Banking in Qatar - Case Study Example

Banking in Qatar Contents Introduction 3 References 9 Introduction The performance of commercial banks is dependent on the market structure in which they operate. Perfect competition is an idealistic market structure where socially efficient and just outcomes happen. But pure monopoly results in inefficient utilisation of resources, inequality in income distribution along with social welfare loss. The monopoly is viewed as a bad situation by the societies that need government intervention for correction by using a variety of structures ranging from perfect competition to pure monopoly. The decision makers face the grey area of market structures where it becomes difficult for them to determine the deviation from the competitive norm. Since the mid-1970s Qatar Central Bank issued a law forbidding foreign banks to enter Qatar, but still the foreign banks existed even before this law became applicable. Presently the Qatar banking system includes 14 commercial banks out of which seven are national and seven foreign along with one specialised bank. Qatar had two banking entities prior to commercial export of Qatar’s oil. In 1950 the first ever bank of Qatar was established when the Eastern Bank established its Qatar branch. In 1954 and 1956, the Ottoman Bank and the British Bank of Middle East opened their respective Qatar branches. These were followed by two Arab banks Intra Bank in 1960 and Arab Bank in 1957. The banking system of Qatar was dominated by foreign bank branches till the mid-1960s when the first national bank, Qatar National Bank, was established in 1965, which was a joint venture capital shared equally between the public and Government of Qatar. With economic expansion in Qatar, more foreign banks were attracted and hence the government authorised four new foreign banks in the second half of the 1960s. In 1973 the government of Qatar established the central bank of Qatar known as the QMA which later came to be known as QCB (Qatar Central Bank). The function of QMA is to regulate the banking finances and credit, issue of currency, managing foreign reserves which were necessary to support the Qatari Rial. QMA took a number of steps, restricting the licensing of new branch openings or new bank establishments of foreign banks was the first of them. In 1973 Qatar was in the middle of oil boom which promoted economic growth, and this resulted in the expansion of the banking sector. During this period three national banks were established. Further during 1980s two additional national banks were added to the banking system. But in 1989 the Qatar branch of Al-Mashrek Bank was put into liquidation. He Sheikh Adbullah bin Saud Al Thani, Governor of Qatar Central Bank, the total assets of commercial banks working in Qatar increased by 18 percent during the first half of 2013. He stated that the total assets of the commercial banks operating in the region have reached QR 875 billion in 2013 from QR 200 billion at the end of 2008. At the same time the deposits have increased by 41 percent and the credit facility grew by 15 percent. The economic and political stability along with the flexibility of the banking sector helped Qatar to reach its goal of development in-spite of global economic instability. Sheik Abdullah told that in 2012 two important laws was introduced. One was Law No. 8 on Qatar Financial Markets Authority (QFMA) while the second was regarding the regulation on functioning of the QCB. The above two laws was regarding helped restructure the framework of the financial sector in Qatar. It acted as a framework for cooperation between QFMA, QCB and Qatar Financial Centre Authority and it acted as a healthy update on the regulatory framework which governs the financial sector in Qatar. The Qatar banks have expanded their branch networks from 38 branches in 1993 to 71 in 2002 (Muharrami, 2014, p. 15). The Banking sector in Qatar has been one of the top performers within the GCC banking region by capitalising on financial resources, economic growth and huge investment. Qatari banks are now well capitalised and profitable. Among the GCC markets, this sector is most profitable in-spite of the fact that there are some limitations of this small domestic market. The banking sector continues to seek acquisitions nationally and internationally and continue this trend over the medium and long term. Qatar National Bank (QNB), flagship bank of Qatar and biggest banks in GCC leads the way in expanding its operations abroad. At the same time other banks like Commercial Bank of Qatar which did acquisition of Turkish lender Alternatif Bank in 2013 and thus they are also growing internationally. Qatar National Bank has low funding cost base and high capital and liquidity base. At the same time the bank has been able to increase its ability of sourcing its deposits from both home and international bank. In 2012, the total deposits of QNB from European countries have grown to 19.6 percent in 2012 from 0.9 percent in 2010 and it had the lowest cost of fund in Qatari market. The bans in Qatar have a strong presence across markets with huge long term growth rate potential like in Iraq and Libya. Qatar National Bank acquired Egypt based National Societe Generale Bank which was in line with their strategy of expanding outside Qatar. Further QNB plans to have a majority stake in one of the top 10 banks in Turkey. QNB lost its recent acquisition of Deniz Bank but is thought to be looking for more opportunities in the large Turkish market. Hence quite clearly Turkey remains one of the main targets for many GCC banks because of strong growth opportunities and attractive valuations. In 2012 QNB acquired Union Marocaine de Banques in Morocco and Commercial Banks International in UAE (Stubbing, 2014, p. 1). QNB has one of the widest international branches, associate banks and subsidiaries amongst GCC banks, which is present in 24 countries. Over the years, the international operation of the bank has been expanding gradually through both acquisitions an organic growth and this bringing diversification to reduce their risk, diversification of income and sources of funding. Over the last few years the Qatari banks have entered into many acquisitions which indicate the strong financial fundamentals of their banks and weak financial positions of European and international banks. The European banks are exiting from the MENA region because of their strong focus on improving their capital positions