COLUMN-Qatar bank ban bad for Islamic finance

By Guest Contributor
February 18, 2011

By Keith Mullin, Editor at Large, International Financing Review; the views expressed are his own.

LONDON, Feb 18 (Reuters) – Qatar’s decision to ban conventional banks from offering Islamic banking services with immediate effect and to wind down their Islamic windows by the end of the year is an absurd development.

It is disgracefully anti-competitive, counter-productive and there is every likelihood that the government will come to regret it.

The central bank’s reasons for imposing the ban were put down to a host of supervisory and monetary policy issues that were poorly explained and ultimately made little sense. It said the Qatari financial system has “well established Islamic banks… that fulfil local demand on Islamic products”. This is laughable since the country’s top three Islamic lenders – Qatar National Bank, Commercial Bank of Qatar and Doha Bank – are all conventional banks.

The authorities suggested banks were finding it difficult to manage co-mingled Islamic and non-Islamic risk from the standpoint of capital adequacy, reporting and financial stability. That was presumably more a comment about the central bank’s own abilities. In short, the QCB circular was nonsense. The ban was a thinly veiled attempt to give the country’s Islamic banks a free ride for no other reason than they can’t compete in an open market.

The fact that QCB governor Abdullah Saud Al-Thani personally opened HSBC’s Islamic banking branch in Doha just last July will do nothing to enhance his reputation or credibility.

Absurd or not, the ban sent a frisson through international banking circles, as there is some support for its extension to other countries in the region.

Before they act, though, monetary authorities should take note of some realities: foreign banks have been almost wholly responsible for all innovations in Islamic wholesale and institutional finance, including capital markets. Local Islamic players have been almost completely absent from this space because they lack experience and technical know-how.

Sharia scholars have profited handsomely for years from sitting on multiple boards, approving Islamic versions of conventional financing, derivative and hedging products. They have had no moral or ethical problems either with the notion of conventional product Islamicisation or its dominance by conventional banks. Nor have Islamic investors, who have been more than happy with the flexibility brought about by the product innovations introduced by international banks.

From a practical perspective, I wonder if the government will continue to support the Islamic banks by engaging them to do all of its financing. If so, they had better lower their expectations. A couple of weeks after the central bank governor starred at HSBC’s Doha jamboree, Barclays Capital, HSBC, RBS, Qatar National Bank and Standard Chartered sold $3.5 billion of Reg S/144a paper for Qatari Diar, the government-owned property developer. A purely Islamic context simply won’t afford borrowers the facility to conduct financing operations of that magnitude.

In October, Qatar Islamic Bank – which has close links with the government and whose single largest shareholder is Qatar Investment Authority, the country’s sovereign wealth fund – printed $750 million of wakala sukuk and appointed Credit Suisse and HSBC to manage the issue. In the light of such examples, doesn’t the ban smack of pointless hypocrisy?

In the hard-nosed world of capital markets, borrowers need to focus on practicalities. It’s not just about setting an all-in financing cost in a vacuum; it’s about dialogue with investors, price discovery, timing, comparables, making markets, and providing liquidity. Getting it right builds credibility and facilitates return borrowing.

It’s hard to fathom at this juncture what implications the ban will have on Qatar or on Islamic investment banking as a whole, but one thing’s for sure: Islamic products and solutions owe their place in the realm of capital markets and institutional finance to international conventional banks.

Taking them out of the equation is a huge step in the wrong direction that will do nothing but undermine creativity and innovation in a market segment in need of a boost. (Editing by John Manley) ((keith.mullin@thomsonreuters.com))

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