Qatari banks’ asset quality is “adequate” with their non-performing loans (NPLs) remaining at 1.7% of total loans in 2012, Standard & Poor’s has said in a report.
“Ample loan loss coverage (97% in 2012), in addition to an abundant general risk reserve of 2.5% of total loans, gives the banks an effective cushion to face a potential increase in the cost of risk,” S&P said in a country assessment.
S&P said it does not expect NPLs to rise significantly though.
“We expect the central bank’s restrictions on personal loans, which introduced more-stringent practices, as well as the establishment of a credit bureau in 2012, to reduce the level of impaired loans in the retail segment,” the report said.
Although Qatar’s banking regulations are in line with international standards, S&P considers that supervision has “some room for improvement.”
“The central bank could have taken more proactive measures during the global 2008-2009 crisis, although the authorities identified potential problems relating to real estate or equity exposures and acted quickly to fix them.
“Additionally, the official NPL ratio in Qatar is 1.7% in 2012, which in our view, underestimates the banks’ impaired assets ratio, as it doesn’t include other substandard loans not reported as official NPLs. The high level of restructured loans is a market-wide phenomenon in Qatar though, as it partly reflects typical delays in construction or infrastructure development projects and subsequent delays in performing loans’ cash flows.”
The Qatar Central Bank has explored some changes in regulation to make it more conservative. Specifically, the central bank introduced more stringent practices on personal loans, foreign currency loans, and reserve requirements in 2011, it said. S&P has assessed Qatar’s lending and underwriting standards as “aggressive.”
Concentration in the real estate and construction sector is high at 20% of total loans at year-end 2012. In addition, foreign currency lending has recently increased dramatically and accounted for 51% of total loans at year-end 2012.
This is primarily due to the interest rate differential between local and foreign currency lending, which has led to high demand for bank credit in foreign currency by residents. As a mitigating factor, foreign currency lending is mainly denominated in dollar to which the Qatari riyal is solidly pegged.
The QCB recently imposed limits on foreign currency lending.
“We estimate that Qatari retail customers are highly leveraged and impaired retail loans reached high levels two years ago. To contain NPLs, the QCB has imposed strict regulations on personal borrowing, capping the amount and rate at which banks can lend to an individual.
“We expect these restrictions to be positive in the long run as they introduce more stringent practices. The QCB also imposed a maximum loan-to-value ratio (LTV) for residential mortgages of 70% in 2011, which should prevent any significant drift in mortgage loans’ asset quality indicators,” S&P said.
Oman Islamic lenders build interbank
market with wakala
Islamic banks in Oman are building a counterparty network for wakala, a Shariah-compliant agency agreement, to use as a major tool for their interbank funding needs.
A viable wakala market could help Omani banks’ profitability and, if it is imitated elsewhere in the Gulf, challenge the dominance of commodity murabaha, a cost-plus-profit arrangement that is popular in other countries.
Last week, a bilateral wakala agreement was signed between Bank Nizwa, Oman’s first full-fledged Islamic bank, and the Islamic unit of Bank Sohar which allows the lenders to place surplus funds with each other.
Bank Nizwa is in the process of signing similar agreements with other banks in Oman, which would help to create a formal network enabling Islamic money markets to function, chief executive Jamil al-Jaroudi told Reuters. “If and when this happens, the volume of transactions would be representative of the size of the Islamic money market in Oman.
“Using the concept of wakala as an interbank instrument is new to Oman and perhaps quite new in some other markets too, especially those which have traditionally relied upon commodity murabaha,” Jaroudi added.