and hence providing opportunities for Qatari and GCC banks. The banks in the Qatari banking system have strong balance sheet positions due to high liquidity and capital ratios. In 2012, it was found that the average capital adequacy ratio for Qatari banks was 17 percent and the non-performing loan ratio of the sector was only 1.6 percent. There are other banks like Masraf Al Rayan which has agreed to the terms of acquiring Islamic Bank of Britain. For this the banks had set aside QAR 1 billion for the next two years. There has been strong growth in the loan portfolios of Qatar Banks due to increased government sector lending. The loan book of Qatar Banks has increased from 2009 to 2012 at a compounded annual growth rate of 26 percent and thus lending to the government sector increased during this period. Comparatively in 2012 the loan growth rate of private sector was 11 percent. The public sector lending in the portfolio of domestic loans of Qatar has increased from 32 percent in 2009 to over 50 percent. The main reason for such increase in overall lending activities of Qatar has been the financing of large capital investment in the infrastructure of Qatar. In 2016 the government of Qatar is planning to spend $ 140 billion on infrastructure due to preparation of 2022 soccer World Cup. There are other plans which is needed to be completed by 2020, like basic infrastructure including construction of new Airport, new roads ($ 28 billion), new railway metro ($ 44 billion) and a new Port ($ 11 billion). Though it is predicted that budget will provide the funds needed for central government projects, it is estimated that additionally $ 160 billion is to be funded from the market. This is estimated to increase the high domestic credit growth for both household sector and private sector companies included for the execution of government projects (Private Sector Qatar Team, 2013, p. 1). The main driver of banking growth in Qatar was domestic asset which was mainly due to growth in credit which accounts for a major part of domestic asset. The largest share of assets was of Conventional banks mainly due to strong growth in their balance sheet. As of March 2013, the top five banks in Qatar comprised of 77 percent of total banking sector assets. The public sector was the key driver of growth rate on banking sector deposits. Public sector was the main growth driver for gains in the banking sector deposits. As of March 2013, the public sector deposit increased by 83 percent on a year-on-year basis. Qatari Banks have been entering into international bond markets and have issued bonds worth USD 4.5 billion in 2012. Qatari banks enjoy high credit ratings, strong growth in their financial and operational results. These features have allowed them to be successful access the debt markets and find funding options at competitive rates. Qatari Banks enjoy increasing profits with their net profits increased by 7.5 percent in 2012. The return on equity achieved by them was 17.5 percent while the return on assets stood at 2.7 percent. The overall profitability of the banks has been supported by low provisioning requirements and low cost base (BQ, 2013, p. 1). It is expected that the banking sector of Qatar will maintain its profitability for the period 2013-14 and will continue on the growth path while taking into account the global expansion by local banks. The banks of Qatar will look at international expansion since the global asset prices will remain attractive and with rapid expansion of Qatar market there will be increased opportunities and needs of banking related services. It is predicted that over the next few years the lending by Qatari Banks will increase significantly with annual growth of around 20 percent for the period. The customer deposit growth was 26 percent matched only by loan and it exceeded the growth in total assets by a significant margin. Hence the liquidity of the overall banking industry improved since banks have increased their liquid assets. Form the above information it is clear that all banks in Qatar will benefit though it is expected that QNB will be the main beneficiary of such strong government spending since it is the preferred banking partner of the Qatari government. It is estimated that Islamic banks like Qatar Islamic Bank (QIB) and Masraf Al Rayan will grow strongly in Qatar due to ban on conventional banks for offering Islamic banking services in Qatar. But there exist some challenges for QIB as the loan asset quality has degraded. Qatar Islamic has built a wide extensive international Islamic banking network by acquiring ort establishing stakes in a number of finance houses and associate banks in London, Lebanon and Malaysia. The focus on the domestic market was to build wide branch network to serve retail customers with deposit products and Islamic financing. On the wholesale side, Qatar Islamic Banking had a significant involvement in large financing projects like oil and gas, infrastructure and property development sectors. QIB had acquired good investment banking expertise through QInvest. The real estate division of QIB provides project management and advisory services to their clients and looks after the real estate Investment of the Bank. QIB has a stake of 49 percent in AL Aqar Real Estate Development and Investment Co. QIB also maintains a controlling stake of 49 percent in Durat Al Doha which is a real estate developer. Prospects of Qatari Banks are positive and it will be driven by strong domestic lending growth. The banking sector of Qatar is acquisitive and it will remain like that while the domestic banks will continue to look for opportunities outside of Qatar. References BQ. 2013. Qatar’s banking system robust, says QNB. Available at: http://www.bqdoha.com/2013/05/qatars-banking-system-robust-says-qnb_a. [Accessed on: 14 April. 2014]. Muharrami, S.A. 2014. Analysis of competitiveness in Qatar banking industry. Available at: www.researchgate.net/...Qatar_banking_industry/.../72e7e51eb562b784e.[Accessed on: 14 April. 2014]. Private Sector Qatar Team. 2013. Qatari banks to continue healthy balance sheet growth for Q2 2013. Available at: http://privatesectorqatar.com/english/2013/07/qatari-banks-to-continue-healthy-balance-sheet-growth-for-q2-2013/. [Accessed on: 14 April. 2014]. Stubbing, D. 2014. Qatar: A Stellar Performer In Banking. Available at: http://gulfbusiness.com/2014/02/qatar-banks-stellar-performance-2013/#.U0tvQKiSxr0. [Accessed on: 14 April. 2014]. Read More