October Cover: Corporate Governance in Qatar

7/31/2019 October Cover: Corporate Governance in Qatar

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H a s a n y t H i n g c H a n g e d ?

CorporateGovernanCe


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tHeres Hardly a Hotter topic in tHe world of finance rigHt now tHancorporate governance. tHe issues wHicH are plaguing tHe industry

in europe, tHe us and in otHer large markets Have tHeir roots inbad corporate practice loose control and poor understanding offinancial risks wHicH didnt pay off. qatar today tries to find out wHy for a country wHicH wasnt Heavily affected by tHe global crisis is tHere a need for qatar to keep up witH corporate governancestandards determined by outsiders?

qatar is criticised by some outsiders for its poor standards in tHisarena and seen to be ignoring international best principles in manyareas yet it avoided mucH of tHe turmoil and profligacy witnessed incountries wHicH brag about tHeir etHical standards and principles. sois it a case of trying to be proactive instead of reactive?

by rory coen


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corporategovernance cover s tory | october 2012 | qatar today 50

Have our bankslearnedtHeir lessons?

last time the Basel Committee issued a set o Core Principles orE ective Banking Supervision, the global nancial crisis struck within two years. That was circa 2006. Just six years on rom that with all that happened in between delegates met in Istanbul onSeptember 13 and 14, 2012 or the 17th International Con erence o Banking Supervisors to determine their next course o action.

Drawing on lessons learnt during the nancial crisis that beganin 2007, the Bank or International Settlements (BIS) an entity which serves central banks in their pursuit o monetary and nan-cial stability declared that their revised Core Principles core

principles or e ective banking supervision and the associated coreprinciples methodology, which were published recently repre-sented a signi cant step orward rom the Basel Committees 2006principles. They also re ected key advances in regulatory thinkingin recent years that included, amongst other things, ostering ro-bust market discipline through sound supervisory practices in ar-eas o corporate governance, disclosure and transparency.

Just under two years ago, the Qatar Financial Centres Regulato-ry Authority (QFCRA) and Thomson Reuters Governance, Risk andCompliance rounded up some o Qatars most prominent person-alities in the industry to discuss the issue o corporate governancein Qatar, the region and beyond. Attendees included Risk Manage-ment Director at Qatar Central Bank (QCB) Mohammad Al Thani;

Doha Bank CEO R. Seerathaman; HSBC Qatar CEO Abdul HakeemMosta awi; Standard Chartered CEO David Godwin; Michael RyanCEO o the QFCRA; and executives rom the Qatar Financial Mar-kets Authority (QFMA), Qatar Exchange and Dubai InternationalFinancial Centre Authority. Their exchange o views was rank andto the point and they chiselled out a consensus on what needed tobe done on a national, regional and global scale to curb the escala-tion o unethical corporate practice.

Raising the baRglobal nancial crisis gave a pro le to the actthat there were weaknesses in the nancialsystem an important one being in the way in which nancial rms were being governed,

said George Pickering, Managing Director o Policy and En orce-ment at the QFCRA. Sel -examination by both the industry andthe regulators about how to strengthen corporate governance be-came a priority.

Since that time, the three regulatory agencies here in Qatar

QCB, QFMA and QFCRA have strengthened the standards thatthey expect o their rms and have raised the bar within their individual/independent mandates, he continued.

But is this bar still hopelessly lingering beneath the unethical andgreedy calls being made by boards that put risk ahead o reason intheir pursuit o greater pro ts, bonuses and dividends? There wasan in ectious greed which transcended the guidelines that were is-sued. How long will it take this in ection to wear o ? Have corporategovernance standards kept sufcient pace with the ever-changingbusiness environment?

Abdul Hakeem Mosta awi, CEO o HSBC Qatar said at the round-table two years ago that it is very important that corporate gover-nance plays a part o a culture rather than part o a business. We

need to go back to the ABCs o corporate governance and rst de-ne them and then standardise them to make them simple to un-derstand.

KPMG Middle East and South Asia Chairman, Jamal Fakhro be-lieves that standards have most de nitely improved, but businesshas become more complex and the rules are unable to match thecomplexities in many key areas.

I would say we are doing much better than 15 years ago, he said.We have rules and regulations here in Qatar. We have a corporategovernance code, and companies and regulators are taking it seri-ously.

