Qatar Islamic Banking Directive to Set Example for Other Markets

8/2/2019 Qatar Islamic Banking Directive to Set Example for Other Markets

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Qatar Islamic banking directive to set example forother markets

By MUSHTAK PARKER | ARAB NEWS

Published: Jan 22, 2012 23:31 Updated: Jan 22, 2012 23:31

The deadline of Dec. 31, 2011, as per the directive issued by the Central Bank of Qatar(CBQ) in January 2011 requiring the country's conventional banks which have openedIslamic banking windows to close them down, has passed almost unnoticed.

Despite the initial outcry at the time of the announcement of the directive stressing that it wastoo arbitrary and the grace period was too tight, there has been no upheaval of the Islamicfinance industry in the emirate. Some Islamic bankers are now arguing that the move wasrequired to stem the alleged rampant co-mingling of conventional and Islamic funds at some ofthe Islamic banking windows, and that the Qatari Islamic banking sector has been successfullyre-aligned and consolidated.

The successful implementation of the directive in Qatar could well have implications for othermarkets in the region and beyond where Islamic banking windows are prevalent. The clearmessage of the directive is that dedicated standalone Islamic banks are preferable to half-wayhouses where co-mingling and all sorts of compromises are possible if not the norm. They alsogive greater legal, regulatory and Shariah compliance clarity and comfort to those depositorsand investors interested in Islamic finance.

The affected banks included the Al-Islami window of Qatar National Bank (QNB), the largestbank in the emirate; Commercial Bank of Qatar; Doha Bank; HSBC Amanah; Ahli Bank; Al-Khaliji Bank and International Bank of Qatar (IBQ), which between them had 16 Islamic bankingbranches in Qatar.

On Jan. 1, 2012 it became clear that only one such window, Al-Yusr of International Bank ofQatar, was acquired by two local Islamic banks the retail banking assets and business wasacquired by Barwa Bank, the newest of the Qatari Islamic banks, while the corporate bankingassets and portfolio was acquired by Qatar Islamic Bank (QIB), the largest Islamic bank in theemirate.

The other banks had wound down their Islamic banking window operations complete withremoving all signage and of course not opening any new accounts or businesses. ExistingIslamic banking customers were in some cases given the option of switching to the banks'conventional banking business or in other cases to continue payments until affected Islamicfinancing facilities matured.

An unrepentant CBQ Gov. Sheikh Abdullah bin Saud Al-Thani as late as mid December 2011warned the affected banks that the directive was "irreversible" and that they must comply withits provisions. In his keynote speech to the 8th International Conference on Islamic Economicsand Finance (ICIEF) which was held in Doha in December 2011, Al-Thani articulated thereasons behind the central bank's directive, which he confirmed is irreversible.

The Islamic Banking Windows, according to Gov. Al-Thani, made it difficult for the bankingregulator to effectively implement its monitoring and supervision of these windows.


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This issue could not have been highlighted more aptly during the acquisition of Al-Yusr's IslamicRetail Banking business. As the first such transaction to be closed in the region, albeit underQatari law, there were some legal and other regulatory challenges which UK law firm,Eversheds, which acted for Barwa Bank, successfully navigated through within the provisions ofexisting Qatari legislation.

"The IBQ window was not a separate legal entity. As such, its assets and liabilities were a partof the conventional bank. We therefore had to consider how best to separate and then packageand transfer these assets and liabilities. There were also challenges concerning transitionservices that were required post completion to serve the transferring customers," explained

Amjad Hussain, partner and head of Islamic Finance at Eversheds, in a recent interview.

The central bank also found that the coupling of conventional and Islamic banking activities atthe same institution, undermined competition and transparency in the affected banks. At thesame time, there is much confusion over the balance sheet treatment of the assets andliabilities of the Islamic banking windows in the financial reports of the conventional banks,which are not separated. As such this has implications for the risk management process of theinstitution.

Al-Thani gave the thumbs up to the Qatari Islamic banking industry which boasts four Islamicbanks Qatar Islamic Bank, Qatar International Islamic Bank, Masraf Al-Rayan and BarwaBank. These banks, he added, have a crucial role in the country's banking sector and economy,in compliance with the objectives of the Qatar Vision 2030 and its first application through theFirst Strategic National Development Project 2011-2016.

He reminded Qatari Islamic banks of their partnership role in financing economic developmentand projects in the country, and stressed that he was confident that the Qatari Islamic banks willrise to and are capable of taking up this challenge together with their conventional counterparts.The Islamic banking sector has a 20 percent market share of the total banking industry in Qatar,which has four dedicated standalone Islamic banks.

It was way back in 2005 that the CBQ allowed conventional banks to launch Islamic BankingUnits (IBUs), which have contributed to the growth of the sector and to the profitability of thebanks, and which have attracted an estimated customer base of just under 100,000.

Eversheds' Hussain rejects any notion of arbitrariness in the action of the CBQ in issuing thedirective. The action, he contended, is "part of a wider process of supporting and shoring up thebanking industry in Qatar. You have to look at it in the context of the proactive approach of thecentral bank during the recession when it helped a number of local banks to remove some ofthe toxic debts that they had exposure to. The CBQ is also making sure that there are enoughopportunities for all the market players."

Previously, the Islamic banking windows were barely competing because of co-mingling issuesand because they were able to offset overheads through the conventional banks. There was afeeling that the market was not as transparent as it could be. In addition to regulatory issues, thecentral bank had to deal with two separate businesses dealing with different banking activities -Islamic and conventional.

"I believe competition was an issue, because the pure Islamic banks were seen to be at adisadvantage. The Islamic banking windows at the conventional banks were able to usebackroom services in their banks. There were also regulatory and corporate governance


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concerning how manage different banking platforms under one roof which is what theconventional banks were trying to do. This resulted in a culmination of issues which the CBQ istrying to address in its efforts to improve out the banking sector," explained Hussain

http://arabnews.com/economy/islamicfinance/article566853.ece

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Qatar Islamic Banking Directive to Set Example for Other Markets