Complete segregation of Islamic and conventional banking in Qatar “should reduce the risk of contagion” from one segment to the other in case banking troubles arise in either one, the International Monetary Fund has said in its country report.
A separate anaylsis by the IMF in its report on “Financial linkages across banks in Qatar” concluded that Qatari banks are interconnected, and called for “closer monitoring of cross-border exposures” of banks, and their domestic interbank exposures.
In February last year, Qatar Central Bank had directed local conventional banks that have Islamic windows, to stop opening new Islamic branches, accepting Islamic deposits, and extending new Islamic financing from 2012.
“The QCB decision was motivated by supervisory and monetary policy considerations,” IMF said.
In QCB’s view, the overlapping nature of non-Islamic and Islamic activities makes banks’ risk management and compliance with prudential requirements more complex.
“The existence of Islamic windows complicates the preparation of financial reports governed by different international standards. It also makes the comparative analysis of financial reports more difficult at the domestic and international level.
“The QCB also argues that conventional banks cannot effectively separate capital for Islamic windows and conventional activities, an issue that is especially problematic for branches of international banks in Qatar with an Islamic window.
“Furthermore, the QCB believes that it is difficult to combine Basel and Islamic Financial Services Board (IFSB) standards for capital adequacy.
“The segregation of Islamic and conventional activities is also aimed at improving the effectiveness of monetary policy, as it will enable the QCB to introduce different liquidity management instruments for the two types of activities.”
According to the IMF, “levelling the playing field between Islamic and conventional banks was a further rationale behind the decision.”
It said the QCB would like to see the orderly growth of Islamic banks in Qatar. Since conventional banks were typically able to raise funds at lower rates, they were able to capture a large share of Islamic banks’ business segment.
“Access to low-cost funding was an advantage, especially in the case of international banks, which were able to leverage their funds from the global markets to take positions in Islamic assets,” the IMF country report said.
Following the issuance of the directive, conventional banks have ceased undertaking new financing activities and taking Shariah-compliant funding.
Conventional lending and Islamic financing activities by the Qatari banking sector continued to grow vigorously in the first half of 2011, although with a wide variation among banks, IMF said.
On the aggregate, June- end (2011) data, which the IMF had reviewed at the time of their consultation with the Qatari authorities, do not indicate a switch from conventional banks to Islamic banks by customers.
The growth rate of total loans including Islamic financing of the five conventional banks was 12.7% in this period, while total financing activities by the three Islamic banks declined by 0.6% due to a contraction of Islamic financing in one of the larger Islamic banks. By December end, 2011, all banks should have complied with the central bank guidelines.
The total assets of Islamic banks grew faster in the first half of the year but this is due to a large increase of their financial investments in Islamic debt instruments, primarily sukuk issued by the QCB.
Healthy growth in operating income in both Islamic and conventional banks in the first half of 2011 is also an indication that the segregation directive did not have a major impact on the banking sector yet.
The Q2, 2011 net operating income was 23% higher in 2011 than in 2010 for conventional banks and by 18% higher for Islamic banks.
(Gulf-Times , 12/2/2012)
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