Qatar is all set to create a strategic plan and comprehensive regulatory framework for non-bank financial companies (NBFCs), which have vast potentials, particularly for the small and medium enterprises (SMEs) sector.
NBFCs should be able to capitalise on their experience in retail lending to expand their operations in the SME segment, Qatar Islamic Finance 2017 report said, adding opportunities for investment companies lie in Qatar’s largely untapped domestic private wealth.
"However, for the non-bank financial sector to achieve its growth potential, a comprehensive development plan is required to create a solid foundation and regulatory stability for the sector," said the report, a joint initiative of the Qatar Financial Center, Thomson Reuters and Islamic Research and Training Institute, a member of the Islamic Development Bank Group.
The report noted that the Qatar Central Bank (QCB) issued a draft regulation in August 2014, which eased limitations on the size of credit facilities previously imposed on NBFCs. The proposed regulation would have enabled NBFCs to offer larger loans to their clients with the value of an individual loan reaching 2%-3% of the lender’s equity.
This would have allowed them to boost their lending activity in the market, especially benefiting those with a lower level of equity. "To date, this regulation has not been approved," the report said, finding that Qatar's NBFCs, the majority of which are Shariah-compliant, are currently presented with strong opportunities for growth.
The report highlighted that the Islamic non-bank financial sector in Indonesia is one the most developed in the world, especially in terms of regulation. The country has taken steps to regulate its non-bank financial industry since 2009, when it introduced a development plan for the capital market and the non-bank financial industry in 2009.
The plan’s primary focus was the development of the framework in areas as regulatory reporting and disclosures, corporate and Shariah governance and investor protection. Another important aspect was a comprehensive regulatory framework governing non-NBFCs in line with sector needs and the fatwas of the Shariah National Board.
"It is possible for Qatar’s financial regulators to adapt some of the strategies mentioned here to create a strategic plan and comprehensive regulatory framework for NBFCs," the report said.
This would help establish more structurally sound financial institutions in the non-bank financial sector, supported by robust infrastructure and regulatory and supervisory frameworks, it added.
The lending environment in Qatar has been evolving in recent years, mainly in corporate credit. Lending institutions have historically preferred to cater to the financing needs of larger, lower-risk corporations, the report said, highlighting that SME lending in Qatar accounted for only 0.5% of total credit.
"However, this underserved segment of the credit market is set to become more prominent in coming years. Qatar’s lending institutions are becoming more proactive in their approach to lending to smaller businesses, introducing SME-friendly measures, including dedicated SME branches, teams and products," it said.
Since the QCB implemented caps on profit rates and charges on personal loans in 2011, profits at NBFCs have been under pressure. As a result, assets from Islamic financing activities fell 20% between 2012 and 2016, pushing these lenders to reconsider their strategies, shifting their focus to the SME sector, which has strong potential for revenue growth.
Following this change in regulation, NBFCs enhanced their involvement in SME financing by joining the Qatar Development Bank’s Al Dhameen SME loan guarantee scheme, seeing increased competition to tap opportunities in this segment.
Highlighting that micro, small and medium enterprises (MSMEs) present an opportunity for growth for NBFCs, which have a unique advantage in serving them; the report said most banks are unlikely to consider financing smaller and micro entities, which usually eye QR1mn to QR2mn funding, whereas SME loans in Qatar start at QR10mn.
