The sands of Qatar might as well be gold dust, or so one is tempted to think when contemplating the recent rise of Qatar to one of the world’s three wealthiest nations with GDP per capita clocking in at $62,914.
This may not be a guarantee of well-being or happiness for the Qataris, but in terms of disposable incomes and needs for financial services go, the Gulf state appears to have all the makings of a heaven for innovative banking providers. (Even if the estimates for purchase power parity [PPP] to GDP, which correlate the national income to cost-of-living factors more accurately than nominal GDP, put Qatar in a slightly less illustrious spot on the world wealth scale.) Qatari banks results for FY 2006 showed a net profit of QAR5.10 billion ($1.4 billion) (against QAR4.18 billion for FY 2005) and total assets of QAR 9.1 billion.
Analysts noted, however, that the sector last year was affected by the regional equities markets. “The most significant part of the operations of the listed local banks in 2006 was the decline in the growth of profitability. The year 2006 witnessed a 28.1% growth in net profit, while it was 109% in 2005, which was due to strong investment income on the back of the buoyant stock markets, not only in Qatar but in the whole GCC region. We believe that the core earnings of the banking sector are more likely to drive growth in net income,” Kuwait-based financial firm Global Investment House wrote in a recent review of the Qatari economy.
Contributing factors to success
The Qatari banking sector is dominated by three major banks: Qatar National Bank, Commercial Bank, and Doha Bank. The industry counts 16 banks, out of which eight are Qatari owned (including three Islamic banks), and eight foreign banks. Qatar GDP rose to QAR191.9 billion in 2006, against QAR154.4 billion in 2005. The contribution of the oil and gas sector to the GDP increased from QAR 92.07 billion in 2005 to QAR 118.7 billion in 2006.
The inflow of oil revenues in latest years has led to a sharp increase in money supply. The Central Bank has tried to tighten the money supply through restriction on bank credits and personal loans, which have seen real estates prices rise and increased demand on time deposits. All this has led to remarkable growth in banking operations, and boosted the banking sector.
During 2006, total credit facilities of the banking sector grew by 47.1% to reach QAR102.5 billion from QAR 69.7 billion at the year end 2005. From 2002 until 2006, total credit facilities grew at a Compound Annual Growth Rate (CAGR) of 29.7% to reach QAR 102.5 billion, whereas total domestic credit grew by 27.4% to reach QAR94.8 billion. The allocation of the public sector in the total credit facilities declined to 21% in 2006 from 26.7% in 2005, which demonstrates the diversification of lending to other sectors.
The personal segment, which had the highest share in the total credit facilities rise, witnessed a growth of 42.2% in 2006 to QAR35.2 billion, mostly through the increased focus on consumer loans as part of their drive to retail banking. The public sector witnessed a growth of 15.5% in credit rise in 2006, which is low when compared to growth recorded by other economic sectors. The credit to the public sector was at QAR21.5 billion in 2006.
“For the last few years, banks have witnessed significant growth in credit off-take to personal segment due to increased focus on consumer loans. This was a trend not only in Qatar but in the whole of the Gulf region” said Chandresh Bhatt, a senior financial analyst at Global Investment House.
New entrants to the banking field are leading to increased competition. Al Rayan Bank last year joined the provider ranks, with a QAR4.12 billion initial public offering, which was described as the Middle East’s largest IPO at the time of its execution in January 2006.
The increased entry of foreign banks is another reason why the sector is becoming more and more competitive. Another factor is the emergent appetite for Islamic banking. World demand for Islamic finance is expected to reach $4 trillion within the coming five years, from a current $400 billion.
Many Qatari conventional banks have entered the Islamic finance field. In 2005, the three top banks, Doha Bank, Qatar National Bank, and Commercial Bank joined the Islamic banking club, which involves now six major Qatari banks. “Effectively, all the six leading banks in Qatar are now providing Islamic banking products,” said Bhatt, adding that in his estimate the ‘old’ Islamic banks will continue to dominate the market whereas newly sharia-compliant conventional banks will face fierce competition among themselves to have a piece of the pie in the Islamic finance sector.
Qatari banks play a major role in financing mega projects in Qatar, which has anchored a global awareness campaign to its program of sustainable growth by saying that $130 billion will be poured into infrastructure and other investments across various sectors over the coming six or seven years. Around 50% of that amount will be sourced through project finance.
Future prospects
Present projects in the oil and gas sectors in Qatar currently amount to more than $60 billion, according to estimates by Global Investment House.
Al Rayan Bank, although less than one year in operations, has its eyes set firmly on financing various big projects in Qatar and the region. On April 4, the bank announced the launch of Al Rayan Investment Bank, a QAR364 million Islamic financial institution, the first to operate in the Qatar Financial Center. “Although the Qatar banking sector is relatively small compared to the region, it has a significant role to play in financing mega projects in Qatar and the region,” Bhatt commented. For all intents and purposes, Qatar’s financial industry is doing very well when measured against the size of the market and the number of banks.
