Islamic banks’ growth on fast track on govt support

By Pratap John

Chief Business Reporter

Qatar’s Islamic banks, which now represent a quarter of the country’s banking system in terms of assets, are growing faster than conventional banks thanks to government backing, S&P has said in its latest outlook.

The international ratings agency anticipates the lenders will continue to gain market share and become the third largest in the Gulf region, after Saudi Arabia and the UAE.

The total balance sheet of Qatar’s Islamic banks stood at $54bn in end-2012.

“Assuming that the banks grow by an average of 15% over the next five years, which is significantly lower than the previous five-year average of 35% – we could see the Islamic banks’ asset base exceeding $100bn by 2017,” S&P said.

There are currently four Islamic banks in Qatar, with a combined asset base of $54.4bn as of end-June 2013.

“Although there is discussion in the market about the potential launch of a new Islamic bank with a largely overseas mandate, we have not seen any tangible progress on this to date,” S&P said.

The Government of Qatar intends to make the country a centre for Islamic banking, and so far, its strategy is succeeding.

Qatar now has one of the fastest-growing Islamic banking sectors in the world, thanks to a surge in the demand for local credit to finance government infrastructure and investment projects.

“We believe that this demand will endure, and therefore that the assets of Qatar’s Islamic banks will continue to grow, and their share of the country’s banking system will continue to rise.

“However, we question the sustainability of growth over the long run once the infrastructure projects slow down, particularly because Qatar has a very small bankable population. This could eventually lead the sector to expand overseas.”

Like other countries in the Gulf region, Qatar’s debt capital markets are at a nascent stage and the bulk of its credit generation derives from bank lending.

“It is therefore on account of the Qatari government’s large infrastructure and investment projects that the country’s domestic credit grew at a compound average rate of 30.9% between 2006 and 2012,” S&P said.

Although S&P observed a visible slowdown in lending in the first half of 2013 due to administrative delays with certain projects, it expects credit growth to reaccelerate in 2014, when major infrastructure projects start in preparation for Qatar hosting the 2022 World Cup.

“We believe this will bolster the domestic demand for credit in the country and support the lending activities of Islamic banks,” S&P said.

The government’s strategy to grow Qatar as an Islamic banking centre means that it is highly supportive of this sector. As an Islamic country, Qatar is committed to the principles of Shariah.

For example, in 2011, the Qatar Central Bank banned conventional banks from extending Islamic banking products, thereby requiring conventional banks to close or divest their Shariah-compliant businesses and not underwrite any new Shariah-compliant loans. As a result, Shariah-compliant banking shifted to the Islamic banks, S&P noted.