By Pratap John/Chief Business Reporter
Funding and liquidity requirements to comply with the incoming Basel III regulatory standard will move Qatar’s Islamic banks to tap debt capital markets more actively over the next few years and raise longer-term funding, Standard & Poor’s has said in a report.
In S&P’s view, accessing the debt capital markets more frequently should diversify the Qatari Islamic banks’ funding profiles. About 65% of the total balance sheet of the Islamic banks is funded with customer deposits, whereas another 18% comes from shareholders’ equity.
At the same time, gross interbank funding on the Islamic banks’ balance sheet is limited, at about 12%. The banks’ foreign liabilities are similarly limited, representing about 11% of the total as of July 31, 2013, the report said.
Unlike the conventional banks, the Islamic banks enjoy a net foreign asset position, albeit a limited one, because they fund themselves predominantly from the local deposit market.
The domestic credit-to-resident deposits ratio of the Qatari banking system stood at 109% as of July 31, 2013, whereas the ratio is lower for the country’s Islamic banks, at 96%, S&P’s “Islamic Finance Outlook 2014” said.
Islamic banks have not been very active in the debt capital markets, with only Qatar Islamic Bank and International Islamic having issued sukuk.
In addition, the contractual maturity of the deposits collected by the Islamic banks is very short term, whereas the lending tenors are substantially longer, S&P said.
Historically, the Qatari banking system’s growth has largely been driven by the country’s large funding needs as a result of its intensive capital expenditure programmes. The banking system’s credit exposure has, therefore, been predominantly domestic.
For example, as per July 2013 CBQ data, credit outside Qatar constituted only 8.7% of the Qatari conventional banks’ total credit book and 5.6% of their total asset base, whereas the banks’ total foreign assets was limited to about 20%.
The Islamic banks’ focus is even more Qatar-centric than that of the conventional banks. The Islamic banks’ credit outside Qatar is limited to 6.3% of the total credit stock, or 4% of the Islamic banks’ asset base, as of July 2013, S&P said.
Additionally, the Islamic banks’ gross foreign asset position is limited to about 8.3% of the total balance sheet, compared with about 20% for the overall sector. This is because a significantly larger portion of the Islamic banks’ interbank and investment exposure is within Qatar.
“We see the outlook for both the Qatari banking system and its Islamic banks as stable over the next two years. The Qatari government’s large infrastructure investments and its highly supportive stance during the global financial crisis of 2008-2009 have enabled the Qatari Islamic banks to benefit from fast-paced credit growth and report strong margins and low credit losses.
“This, in turn, has led to strong performance metrics, and healthy capitalisation and funding and liquidity metrics. We do not envisage this changing over the next two years,” S&P said.
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