Qatar's central bank takes steps to protect against volatility

During her visit to Qatar in late November 2015, Christine Lagarde, the managing director of the IMF, issued a statement endorsing the regulatory work carried out by the Qatar Central Bank (QCB) in recent years. “Substantial progress has been made on enhancing financial sector regulation, including adopting the international regulatory framework for banks, Basel III,” she wrote. “The banking system in Qatar is well placed to weather lower oil prices, weaker non-hydrocarbons growth and higher US interest rates.”

Strength & Resiliency 

Lagarde’s positive review of the raft of updates and new policies enacted by the QCB and other related regulatory entities since 2012, in particular, was widely taken to be a signal of the resiliency and many strengths of the country’s financial sector. Lagarde also noted that Qatar’s banking sector is better situated to weather a potential slowdown than many of its neighbours, due in large part to recent regulatory work carried out by the QCB. Indeed, the central bank’s efforts over the past five years were developed and implemented specifically with an eye towards preparing for and protecting against future economic volatility.

Developed in the wake of the 2007-08 international economic downturn, the central bank’s Strategic Plan for Financial Sector Regulation (SPFSR), is made up of a comprehensive series of reforms for the period 2013-16, including strengthening risk-based regulation and expanding macroprudential oversight throughout the country’s financial industry. This development blueprint builds on Law No. 13 of 2012, which formally unified financial sector oversight under the QCB, thereby eliminating regulatory overlap and streamlining regulatory operations in banking sector. Taken together, these efforts, plus the implementation of Basel III, have resulted in the development of a robust banking sector that is well placed to not only ride out the current volatile period, but to thrive despite ongoing economic uncertainty.

Fast-Acting Oversight 

In the wake of the 2007-08 global financial crisis, Qatar’s government moved quickly to secure the banking sector, guaranteeing all Qatari deposits and increasing the capital of domestic banks via the Qatar Investment Authority, the country’s sovereign wealth fund. These efforts, along with the nation’s long-standing conservative fiscal policy, contributed to a quick post-downturn recovery and minimal long-term damage.

Nonetheless, soon thereafter the QCB and other regulatory entities set out to ensure that the country’s financial industry would be better protected in the future. Law No. 13 of 2012 was widely considered to be a major development in this regard. Under the 2012 law the QCB’s supervisory authority was expanded to include insurance and capital markets activities, as well as all business carried out in the Qatar Financial Centre, which previously operated under its own, independent regulatory framework. Additionally, the new law included rules for a number of sub-segments and financial activities that were not addressed previously, including Islamic financial services, mergers and acquisitions, and credit ratings.

Comprehensive Planning

The QCB’s efforts to bring all of the nation’s financial sector under a single, comprehensive regulatory regime were laid out in detail in the SPFSR. Developed in conjunction with the Qatar Financial Market Authority (QFMA) and the Qatar Financial Centre Regulatory Authority (QFCRA), the strategy was designed in line with Law No. 13 and with reference to Qatar’s medium- and long-term economic development strategies, namely the Qatar National Development Strategy 2011-16 and the overarching Qatar National Vision 2030. Furthermore, the SPFSR aims to examine “ways to further boost the collaboration between the three regulatory authorities”, namely the QCB, the QFMA and the QFCRA, according to the document’s foreword, written by the QCB’s governor, Abdulla bin Saoud Al Thani.

Basel III

A key component of this effort has been the implementation of Basel III reforms. Since Basel III guidelines were rolled out in 2011, the QCB has issued a series of rulings aimed at implementing the standards in Qatar. As of January 2014 all domestic banks have been required to comply with Basel III-mandated capital adequacy and liquidity requirements. These include a minimum total capital requirement of 12.5% (as a share of risk-weighted assets), which is made up of 10% Tier-1 capital and 2.5% capital conservation buffer; and a minimum net stable funding liquidity ratio of 100%, among others. Given the domestic banking sector’s strong liquidity situation, most institutions have easily exceeded this. Indeed, as of year-end 2015 Qatar’s banking sector boasted a capital adequacy ratio (CAR) of 15.6%, according to the QCB.

Despite the sector’s high CAR, in 2015 and 2016 Qatari banks have worked to build their capital base well in excess of Basel III standards. Indeed, according to a recent study carried out by the US-based global consultancy Strategy&, banks operating in GCC countries will require an additional $35bn in capital by 2019, much of it Tier 1, or core, capital. As such, a number of domestic Qatari banks have launched capital-raising efforts recently, primarily in the form of bond and sukuk, or Islamic bond, issues. In February 2015, for instance, Qatar Islamic Bank, the nation’s largest sharia-compliant bank by assets, announced that its shareholders had approved a plan to issue up to QR5bn ($1.4bn) in Tier-1 sukuk. In March 2015 both Doha Bank and the Commercial Bank of Qatar followed suit, receiving approval from shareholders to issue up to QR2bn ($548.8m) and $1bn, respectively.

In January 2016 Qatar National Bank reported that its shareholders had approved the issuance of bonds that could enhance its core Tier-1 capital or its supplementary Tier-2 capital. In March 2016 Commercial Bank of Qatar also announced it had raised QR2bn ($548.8m) in additional Tier-1 perpetual capital notes, and in March the bank’s annual general assembly gave approval to raise capital of up to $1.5bn through the issuance of different debt instruments. Other lenders include Al Khaliji, which secured shareholder approval in early 2016 for up to QR2bn ($548.8m) of bonds to boost its core capital; Masraf Al Rayan, which announced it was eyeing a debut in the debt capital markets with a dollar-denominated benchmark sukuk issue; Qatar International Islamic Bank, which was reported in March 2016 to be in the advanced stages of preparing to conduct a Tier-1 sukuk issue worth QR1bn ($274.4m); and Ahibank, which announced the completion of a $500m debut bond issue in April 2016. “There is a lot of caution from the banks and the central bank at the moment,” Sheikh Faisal bin Abdulaziz bin Jassem Al Thani, the chairman of Ahlibank, told OBG. “Institutions have been issuing capital to ensure they are prepared both for expected upcoming economic volatility and for future growth.”