Qatar’s decision to restrict Islamic banking and introduce
limits on consumer borrowing may reduce profit by as much as 22 percent for banks
in the world’s fastest-growing economy.
Net income estimates for Commercial Bank of Qatar QSC, the
nation’s second-largest bank, were cut 22 percent, or QR478m ($131m) on the
rule changes by analysts at Credit Suisse Group AG (CSGN) last month. They also
cut their estimates for Doha Bank QSC, the fourth-biggest lender, by 10
percent, according to a report to clients. Qatar National Bank, the country’s
biggest lender by assets, will be hurt by slower loan growth and a disruption
to its strategy from the decision, Nomura International analysts said last
The central bank in February told all conventional lenders
to wind down their Islamic banking divisions and to stop taking Islamic
deposits immediately on concern they may be using funds from the conventional
bank for Islamic loans. The regulator last month also reduced the amount banks
can lend to Qataris to QR2m riyals from QR2.5m and to foreigners to QR400,000 and
limited the interest lenders can charge on the loans to 1.5 percentage points
over the bank rate, at five percent today.
“The impact is negative for the conventional banks, although
the opportunities are very large for Islamic finance,” said Jaap Meijer, head
of the bank team at Dubai-based Alembic HC Securities. “If you leave banks on
their own, they start to be short-term oriented and be quite reckless with
their lending and that is what the Qatar central bank wants to prevent.”
HSBC Holdings, Europe’s biggest bank, said this week it will
shut its Islamic banking unit in Qatar by the end of December to comply with
the central bank’s decision.
Islamic banks are required to follow Muslim Sharia rules,
which ban the payment and receipt of interest as well as investments in
industries like alcohol and gambling. Islamic lenders pay a profit instead of
interest, and their loans are backed by assets that may include an agreement
where the bank and the borrower agree on the cost and a profit margin.
Qatar, the world’s biggest exporter of liquefied natural
gas, predicts the economy will expand by 15.7 percent this year, helped by fuel
exports, according to the General Secretariat for Development Planning. Growth
will ease to 7.1 percent in 2012 and to four percent by 2013 as early
investment for the 2022 World Cup fails to replace falling energy investment.
The central bank imposed the regulations because there was a
risk that conventional deposits would be used for Islamic lending, Raghavan
Seetharaman, chief executive officer of Doha Bank, said in an interview. There
was “systemic risk to them both,” and therefore a need to separate them, he
Spokesmen for Qatar National Bank and Commercial Bank of
Qatar declined to comment on the rules.
Because the changes “have negative implications on growth,
we think the time has come to turn less positive on the sector,” Mohamad Hawa,
an analyst at Credit Suisse Group, said in a research report last month. The
bank reduced its target price of Commercial Bank of Qatar by 20 percent and of
Doha Bank by 16 percent and cut its rating to neutral.
Islamic loans accounts for 20 percent of Qatar National
Bank’s lending, 11 percent of Doha Bank’s and 8 percent of Commercial Bank of
Qatar’s, according to an Alembic HC report. Alembic said it expects Qatar
National Bank to wind down its Islamic banking and Commercial Bank to sell it
loans. Qatar Islamic Bank, the country’s biggest Islamic bank, is likely to
benefit because it may be able to increase its 29 percent share of the market
for Islamic loans in Qatar, Alembic said.
Qatar has seven conventional banks, which pay and receive
interest on deposits and loans, four Islamic lenders, which don’t, and seven
foreign institutions operating in the country, including the HSBC unit that is
scheduled to close.
Domestic bank credit grew at more than a 40 percent annual
rate from 2006 to 2008, then slowed to 14.1 percent in 2009 and 16.7 percent in
2010, government data show.
For conventional banks, the impact on earnings of winding
down their Islamic banking divisions will be “slim to none,” Ryan Ayache, a
Dubai-based analyst at Deutsche Bank said. People confused the growth of the
last two years as coming from Islamic banking while it actually came and
continues to come from the government, Ayache said.
Qatar has the world’s fastest-growing economy and the
highest per-capita gross domestic product, according to the CIA World Factbook,
and a population of about 1.7 million. Along with the United Arab Emirates,
Qatar hasn’t experienced the anti-government protests that spread elsewhere in
“Islamic banking used
to be more profitable, not anymore,” said Doha Bank’s Seetharaman. “Banks would
earn a 4 percent margin on Islamic loans and a 3 percent to 3.25 percent margin
on conventional lending,” he said. “Now the gap is closed” because of new
competition in Islamic banking, he said.
Qatar isn’t the only country in the region to have framed
new rules on consumer lending. The UAE announced regulations earlier this year
that came into effect May 1 to curb excessive bank lending and cap some service
fees. It didn’t restrict Islamic lending by conventional banks.
The UAE capped personal loans at 20 times a borrower’s
monthly salary and its repayment period to 48 months, while overall installments
for all loans, including personal, car, housing and credit cards, must not
exceed 50 percent of a borrowers’ gross salary and any regular income.
Raj Madha, a Dubai-based analyst at Rasmala Investment Bank,
said he scaled down his forecast of consumer loan growth in Qatar this year to
about 5 percent from 8 percent to 10 percent earlier after the new lending
The rules so far haven’t hurt banks’ profits. Qatar National
reported a 35 percent jump in first-quarter profit to QR1.7bn, Commercial Bank
had a nine percent rise to QR446m and Doha Bank said profit grew 15 percent to QR363m.
Qatar National’s shares have risen 6 percent since the
regulator’s decision in broke in February. Commercial Bank has dropped 15
percent and Doha Bank has shed 15 percent.
“People are getting nervous” because the rules are designed
to promote stability rather than growth, said Ayache at Deutsche Bank. “Why is
there a need for more stability in the banking sector that is not known to be
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