CAN BASEL III DENT IS­LAMIC BANKS' GROWTH?

Will the Is­lamic banks around the world in­clud­ing four of them in Qatar, which have been main­tain­ing their growth tra­jec­tory so far, sus­tain the mo­men­tum once Basel III norms are in place in 2018?

Qatar Today - - INSIDE THIS ISSUE - BY V L SRINI­VASAN

Qatar's Is­lamic banks have been bullish all th­ese years but what will hap­pen to their growth rate once Basel III norms are in place in 2018?

Qatar To­day finds out.

“If we look at the prod­ucts that are be­ing of­fered by Is­lamic banks in Qatar to­day, we can no­tice that there is a lot of in­no­va­tion in prod­uct cre­ation com­pared to a decade ago or when Is­lamic banks started their op­er­a­tions.”

DR MO­HAMMED GHIY­ATH SHEIKHAH Head of Lo­cal & In­ter­na­tional In­vest­ments and Trea­sury & In­vest­ments Qatar In­ter­na­tional Is­lamic Bank

Is­lamic fi­nance has been the fastest grow­ing business in Qatar and its mar­ket share has reached about 25% of the Qatari mar­ket at present and is ex­pected to cross 50% by the end of the decade.

Sta­tis­ti­cally speak­ing, the Is­lamic as­sets, which were QR119 bil­lion ($32.6 bil­lion) in De­cem­ber 2010, have grown to QR213.1 bil­lion ($58.4 bil­lion) in De­cem­ber 2013, reg­is­ter­ing a stu­pen­dous growth rate of 78.6% over three years. This can be at­trib­uted to the fact that th­ese banks are tar­get­ing all seg­ments – whole­sale, in­sti­tu­tions and re­tail – on the lines of con­ven­tional banks.

The eco­nomic growth in Qatar is ex­pected to reach around 10% in the next few years and this kind of growth re­quires fund­ing. At present, there is enough business for Qatari banks in­clud­ing con­ven­tional banks as the gov­ern­ment has taken up mas­sive in­fra­struc­ture projects. How­ever, the ma­jor chal­lenge for the Is­lamic banks is to ex­pand their global foot­print to keep the cur­rent growth.

Ac­cord­ing to mar­ket watch­ers, the Is­lamic banks are awash with funds and strong enough to meet Basel III's cap­i­tal re­quire­ments. How­ever, it is the de­posit base

that may get in the way of their un­hin­dered growth as no riba (in­ter­est) would be paid or re­ceived on such fi­nan­cial in­stru­ments as per the Sharia prin­ci­ples.

Short­age of HQLAs

The banks have to negate the vo­latil­ity to abide by Basel III reg­u­la­tions by in­creas­ing their high-qual­ity liq­uid as­sets (HQLAs), which are in short sup­ply, and it would be in­ter­est­ing to see how they re­solve the is­sue.

This is not only limited to the Is­lamic banks in Qatar but to all such in­sti­tu­tions across the world. In fact, the reg­u­la­tors are again look­ing at the Kuala Lumpur-based Is­lamic Fi­nan­cial Ser­vices Board (IFSB), a global stan­dard-set­ting body set up by Is­lamic banks and reg­u­la­tors, which is likely to re­lease a guid­ance note on the sub­ject in early 2015.

The IFSB has is­sued some reg­u­la­tory stan­dards that con­sti­tute the equiv­a­lent of Basel II for Is­lamic fi­nance in 2005 which helped the Is­lamic banks to com­pute a ra­tio equiv­a­lent to the Basel II cap­i­tal ad­e­quacy ra­tio by tak­ing into ac­count the Profit Shar­ing In­vest­ment Ac­counts (PSIAs)-speci­fici­ties of Is­lamic banks.

In­no­va­tion, the need of the hour

Head of Lo­cal & In­ter­na­tional In­vest­ments and Trea­sury & In­vest­ments at Qatar In­ter­na­tional Is­lamic Bank (QIIB) Dr Mo­hammed Ghiy­ath Sheikhah says that the Is­lamic banks in the coun­try have al­ready met all re­quire­ments of Basel III norms as they have a strong cap­i­tal base and very healthy fi­nan­cial ra­tios.