But how e ective are guidelines? Arent we back to the sameproblems as be ore? Fahkro was honest in his assessment o this.

Are we ollowing guidelines absolutely? No. Are we ollowingthem to a high level? Yes. Are there loopholes? Yes. Are they major?No.

Regarding the recent scandals, he continued. They have noth-ing to do with regulation, because people start to lose values - they become greedy. They are willing to do anything to make money.

I would say the current regulations have been written to de -nitely minimise raud. You cant ever say that you wont have raudin an organisation or you will never have scandals. Regulators andauditors are discovering acute discrepancies aster than be ore. Itmay have taken two or three years a decade ago; now its a mattero months.

Regulators have quite a bit o in uence over rms through thesupervisory process, said Pickering. It also helps to have things

tHe

the impoRtanceof a moRe

effective andfunctional boaRdis a topic of gReatinteRest in theRegion and mucheffoRt is beingeXeRted heRe.

ABDUL HAKEEMMOSTAFAWIceo hsbc QataR

tHe


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in legislation and rules. Shareholders and other stakeholders arealso more concerned about it and more involved in making thingsbetter. In Qatar and the GCC, corporate governance standards are

being strengthened they were probably lagging a ew years back in best practice standards compared to some other countries, par-ticularly in Europe and North America.

Abdul Hakeem Mosta awi saw a shi t in pattern last year due toan increase in general awareness in the corporate world. He eltthere was no appetite to return to the days o taking risks or thesake o it.

We have seen a positive change over the past year and witnessedthat most companies are changing the business culture to havemore e ective corporate governance. This progress is due to an in-crease in general awareness as well as renewed action to review andimplement best practices. The Hawkamah Institute or CorporateGovernance has done outstanding work in this regard. And in the words o Dr Nasser Saidi [Executive Director, Hawkamah Insti-

tute]: corporate governance is a journey.There are drastic regulatory re orms which will remain as core

or all businesses. No one will be allowed to return to old habits asit will not be tolerated and there is no risk appetite or this. We allagree that implementation o corporate governance principles isan indication o a sound and e ective management system in any

nancial or non- nancial institution. Robust corporate governancestandards have been issued by QCB or banks and nancial insti-tutions since 2008. Similarly, QFCRA and QFMA have also issuedguidelines to the entities that they supervise, added Mosta awi.

a guide to betteRpRactice

mentioned by Mosta awi, early this year, the QF-CRA released its Guide to Corporate Governance

or QFC-authorised rms. This is exactly what it is:a guide. Adherence to the principles contained in the Guide is vol-untary and non-binding. However, it is the intention o the QFCRA to review the status o the Guide a ter it has been in use or a pe-riod o time, to determine i compliance with any o the principlesshould become mandatory by the establishment o speci c rules,it states.

When designing the guide, the QFCRA drew on global standardsand principles issued by such international organisations as the Or-ganisation or Economic Cooperation and Development (OECD),the International Association o Insurance Supervisors (IAIS) andthe BIS. It also took into account governance standards developedby other relevant regulatory authorities in the region and by theother two bodies in Qatar the QCB and the QFMA. They say this ispretty much it the culmination o months o research and study.

The QFCRA regulates banks through a set o rules, explainedPickering. Our rules deal with the key issues including authorisa-tion, how a bank sets itsel up, approved individual processes, pru-dential regulations and conduct o business. Throughout our rulesand our enabling legislation, there are already very clearly outlinedresponsibilities or the board, the roles o directors and the roleso senior management. Although we elt that it was a very robust

ramework or corporate governance, a year ago we developed a seto guidelines as a companion to our legal ramework in order to givea higher pro le to corporate governance. It provides in one singleplace the principles that weve developed which are t or purposein Qatar.

It outlines the roles and responsibilities o the board o direc-tors, senior management and other important stakeholders. Be-cause its a guide, it doesnt have the same legal standing as rules,but we asked our rms to do a sel -assessment o their own corpo-rate governance against these guidelines. The QFCRA, as part o itsongoing supervisory process, is using the guide as a ramework ordiscussion with nancial institutions undertaking regulated activ-ity in the Qatar Financial Centre.

