’s largest lenders. “We could live with the 2010 ruling, even though it would limit growth, but this new circular will have a much more detrimental effect.”

Discussions with the QCB, launched in the wake of latest circular, are ongoing and bankers in the country expect further clarification on the ruling to emerge by mid-February.

Sources in Doha say the recent circular was issued without any industry consultation, and gives little guidance as to exactly what next steps banks should take, which is part of the reason that their now so much confusion.

“There is no clarity as to whether the QCB wants the banks to just close down their operations, or if they will do something like issuing new Islamic banking licences for them to operate under,” says the Doha-based lawyer.

If new licences were issued, it would allow conventional banks to operate their Islamic arms under a separately licensed entity. This would help ensure the Islamic activities of the banks remain clear of the conventional deposits. There is a suggestion that ensuring the purity of the Islamic banking system is part of the reason why the QCB has followed its recent path of forcing a demarcation of Islamic and conventional banking activities. The QCB has given no reason for its decision.

The sense of confusion is exacerbated by stipulations in the February circular that conventional Qatari banks shut down all Islamic banking activities, even those outside Qatar. This is despite the QCB holding no authority over banking operations outside Qatar. The August 2010 circular only contained limitations on the local Islamic operations of Qatari banks.

“The concern is that if criticism of this ruling is too vocal then the QCB will get defensive and won’t move on its current position.” says one executive at a Qatari bank.

In the wake of the ruling, shares in conventional Qatari banks fell and Islamic banks in Qatar rose under the assumption that Islamic banks would be able to rapidly expand. One local analyst says it may not be that easy for Islamic banks to cater for the demand if Islamic windows are forced to close. “The local Islamic banks simply don’t have the capacity or the sophistication to cater for the demand if the other banks have to close down.”

The QCB could not be reached to comment.