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The Qatari economy is experiencing significant dynamism, and the banking sector is no exception to that. Various structural changes are occurring, including the banks’ declining exposure to the government, growing Islamic financing, and expanding private sector lending. The immense project finance requirements of energy sector investments and mega infrastructure projects offer banks abundant opportunities and present them with several challenges. In addition, the banking sector was caught in the boom and bust of the Qatar equity market. The investment gains logged from that exposure were significant, especially during 2005. Finally, with relatively low levels of financial intermediation, as measured by loans-to-GDP ratios and indirectly by deposits-to-GDP ratios, there is ample room for overall sector growth both in Qatar and across the GCC. During 2005, the government, inclusive of its various institutions, shifted from being a net borrower from local banks to a net lender, with the ratio of government assets to government deposits dropping below 100%—down from much higher levels in previous years. Nevertheless, government dissociation from the sector is not uniform; government deposits continue to climb, while government borrowing is at relatively stable levels. This is partly explained by the huge budget surpluses witnessed in Qatar stemming from the robust economic growth generated by rising energy prices. Another explanation lies in the government liberalization strategy, which aims to boost private sector participation in the economy as a whole. The banks’ declining exposure to the government coincided with a surge in private sector borrowing, with personal lending overtaking public sector lending as the main route of banking credit. Accordingly, it is expected that banks’ profitability will be enhanced as higher-margin private sector lending replaces the lowrisk, low-return government lending.
The launching of Islamic banking services by conventional banks during 2005 was a turning point for that subsector, as well as for the overall banking sector. With the appetite for Islamic financing growing rapidly not only regionally but also globally, all listed Qatari banks have opened Islamic branches or Islamic windows. The earnings of the two well-established Islamic banks have witnessed exponential rates of growth lately, while, at the same time, conventional banks are swiftly gaining market share in the Islamic banking arena.
The project finance market in Qatar has become one of the fastest growing worldwide, which translates into considerable potential for the banking sector. Mitigating the asset/liability mismatch by sourcing more long-term funds is becoming more requisite if a bigger share of the generally long maturity project financing is to be reaped by the Qatari banks.
Net profits skyrocketed in 2005 on the back of substantial investment earnings fueled by the performance of the Gulf equity markets in general and the Doha Securities Market in particular. Earnings growth was scathed in 2006 as the equity markets collapsed, but banks comfortably withstood the shock due to healthy performance in their core underlying business. Despite the banks’ declining exposure to the government, capital adequacy remains significantly higher than the minimum requirements stipulated by the Qatar Central Bank and the Bank of International Settlements (BIS).