Qatar’s banking sector fuelled by supportive regulations

Well capitalised and supported by one of the world’s wealthiest economies per capita, Qatar’s banking sector has successfully navigated a range of external challenges in recent years. It has emerged strong and resilient, in an advantageous position to leverage the resurgence in local and international demand for a wide variety of financing options. Consisting of commercial, Islamic, investment and development banks, the sector benefits from the country’s onshore Qatar Financial Centre (QFC), led by an independent legal and regulatory body, as well as a growing financial technology (fintech) industry.

Despite these strengths, Qatar’s banks were negatively impacted by the Covid-19 pandemic and the economic blockade imposed by some of the country’s neighbours in the region, the latter of which was lifted in January 2021 after the signing of the Al Ula Agreement. Years of low oil and gas prices prior to the pandemic also weighed on the sector. However, the country’s lenders can look forward to a year in which Qatar will host the 2022 FIFA World Cup, one of the world’s top sporting events. The banking sector and the economy as a whole are also set to benefit from expanding demand for Qatar’s energy exports, which supports government revenue and lending opportunities.

Oversight

The Qatar Central Bank (QCB) was created in 1993 to provide oversight for the financial sector. The central bank aims to preserve monetary stability; establish a stable, transparent and competitive sector based on market rules; reinforce investor confidence; and help develop services and products to meet evolving demand. The QCB sets interest rates, manages money supply and acts as the custodian for all banks operating in the country. It grants licences for banks to operate and issues periodic instructions to the sector, along with advisories. The central bank is headed by the governor of the QCB, an office that is currently held by Sheikh Bandar bin Mohamed bin Saoud Al Thani, who is also chair of the QCB’s board of directors.

As part of efforts to strengthen the regulatory ecosystem, the QCB supervises the Qatar Credit Bureau. In operation since 2011, the bureau provides credit information on individuals, companies and institutions operating in the country, alleviating risk by enabling better credit decisions and the tracking of credit records. The credit bureau took a step forwards in October 2021 when it signed a memorandum of understanding with the QFC to extend the bureau’s database to include companies registered with the QFC, including banks.

“Consumer and commercial delinquency rates continue to decline, despite economic challenges in the past couple of years,” Sheikha Maryam bint Khalifa Al Thani, CEO of the Qatar Credit Bureau, told OBG. “This is partly due to the bureau’s legal entity identifier, which improves transparency throughout the market. It also highlights the importance of technology in improving market conditions, reducing risk and boosting confidence.”

QFC & Bourse

The QFC is a one-stop shop for licensing, registration and related services for the financial sector. Its mission is to turn the country into an international centre for finance and commerce, and to drive economic diversification through the provision of a supportive regulatory framework. Between its establishment in 2005 and early 2022 the entity had helped more than 1200 companies set up operations in Qatar. Entities registered at the QFC fall under the authority of the QFC Regulatory Authority (QFCRA), which operates according to its own legal framework, based on common law and international best practices.

While companies registered in the QFC can be 100% foreign owned, participation in Qatari banks – whether listed on the Qatar Stock Exchange (QSE) or not – has historically been closed to foreigners. In April 2021, however, a new draft law was approved by the Council of Ministers that would allow up to 100% foreign ownership of listed companies. The draft law was followed in August 2021 by a Cabinet decision to approve the opening up of Qatar’s four listed banks – Qatar National Bank (QNB), Qatar Islamic Bank (QIB), Commercial Bank of Qatar (CBQ) and Masraf Al Rayan – to 100% foreign investment.

Banks that are listed on the QSE also fall under the remit of the Qatar Financial Markets Authority (QFMA), which regulates and supervises the country’s financial markets – either exclusively, if the company is based outside the QFC, or in conjunction with the QFCRA for those based in the QFC. The banking and financial services board is the exchange’s largest, with eight listed banks – one of which, Qatar First Bank, is based in the QFC.