Just last month, the QFCRA issued a set o proposals which wereaimed at strengthening the QFC regulatory regime. The proposedrule changes are aligned with the recently revised core principlesset out by the BIS or banks and the IAIS or insurance companies.They clearly outline the responsibilities and roles o boards o direc-tors, particularly with respect to risk management and control pro-cedures and important actors such as the remuneration policieso rms. For instance, boards will be expected to be more actively involved in making sure that the remuneration o senior manage-ment is linked to the longstanding per ormance o the rm.

aS

RegaRding the Recent scandals,they have nothing to do withRegulation, because people staRt tolose values they aRe willing to doanything to make money.

JAMAL FAKHROkpmg middle east and south asia chaiRman


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The dra t rules also require the governing body o a QFC-autho-rised rm to approve and establish a ormal governance ramework;risk management and internal controls ramework and a remuner-ation policy.

In addition, the dra t rules propose a new control unction or in-ternal audit or QFC insurers, QFC banks and QFC Islamic banks,and a new requirement or QFC banks and QFC Islamic banks tohave a risk management unction.

The Basel Committee issued 39 new assessment criteria whichgovern authorities assessment o how closely banks adhere to theprinciples, the most important additions being in risk managementand supervisory practices.

The latest revision goes back to the roots o banking supervi-sion, Teo Swee Lian, Co-Chair o the Core Principals Group, saidin a statement on September 14. Lian, the Monetary Authority o Singapores Deputy Managing Director, highlighted the emphasison a orward-looking perspective through early intervention andthe application o a more e ective risk-based approach as impor-

tant elements o the new principles.

is QataR laggingbehind inteRnationalstandaRds?

the round table discussiontwo years ago, Mosta awisaid that one o the things we dont have in this region

is independent directors who come in rom outside the business andgive eedback on di erent elements o the business model. MichaelRyan, CEO o the QFCRA, noted that it was critical or regulators tobe con dent that bank boards had de ned and ully understood theirresponsibilities, especially in the context o the nancial crisis.

At the same time Nasser Saidi, Executive Director, HawkamahInstitute or Corporate Governance, cited a study which examinedevery board member o every listed company in the GCC to measure

amily interconnection. I everybody knows each other, and every-body is sitting on ve di erent boards, and they are doing business with each other, then even the concept o non-executive directorsand independent non-executive directors gets thrown out the win-dow, he said, be ore urging the regions nancial industry to pushe orts to address such con icts.

Pickering picked this up: International best practice over the past15-20 years is leaning away rom boards that are controlled by insid-ers and large shareholders. One o the objectives, which can be chal-lenging to meet, is putting together a board o directors comprisingthose who are directly involved in its ownership and management o the business with independent directors who are knowledgeable andindependent thinkers.

For small countries, such as Qatar, its difcult to nd people whoquali y or the role o independent directors. Independent directorsshouldnt be on dozens o boards; they should be independent o theday-to-day business and not be involved in other companies whichare closely aligned. I know, rom my previous experience in Canada,it can be a challenge or rms to nd good independent corporate di-

rectors.So what have rms in Qatar being doing recently to catch up with

international best practice? Mosta awi believes that there are cer-tainly still challenges ahead or Qatar, namely in attracting quali ed

board members who have the capabilities and experience to handlethe risk unction, but it is getting there.I believe our banks have the proper people sitting on the board,

which will cover business as well as risk, although there is room orimprovement in the risk culture, which is evolving by the day.

Getting quali ed personnel or boards still remains a challenge,however. We have seen the recent inception o quali ed people andcalls or changes in board appointments in corporates.

Regarding his comment rom two years ago, about the lack o in-dependent directors who come in rom outside and give critical eed-back, Mosta awi said: We have not seen any real material changesince then, but this will be encouraged to change again in the monthsto come. The latest IMF country report emphasised the importanceo recruiting credible and knowledgeable people in these positions

to mitigate risk.The importance o a more e ective and unctional board is a topic

o great interest in the region and much e ort has been exerted inthis area. Several initiatives in the region are supporting the devel-opment o competent and capable directors and executives making well-in ormed decisions on a rm level. The regulators are closely monitoring and issuing directives on adhering to the principles o corporate governance. This ensures pro essionals are appointed onthe board/executive committee so they can drive corporate strategy and policies o business, he said, when asked about the potentialcon icts board members may have.

