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Middle EastMay 1 2005

Open season

Changes to the law will soon allow conventional institutions to offer Islamic banking services, a move that the market is keenly anticipating. By Will McSheehy.
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If there is one segment of the Qatari financial services industry that is likely to see dramatic change in the coming months, it is the space currently occupied by the duopoly of Qatar Islamic Bank (QIB) and Qatar International Islamic Bank (QIIB). Established in 1983 as the country’s first Islamic financial institution, QIB is now Qatar’s fourth largest bank and focuses on consumer lending, trade finance, leasing, real estate and fund management through its 12-branch network. Somewhat smaller than its rival, QIIB was established in early 1991 and operates seven branches plus a cash office. According to analysis by Kuwait-based Gulf Investment Corporation, the two banks maintained asset market share of 7% and 5% respectively as at end-2003 and both are 80% publicly owned.

Alongside their conventional peers, QIB and QIIB had a good year in 2004. QIB recorded an increase in annual net profits from QR145m ($40m) to QR302m as assets grew by 37.8%, while QIIB grew net profits by QR20m to QR84m. Recognising that its small capitalisation would be a hindrance as the Qatari economy grows, QIIB shareholders also agreed to raise the bank’s capitalisation by QR46.87m to QR203.1m at the end of March 2005. This will be achieved by a three-for-10 bonus share issue.

Test to come

While both banks have focused on boosting their local financing portfolios in the past year, the true test of their stamina and resilience to outside shocks will come when the Qatar Central Bank (QCB) finally authorises the expansion of conventional banks into the Shariah-compliant services business. Senior executives in the major conventional banks expect the change to come soon and, almost universally, they are champing at the bit to get started.

Mohammed Moabi, Qatar National Bank (QNB) executive manager for economics and research, explains that the QCB’s rules already permit conventional banks to structure Shariah-compliant transactions for institutional clients, but that the impending change in the law will dramatically redraw the retail landscape.

Conventional banks are being presented with two options: either conduct structured financing for clients without accepting deposits or construct a separate branch or subsidiary with an independent balance sheet.

According to Mr Moabi, QNB’s plans call for a separate Islamic business that will start with one branch and then grow organically. Ahli Bank is thinking along the same lines, as is Commercial Bank of Qatar. Andrew Duff, group head of corporate banking and capital markets at Commercial Bank, believes the secret to success will be to beat the incumbent Islamic banks in terms of product range and to outperform them in customer service.

“It’s really a very simple proposition,” he says. “Customers are telling us they want the broadest possible choice of products and the majority are requesting Islamic financial services. Rather than let those customers walk down the road to QIB or QIIB, we’d rather offer what they want. If any conventional bank here does not offer Shariah-compliant services, they’ll soon find they’re only playing half the game.”

Meanwhile, Doha Bank is preparing to launch a fully independent Islamic banking brand. Acting general manager R. Seetharaman sees Islamic finance as “a great way to re-deploy capital into a new business with great potential”, and will be executing a two-pronged strategy both to serve existing customers wishing to use Shariah-compliant services and to win market share away from the pure-play Islamic banks.

Foreign banks join in

Foreign banks will not be excluded. HSBC, for example, intends to bring its Amanah Islamic finance brand to Qatar before the end of the year.

So it seems QIB and QIIB are in a precarious position. Having spent the past 14 years competing against each other for custom, they could soon find five or more new competitors on their doorstep.

This is why, over the past year, both banks have been actively diversifying outside Qatar in a bid to support wider market penetration. QIB has followed an almost formulaic approach, establishing finance houses in every major continent bar Africa and Australasia. The process began in January 2004 with the co-foundation of the Arab Finance House in Lebanon with $60m of seed capital provided by QIB and Bahrain’s Gulf Finance House.

Not to be outdone by its larger rival, QIIB became a founding partner in the much-publicised Islamic Bank of Britain (IBB), which opened its first branch on London’s Edgware Road last September.

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