Strategy

The QCB, the QFMA and the QFCRA are working to implement the financial sector’s Second Strategic Plan 2017-22. The programme is in line with the overarching objectives of Qatar National Vision 2030. The strategic plan includes five key goals: to enhance the regulatory framework and facilitate cooperation between the three oversight entities; to develop deeper and wider financial markets and foster financial innovation; to maintain the integrity of and confidence in the financial system; to promote financial inclusion and literacy; and to develop human capital. The framework also includes provisions related to the creation of a robust cybersecurity network and fintech development.

The authorities are working to build off momentum from the First Strategic Plan 2013-16. A series of key achievements were met during the first plan’s implementation period, including that all banks registered with the QCB were compliant with Basel III standards by 2014; the QSE was upgraded to emerging market status the same year; new corporate governance codes for banks were issued by the QCB in 2015; and the country’s Islamic banking regime was aligned with the Islamic Financial Services Board capital framework standards in 2016. Over the same period total bank assets rose from an average of 116% of GDP in 2008-12 to 170% in 2013-16.

Structure

The sector is divided into conventional and Islamic banks, with the QCB ruling at the end of 2011 that banks cannot be both. In mid-2019 the QCB announced it would establish a unified sharia board for the Islamic segment to facilitate greater consistency across institutions, and encourage their alignment with local and international best practices. However, as of early 2022 Islamic financial institutions were still referring to their own sharia-compliance boards when evaluating products and practices (see Islamic Financial Services chapter). The Islamic banking segment also looks to the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions for rulings equivalent to the International Financial Reporting Standards in the conventional segment.

All of Qatar’s banks meet Basel III standards, with the QCB and its regulatory partners working to improve standards further in line with the Basel III reforms, or Basel IV. The reformed standards are set to be implemented by banks around the world by January 1, 2023, after the pandemic caused the initial deadline of January 1, 2022 to be postponed.

Qatar’s banks are well capitalised to meet the new standards, with credit ratings agency Fitch finding that the common equity Tier-1 ratio in the banking system was 14% at the end of the first half of 2021 – significantly above the 8.5% minimum regulatory requirement. Moreover, in 2020 banks in the market had an average capital adequacy ratio of 18.7%, comfortably above the 12.5% regulatory minimum set by the QCB. That year Masraf Al Rayan had the highest capital adequacy ratio, at 20.3%, followed by Doha Bank (19.8%), QIB and Al Khaliji Bank (both 19.4%), and QNB (19.1%). While CBQ, Ahli Bank and Qatar International Islamic Bank (QIIB) had capital adequacy ratios below the average, at 19.8%, 16.9%, and 16.5%, respectively, these figures were still above the minimum requirement.

As of end-2020 the Islamic segment held 20.5% of total banking assets, and the conventional segment 79.5%. The four listed Islamic banks were QIB, Masraf Al Rayan, QIIB and Qatar First Bank. Their conventional counterparts were QNB, CBQ, Doha Bank and Ahli Bank. Qatar is also home to Qatar Development Bank (QDB), a non-profit, government-owned institution. It was established by Amiri decree in 1997 to help the country to diversify the economy. QDB funds and supports businesses in a range of sectors, including agriculture, tourism and manufacturing.

Main Players

QNB is the largest bank in the GCC and the wider Middle East. It was established in 1964 as the first commercial bank in the country, and the Qatar Investment Authority, the national sovereign wealth fund, holds over 50% of the bank’s shares. As of mid-2021 QNB had operations in 31 countries, either directly or through subsidiaries. According to a June 2021 report from Forbes Middle East, it was the top listed bank in the Middle East when market value, sales, assets and profits were considered. The report found that QNB had a market value of $45.2bn, with $281.6bn in assets.