Doha Bank CEO R. Seerathaman made a call two years ago orwhistle-blowers within the ramework o accountability to add val-ue to the quality o governance at board level or somebody rom theoutside with the ability to change what the management is doing.

The regulators have a clear policy on whistle-blowers, said Mo-sta awi. QCB assists customers in investigating complaints againstthe nancial institutions under its supervision. This is in line withthe IMF recommendations to have a more robust risk assessmentculture and conduct regular stress-testing o banks

durinG

foR smallcountRies, suchas QataR, itsdifficult to findpeople whoQualify foR theRole ofindependentdiRectoRs.

GEORGER PICKERINGmanaging diRectoR, policy andenfoRcement, QfcRa.


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do you decide where to bank? Are youmore interested in earning interest onyour savings or does a bank which o ersconvenience and classy customer service

do it or you? Its probably a bit o both. Well, with most banks o -ering almost 0% interest rate on savings, youre going to want ser-

vice with a smile. Which o the options out there can best serve youracute nancial needs?

Qatars retail banking segment seems to be showing signs o con-dence. There are over a dozen retail banking options currently

serving a population o less than two million people. Innovationsin online and mobile banking, customer service and product diver-sity have given customers a chance to shop around. Qatars CentralBank (QCB) said last month that it wanted to keep interest rateslow to support lending to the real economy, and also reported thatlocal banks had little exposure to the euro zone.

In ation rates in Qatar remain much lower than in other GCCnations, said Sheikh Abdullah bin Saud Al Thani, Governor, QCB,last month. Qatars in ation rate will be around two to three per-cent this year. The Central Bank is very com ortable with currentinterest rates and is not concerned about hot money in ows. Low-er interest rates helped to boost growth margins in 2011. With lowerinterest rates there was more money oating about, but in ationlevels remained static.

With such optimism circulating in the segment, Qatar Todaycaught up with three retail banks to see what they were doing to

How

are tHeretail BankSServinGour needS?

competition always woRks to theadvantage of customeRs, but thediffeRentiatoR is the seRvice. withthe pRojected population gRowth, ibelieve, in the long Run, theRe willbe enough foR eveRyone to caRve aniche in theiR Respective businesses.

HUSSAIN AL ABDULLAHhead of Retail banking at baRwa bank

by rory coen


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bump up their pro ts and draw in more customers. The recent di-rective rom the QCB to shut the Islamic windows o conventionalbanks meant that some customers were orced to close their bank accounts and look elsewhere. We asked banks how important retail

banking was to their overall enterprise and how they were innovat-ing to attract customers, rom an in ormation technology perspec-tive, through internet and mobile banking to the security o theirservices.

seRvice with a smile?CEO at Qatar Islamic Bank (QIB) Ahmad Mesharisaid: Retail banking is im-

mensely important to QIB, orming as it does one o the two mainstrands o our operation (the other being wholesale banking). Thebanks commitment to the retail sector is total, and our branch ex-

pansion programme is evidence o this. Further, we see great op-portunities in the expanding private banking and private assetmanagement sectors o retail banking, so its a sector that continuesto thrive or us. Customer deposits to the bank have increased to atotal volume o QR33.4 billion as o end-June 2012, a growth o 26%above the gure rom end-June 2011. Retail banking represents ap-proximately three-quarters o QIBs total deposits.

Providing a good customer experience is one o QIBs statedstrategic goals, he continued. This is evidenced by our branch ex-pansion e orts, our unending quest to innovate and bring new, at-tractive products to market. We have had a busy year in terms o thebanks IT resources to enhance the security o our customers data

in line with the requirements o the times. These developments willhelp us towards our goal o increased automation, and, additionally, we have enhanced our internet, phone and SMS banking acilities.QIB is now looking a lot more solid and productive in the applica-

tion o current banking technology.Our contact centre o ers a variety o services to our customersand is available 24/7. You also have the option to complete your en-quiries and transactions on our automated phone banking serviceinteractive voice response. The services include general enquiriesabout the banks products and promotions, accounts and card bal-ances and transactions; placing and changing maturity instructions

or your xed deposits; paying your utility bills and making cardpayments and trans ers; and requesting cheque books and state-ments by e-mail or ax.