He says the present Sharia-com­pli­ant prod­ucts can meet the de­mand of the mar­ket. How­ever, there al­ways is a need to cre­ate more in­no­va­tive prod­ucts to en­able the Is­lamic banks to grow fur­ther and com­pete with the con­ven­tional bank­ing sec­tor.

“If we look at the prod­ucts that are be­ing of­fered by Is­lamic banks in Qatar to­day, we can no­tice that there is a lot of in­no­va­tion in the prod­ucts cre­ation com­pared to a decade ago or when Is­lamic banks started their op­er­a­tions,” Dr Sheikhah adds.

Dr Sheikhah also feels that the present reg­u­la­tory frame­work in Qatar is ap­pro­pri­ate and suf­fi­cient to en­cour­age growth and mit­i­gate all the re­lated risks that many banks are fac­ing. “The sukuk mar­ket is de­vel­op­ing but will take some time to be ac­tive and many com­pa­nies will use sukuk as a fi­nanc­ing ve­hi­cle when the mar­ket will de­velop,” he adds.

Im­mense con­tri­bu­tion

“I think that Is­lamic banks in the coun­try are in a good po­si­tion to meet Basel III re­quire­ments, like other banks in Qatar,” says Mo­hamed Da­mak, An­a­lyst at Stan­dard & Poor's Rat­ing Ser­vices.

Da­mak says that Is­lamic banks are con­tribut­ing to the fi­nanc­ing of the sig­nif­i­cant project pipe­line in Qatar akin to con­ven­tional fi­nan­cial in­sti­tu­tions.

“The key chal­lenges the Is­lamic banks face in the fu­ture are sim­i­lar to those faced by con­ven­tional banks, namely high ex­po­sure to the real es­tate sec­tor. This is all the more true for Is­lamic banks due to the as­set back­ing prin­ci­ple in­her­ent in Is­lamic fi­nance, and the sig­nif­i­cant com­pe­ti­tion due to the nar­row­ness of the mar­ket,” he says.

It may be men­tioned here that in Qatar, con­ven­tional banks are no longer au­tho­rised to of­fer Sharia-com­pli­ant prod­ucts and that a por­tion of the gov­ern­ment-spon­sored projects is gen­er­ally fi­nanced us­ing Sharia-com­pli­ant fi­nanc­ings. The com­bi­na­tion of th­ese re­sults had re­sulted in a rel­a­tively pro­tected en­vi­ron­ment for Is­lamic banks.

Da­mak points out that the Qatari is­suers have been tap­ping the sukuk mar­ket more ac­tively this year. The to­tal amount of is­suance by Qatar-based is­suers reached QR10.92 bil­lion ($3 bil­lion) as of Oc­to­ber 1 com­pared with QR3 bil­lion ($823 mil­lion) in the same pe­riod last year. How­ever, all th­ese is­suances were done by the gov­ern­ment.

The main rea­son for the un­der­de­vel­op­ment of the sukuk mar­ket is the high liq­uid­ity in the Qatari bank­ing sec­tor, though sukuk is­suance in Qatar was QR19.84 bil­lion ($5.45 bil­lion) of the to­tal QR168.9 bil­lion ($46.4 bil­lion) around the world, ac­count­ing for 12% of the global sukuk is­suance in 2012.

“The lo­cal sukuk mar­ket is still to be de­vel­oped and the Qatar Cen­tral Bank, and more gen­er­ally reg­u­la­tors, can take the op­por­tu­nity of Basel-III and the lack of HQLA for Is­lamic banks as an op­por­tu­nity to de­velop the nec­es­sary in­fra­struc­ture lo­cally,” he adds

“The key chal­lenges the Is­lamic banks face in the fu­ture are sim­i­lar to those faced by con­ven­tional banks, namely high ex­po­sure to the real es­tate sec­tor. This is all the more true for Is­lamic banks due to the as­set back­ing prin­ci­ple in­her­ent in Is­lamic fi­nance; and the sig­nif­i­cant com­pe­ti­tion due to the nar­row­ness of the mar­ket.”

MO­HAMED DA­MAK An­a­lyst Stan­dard & Poor's Rat­ing Ser­vices

Newspapers in English

Newspapers from Qatar

© PressReader. All rights reserved.