QIB, for its part, is the largest Islamic bank in the country – accounting for 40% of the market share in the Islamic banking segment – and the 12th-largest bank in the Middle East, according to Forbes Middle East. It was established in 1982, and as of mid-June 2021 had a market value of $11.2bn and assets worth $47.9bn. Established in 2006, Masraf Al Rayan is the country’s second-largest Islamic bank and the region’s 18th largest financial enterprise. As of mid-2021 it had 17 branches in Qatar and five in the UK through a subsidiary, with a market value of $9.1bn and assets of $33.3bn.

CBQ is another major player, with 29 branches across the country. Established in 1974, it owns Alternatif Bank in Turkey, and has signed strategic agreements with the National Bank of Oman and United Arab Bank. In mid-2021 it was the 21st-largest bank in the region, with a market value of $5.9bn and assets of $42.2bn. Doha Bank, for its part, is another large commercial bank and has branches in Kuwait, the UAE and India, as well as representative offices in countries including the UK, Japan and China. It had a market value of $2.4bn and assets of $28.4bn as of mid-2021. Other major players in terms of market value and assets include QIIB ($4bn and $16.8bn, respectively), Al Khaliji Bank ($2.2bn and $15.5bn) and Ahli Bank ($2.5bn and $13.1bn).

In November 2021 Masraf Al Rayan and Al Khaliji Bank completed a merger, creating one of the largest sharia-compliant banks in the region, with around QR182bn ($50bn) in assets at the time. The merged entity holds Masraf Al Rayan’s name, with the integration process expected to be completed in 2022. The merger was considered a milestone in the Qatari banking sector, as it reflected market maturity and the ability to facilitate large-scale deals.

Sector Performance

According to the most recent “Quarterly Statistical Bulletin”, published by the QCB in December 2021, the country’s commercial banks closed the year with a combined QR1.8trn ($494bn) in assets, up from QR1.5trn ($411.7bn) and QR1.7trn ($466.6bn) in 2019 and 2020, respectively. Domestic credit accounted for the largest portion of assets in 2021, at QR1.1trn ($301.9bn), followed by domestic investment (QR239.4bn, $65.7bn), deposits in banks overseas (QR110.2bn, $30.2bn) and deposits at the QCB (QR81.2bn, $22.3bn).

Commercial banks held QR974.1bn ($267.4bn) in deposits at the end of 2021, a figure that experienced a similar upward shift as assets in recent years. In 2019 and 2020 Qatari banks held QR849.1bn ($233.1bn) and QR905.5bn ($248.5bn) worth of deposits, respectively. The private sector accounted for the largest share of deposits in 2021, at QR404.8bn ($111.1bn), QR318.4bn ($87.4bn) of which was in riyal and QR86.4bn ($23.7bn) in foreign currency. The public sector, for its part, was responsible for QR288.7bn ($79.2bn) of the sector’s assets, QR164.5bn ($45.2bn) of which was in riyal and QR124.2bn ($34bn) in foreign currency.

Financial Results

This expansive trend was reflected in individual banks’ returns. QNB reported a net profit of QR13.2bn ($3.6bn) in 2021 – up 10% from the previous year’s QR12bn ($3.3bn) – with operating income up 11% at QR28.3bn ($7.8bn). The bank’s assets reached QR1.1trn ($301.9bn) in 2021, a 7% increase from 2020 that was largely driven by an uptick in loans and advances. Consumer deposits also rose over this period, from QR739bn ($202.8bn) to QR786bn ($215.7bn). QNB’s loan-to-deposits ratio improved from 98% to 97.2%, while the ratio of non-performing loans (NPLs) to gross loans remained stable at 2.3%.

CBQ also saw its net profit rise, from QR1.3bn ($356.8m) in 2020 to QR2.3bn ($631.3m) – an increase of more than 77% – while total assets were up 7.7% at QR165.5bn ($45.4bn). Customer loans and advances at the bank also saw an improvement over this period, from QR96.7bn ($26.5bn) to QR98bn ($26.9bn), while customer deposits saw 8.1% growth, from QR75.8bn ($20.8bn) to QR82bn ($22.5bn).