QIB is currently developing its mobile banking application which will o er a range o conveniences. The application is en-riched with a range o services including a branch and ATM locatoras well as a currency calculator, and we will continue adding more

services as we go. The application will be available on a wide rangeo mobile operating systems and smartphones this November.

Country Manager at Mashreq Bank Howard Kitson said: We area ull service provider in the retail banking segment and have beengrowing at a steady rate o 30% year-on-year.

We have invested heavily in technology to provide our custom-ers with user- riendly e-banking solutions which provide exibility to manage nances rom the com ort o their homes or ofces. Ouronline banking plat orm was awarded the Best Internet Consum-er Bank in Qatar by New York-based Global Finance magazine or

our consecutive years. Its services o er comprehensive bankingand payment solutions based on individual customer pre erencesspanning services that include utility bill payments, local and inter-

national unds trans ers, account opening, investments, loans anddeposits in addition to standard account servicing.Mashreq was one o the rst banks in Qatar to introduce a ully

unctional mobile banking service where customers can access theiraccounts, check balances, trans er unds, request cheque books ande ectively manage their nancial a airs.

We have embarked on an ambitious project o replacing ourexisting core banking system with the state-o -the-art Flexcubeplat orm, which bene ts customers by allowing them to per ormall their basic banking transactions online with just two clicks. Ourgoal is to continuously o er convenient banking solutions, and weare on the path to achieving that. The project was pilot-tested inQatar and is being rolled out to other Mashreq locations around the world.

Head o Retail Banking at Barwa Bank, Hussain Al-Abdullah said:Across the globe, retail banking has witnessed spectacular innova-tion in the commercial banking sector in recent years. The growtho retail banking, especially in this region, is attributable to therapid advances in in ormation technology, the evolving macroeco-nomic environment, nancial market re orm, and several micro-level demand- and supply-side actors. Retail banking business,on non- nancial contribution, adds substantial brand strength tocommercial banks, thereby making it signi cantly important to any commercial bank, and Barwa bank.

We have a customer loyalty model within retail banking whereby,through our di erent channels, we ensure customers are delightedat the time o acquisition. Then we endeavour to deliver great expe-

undeR the Recent Qcb Regulations,we focus on seRvice to diffeRentiatemashReQ fRom otheR banks, keepingthe customeR at the centRe of ouRoffeRings with bundles and well-Rounded financial solutions.

HOWARD KITSONcountRy manageR at mashReQ bank

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rience consistently throughout this journey by way o various ini-tiatives ( nancial planning, advisory, cross-sell and event invites),especially in the rst twelve months o the relationship.

diffeRentiating pRoductsrates on savings accountare almost negligibleacross the board. Forgetcustomer service and mo-

bile banking, customers want their money to work while its in thebank and not sit there earning no interest. Or do they? Does cus-tomer service really matter? How big a challenge is it to attract cus-tomers when theres a 0% interest rate on savings?

Barwa Banks Hussain Al-Abdullah said: With a diminutive tar-get market and an overbanked country it is indeed challenging, but with our proactive product innovations (i.e. tweaking the working

mechanism o a product and bundling it with extra bene ts) we areable to manage our liability needs quite smoothly. You can presentthe same thing in a di erent way or a di erent thing in the same way, but what brings customers or generates loyalty is the way, i.e.your capabilities to deliver service excellence.

Competition always works to the advantage o customers, butthe di erentiator is the service. With the projected populationgrowth, I believe, in the long run, there will be enough or everyoneto carve a niche in their respective businesses, he added.

QIBs Ahmad Meshari believes its no more a challenge or QIBthan it is or other banks. For one thing, i you have money to investthen there are many alternatives to savings accounts that can o erpotentially superior rates o return. Secondly, as discussed above,

customers place a lot o importance on nding a bank that is readily accessible and o ers them a distinctive level o service. We believethat we have the right products, and we also believe we have theright team in place.

Mashreq Banks Howard Kitson believes that attracting new cus-tomers is always a challenge and it requires an innovative approach.However, we have in place an Easy Saver account that o ers oneo the best rates in the market and it can be opened by customersonline in real time. We also create special structured notes and de-posits or our customers, based on their nancial objectives, whicho er higher returns than the normal savings account. With suchproducts and o erings, we have been able to grow at a steady pace.

