Qatar’s conventional banks’ are being forced to revaluate the future growth of their Islamic finance business in the wake of wide-sweeping regulations issued by the central bank.
The regulatory changes limit an Islamic branch’s net liability to the bank to 10 per cent of shareholder capital, while assets must not exceed 15 per cent of total assets. There will also be no further issuance of Islamic branch licences according to a statement published by the central bank on 29 August. Banks have been given till the end of 2011 to comply with the regulations.
The changes came with little warning according to Qatari banking heads, but their desired aim is clear – to reduce the competition for the pure Islamic banks.
With Islamic asset growth outstripping conventional, albeit from a lower base, sharia-compliant banking was a rapidly growing source of income. Qatari banks’ Islamic assets grew at an average of 54.3 per cent between 2003-2010, compared to 37.8 per cent in conventional bank assets during the same period.
Banking executives say the major impact of the changes will be on corporate lending given the large size of such deals.
Banks the world over have been keen to get into sharia financing given the estimated 15-20 per cent annual growth of the industry.
Marketed as an ethical alternative to conventional finance, its image has benefited further during the downturn by the fact that the central tenets of sharia law have spared its banks the huge losses associated with Western practices.
The prohibition on speculative trading prevented banks from playing on the derivatives market, nor did they invest in subprime debt.
The increased entrance of both local and international banks into Qatar in recent years has already made it a more challenging environment.
Banks had increasingly been turning to sharia financing to grow their market share, but the latest regulations will inevitably squeeze these profit margins. They will now need to seek out new growth avenues as they adapt to the changing financial landscape.