Doha Bank posted net profit of approximately QR704m ($193.2m) in 2021, up slightly from the QR703m ($193m) seen in 2020. The bank’s net operating income rose by 5.8% over the course of the year to QR3.1bn ($850.9m), even as net loans and advances trended downwards, from QR65.5bn ($18bn) in 2020 to QR62.7bn ($17.2bn) in 2021. Ahli Bank, for its part, reported that its net profit rose from QR680.1m ($186.7m) in 2020 to QR713.5m ($195.8m) in 2021, as did total assets, from QR47.6bn ($13.1bn) to QR48.1bn ($13.2bn). The value of loans saw more subdued expansion over the year, rising from QR33.5bn ($9.19bn) to QR33.6bn ($9.22bn).

In the Islamic segment, QIB’s profits expanded by 16% in 2021 to QR3.6bn ($998.1m) at the close of the year, while assets grew by 11.2% to QR194bn ($53.2bn). The bank also saw customer deposits rise, from QR118bn ($32.4bn) at end-2020 to QR131bn ($26bn) in December 2021. QIB reported that its financing-to-deposits ratio improved over the period, from 101% to 98%, reflecting the bank’s strong position in terms of liquidity.

Other Islamic banks recorded improvements over the course of 2021, fuelled by broader economic recovery. QIIB’s net profit rose from QR937.7m ($257.4m) in 2020 to over QR1bn ($274.5m) in 2021, and its assets grew from QR61.3bn ($16.8bn) to QR61.8bn ($17bn). The bank’s total deposits expanded by 6.3% over the year, from QR36.2bn ($9.9bn) to QR38.4bn ($10.5bn).

Masraf Al Rayan, meanwhile, registered a net profit of QR1.7bn ($466.6m) in 2021, while total assets grew by a substantial 43.7% to QR174bn ($47.8bn), reflecting its merger with Al Khaliji Bank. Qatar First Bank’s net profits for 2021 reached QR100.4m ($27.6m), due to the institution’s efforts to develop new products and services during the pandemic and enlarge its client base.

Pandemic Response

Qatari banks’ success in navigating the pandemic can be partly attributed to good credit-risk policies and collections, as well as enhanced efficiencies stemming from the increased use of fintech and other innovative solutions that helped to ensure operational continuity in the early months of the health crisis. Indeed, the pandemic fast-tracked the sector’s digital transformation process, which was already well under way prior to 2020. Banks now are offering a range of online services and digital solutions.

The sector’s performance was also supported by government initiatives aimed at providing aid to financial institutions and the wider economy. For example, in March 2020 the QCB announced that it would offer commercial banks a repurchase agreement (repo) worth QR50bn ($13.7bn) at 0% interest to provide liquidity to banks and enable them to reduce rates for customers from affected sectors. Also included in the announcement was a six-month grace period for the repayment of loans from entities in affected sectors starting that month, with all commissions and fees waived.

The central bank utilised interest rates to encourage lending, and in turn stimulate spending and investment. In March 2020 the QCB announced that it had lowered deposit rates by 50 basis points (bps), from 1.5% to 1%. It also cut lending rates by 100 bps, from 3.5% to 2.5%; and repo rates by 50 bps, from 1.5% to 1%. The cuts followed a similar move by the US Federal Reserve: as the riyal is at fixed parity with the US dollar, QCB’s short-term interest rates are often closely related to those set by the Fed.

QDB also played a key role in the pandemic response. In April 2020 it implemented the Covid-19 National Response Guarantee Programme, which provided QR5bn ($1.4bn) in guarantees to banks. In turn, both commercial and Islamic banks could grant interest-free loans to companies affected by the pandemic for costs such as payroll and rental fees. To be eligible, companies must be fully private and registered in the wage protection system.