In a small but growing market like Qatar, all banks are compet-ing or a share o the customers banking needs. Under the recentQCB regulations, we ocus on service to di erentiate Mashreq romother banks, keeping the customer at the centre o our o erings with bundles and well-rounded nancial solutions, coupled withli estyle bene ts, 24/7 convenient accessibility and excellent cus-tomer service, added Kitson.

pRivate sectoR assistancea drive on in Qatar to encourageentrepreneurship and promoteprivate sector growth. But suchbusinesses need to have con -

dence in their banks to provide credit when they need it most. Therst couple o years are the hardest or start-ups, and SMEs (small-

to-medium enterprises) are always looking to grow urther, so how are the banks helping these businesses get nancial assistance?

A ter assessing the trade and nancing requirements o our

SME customers, Mashreq o ers nancing solutions up to QR20million, said Kitson. We have also partnered with QDB (Qatar De- velopment Bank) in its Al Dhameen nance assurance programme where we o er nancing acilities to new start-up ventures.

Our leading product is the Small Business Loan, through which we give SMEs up to QR2 million in lending with minimum docu-mentation - just a copy o a bank statement is all thats required. Inaddition, our SME relationship managers also provide customers with competitive pricing and best in class service on branch bank-ing, transaction banking, trade nance and working capital nance,LCs, LGs, guarantees, discounting, key man insurance and other -nancial needs, said Kitson.

Ahmad Meshari said: The Qatari authorities know well the im-portance o SMEs in diversi ying the economy away rom its cur-rent reliance on hydrocarbons, and QIB is completely aligned andsupportive to this position. It is or this reason that we have devel-oped a suite o nancing products speci cally tailored to the SMEsector so that we may give this market the attention and supportthat it demands. Its certainly an area o special attention or us.

According to reports, the Qatari market economy is now stand-ing at 28%, o which 55% comes rom trade and 16% rom industry,so the sector is poised or big gains, said Al-Abdullah. With theawarding o the 2022 FIFA World Cup hosting rights to Qatar, thegrowth o SMEs is expected to urther improve due to heightenedeconomic activity in several sectors o the economy. Volumes willonly increase rom here as SME business con dence in Qatar re-

ects an extremely positive environment or business growth

customeRs place a lot of impoRtanceon finding a bank that is Readilyaccessible and offeRs them adistinctive level of seRvice. we

believe that we have the RightpRoducts, and we also believe wehave the Right team in place.

AHMAD MESHARIacting ceo at QataR islamic bank (Qib)

intereSt

tHereS


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& Poors Ratings Ser- vices rank the bankingsector in Qatar AA/

Stable/A-1+ in group 4 under its updated Banking Industry Country Risk Assessment (BICRA) methodology. Other countries with a BICRA group 4 score include Kuwait, Mexico, Oman, Peru,South A rica and Taiwan.

Our criteria de ne the BICRA ramework as one designed toevaluate and compare global banking systems. A BICRA is scoredon a scale rom 1 to 10, ranging rom the lowest-risk banking sys-tems (group 1) to the highest-risk (group 10). The BICRA com-prises two main areas o analysis - economic risk and industry risk.For Qatar, we have assigned a score o 4 to the economic risk and5 to the industry risk.

a stRong oil- andgas-based economy, butgeopolitical and cReditRisks Remain.

Our economic risk score o 4 re ects our opinion that Qatar haslow risk in economic resilience, as Qatars hydrocarbon reservecontains almost 14% o the worlds natural gas making it the third-largest reserve in the world and 2.2% o the worlds proven oil re-serves. As a result o prudent management o this natural resource

How mucH risk are Qatari banks exposing tHemselves to? tHe averagereturn-on-eQuity for tHe banking industry was 19% in 2011, wHicH wasa reflection on How well tHey did last year, but is it also temptingtHem to sQueeze out a little bit more, especially witH tHe Qatarigovernments track record of providing liQuidity and capital duringperiods of market turmoil? stepHanie mery carillon, director offinancial services at standard & poors, looks at Qatars banking sectorfrom a distance.

