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'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.
“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