QatarSBankS HaveaGGreSSiveriSk appetite

Standard


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endowment, Qatar has very high per capita income; we estimate it was $111,000 (QR404,000) in 2011. Moreover, Qatar has made sig-

ni cant progress toward diversi ying its economy despite the actthat it still depends heavily on oil and lique ed natural gas (LNG)production. We believe the economy will continue to show strongmomentum, re ecting Qatars positive market dynamics and signi -icant in rastructure development programme. High oil prices andlong-term LNG contracts at xed prices are also helping the coun-try to secure its revenues. We also expect Qatars real estate marketto recover rom its sharp decline in 2009-2011, although the com-mercial sector still aces more risk than the housing segment.

Political risk, however, heightens our assessment o Qatarseconomic resilience. Like other sovereigns in the region, Qatar isexposed to geopolitical risk such as a potential escalation o ten-sions between the West and Iran, with which Qatar shares the largeNorth Field gas reservoir. In addition, Qatars more aggressive

oreign policy stance could result in an escalation o antagonismamongst uneasy allies in the region. Institutional transparency andaccountability are a urther consideration in our assessment o Qa-tars political risk.

One o the main risks or the Qatari banking sector is its exposureto credit risk, in our view. This is underpinned by very rapid loangrowth (28% growth in 2011), lending and underwriting standardsthat we view as aggressive, and a high concentration in lending tocyclical or vulnerable sectors like real estate and construction (19%o total loans at year-end 2011 and almost 25% when contractorsare included). In addition, oreign currency lending has recently increased dramatically and accounted or 47% o total loans atyear-end 2011. We expect sustained lending growth over the next

ew years, although Qatars central bank is currently tightening reg-ulation, which may limit business and lending growth in the shortterm. The banking system is also penalised by a modest paymentculture, as shown by recently increased problem loans in retail de-spite the assignment o salaries on personal loans, something whichusually protects banks.

industRy Riskindustry risk score or Qatar is 5. The Qatari in-stitutional ramework is considered intermedi-ate risk as banking regulations are in line with

international standards, although we consider that supervision hassome room or improvement. While the central bank could havetaken more proactive measures during the global 2008-2009 crisis,the authorities identi ed potential problems relating to real estateor equity exposures and acted quickly to x them. The central bank also severely tightened regulation surrounding personal borrow-ing in the second quarter o 2011 by capping the amount and rate at which banks can lend to an individual.

We classi y as high risk Qatars competitive dynamics. Eveni banks in Qatar have stable market shares and barriers to entry remain high, we consider Qatars banks to have an aggressive risk appetite. The banking sectors pro tability has been higher thanthat o other sectors o the local economy or the past ew years.The average return on equity or Qatars banking sector was 19% in

2011. This high level o pro tability is also the result o the low costo labour and absence o income tax. In addition, the small size o the domestic market leads to high price competition and concen-tration, and pushes the banks to expand abroad. That said, strongmargins and efciency, and the absence o income tax, give them ane ective cushion to ace a potential increase in the cost o risk.

Qatari system-wide unding is considered intermediate riskas banks rely mainly on customer deposits or unding. The bank-ing system has a stable share o core customer deposits to loans, al-though the share o net external unding to loans has been increas-ing recently. We expect the deposit-to-loan ratio to decline urtheras a result o strong loan growth largely linked to the 2022 FIFA World Cup and in rastructure programme nancing. This risk o decline is partially mitigated by the Qatari governments success-

ul track record in providing liquidity and capital during periods o market turmoil.

The governments role improves our score on system-wide und-ing or Qatar. We view the governments role as strong and believethe authorities are likely to provide extraordinary liquidity supportto the banking system, i needed. The government has recently sig-ni cantly increased its borrowing in capital markets. In our view,enlarged government debt is being issued to oster the develop-ment o domestic capital markets and to build up a domestic sover-eign bond yield curve

tHe

one of the main Risks foR the QataRibanking sectoR is its eXposuReto cRedit Risk, in ouR view. this isundeRpinned by veRy Rapid loangRowth (28% gRowth in 2011), lendingand undeRwRiting standaRds thatwe view as aggRessive.

STEPHANIE MERy CARILLONdiRectoR financial seRvices standaRd & pooRs

Documents

October Cover: Corporate Governance in Qatar