Lending

While credit growth has expanded in recent years, there have been concerns that sectors such as transport, tourism, real estate and construction – those that sought funding in the run-up to the 2022 FIFA World Cup – were also among those most affected by the pandemic. According to a November 2021 report from UK-based consultancy Capital Economics, around 40% of all lending in Qatar was directed towards the real estate, travel and tourism sectors. Even so, the ratio of NPLs to total loans remained relatively stable, rising from 1.8% in 2019 to 2% in 2020, according to the QCB. Sector stakeholders remain optimistic about the health of these sectors in the coming year. “We expect an uptick in activity in 2022 across real estate, hospitality and retail as a result of the 2022 FIFA World Cup, as well as in construction, which will benefit from the ongoing work at the North Field,” Mohamed Gad, CEO of Standard Chartered Qatar, told OBG.

According to a report from Kuwait-based Kamco Invest, in the second quarter of 2021 Qatari banks had the lowest ratio of NPLs in the GCC, as well as the highest provision cover and return on equity. The sector also had a ratio of Tier-1 capital to riskweighted assets of 17.6%, and that of regulatory capital to risk-weighted assets of 18.8% in 2020, according to the QCB. This underscores that the sector has a number of advantages that should ensure its resilience in the coming years.

The banking industry is also expected to benefit from efforts to widen its customer base to include more small and medium-sized enterprises (SMEs). “Stable value creation comes from diversifying customers, and a focus on SMEs will be beneficial,” Gudni Stiholt Adalsteinsson, acting CEO of Doha Bank, told OBG. “However, it will be important to offer right-sized and tailored solutions to fit smaller enterprises’ specific needs.”

Sustainability

In line with global trends, the sector has sought to embrace environmental, social and governance (ESG) criteria. Financial institutions have taken steps regarding sustainability reporting, ensuring diversity among offerings and launching green bonds, such as QNB’s issuance in September 2020. The $600m tool aimed to raise money to finance various green projects.

The QSE and MSCI jointly launched an ESG index in November 2021, featuring companies that demonstrate the best performance in terms of adherence to and reporting of ESG principles. Several local banks are included in the MSCI QSE 20 Index, including QNB, Masraf Al Rayan, CBQ, QIB and Doha Bank. More recently, in February 2022 QNB and the UK’s HSBC launched a green energy-focused financial tool to create more short-term sustainable funding options for banks and companies. Under the terms of the repo, QNB will receive green bonds from HSBC, which will in turn allocate an amount equal to the bond price to environmentally friendly projects.

The QSE has eyed the implementation of mandatory ESG reporting for listed companies, but as of March 2022 these measures had not been finalised. “Improvements in transparency are essential if financial institutions are to fully embrace ESG principles,” Adalsteinsson told OBG. “Mandatory reporting would be a positive step to this end, especially if tied to specified key performance indicators.”

Disruptive Innovation

In 2019 the National Fintech Strategy was issued by the QCB, in partnership with QDB and the QFC, to create a supportive ecosystem for local start-ups and spur fintech development. It targeted opportunities in digital payments, money management and budgeting, and lending, among other segments. These efforts have been supported by the Qatar Fintech Hub (QFTH), which offers incubator, accelerator and mentorship services; provides financing through a dedicated capital investment fund; and hosts events such as hackathons. The country’s first hackathon was held in July 2020, and brought together start-ups to find solutions to issues related to digital payments, merchant acceptance and credit. The most recent hackathon was held in March 2022, and sought to leverage technology to help financial institutions increase revenue, reduce recurring costs, enhance the customer experience and use data-driven insights for product design.

The centre is able to leverage the existing wealth of venture capital (VC) funds, well-capitalised financial institutions, science and technology facilities, and e-commerce outfits in the country. These range from Qatar Science and Technology Park (QSTP) to the Qatar Business Incubation Centre (QBIC), as well as the QDB’s $100.3m VC support fund. QBIC and QSTP also offer funding opportunities, as does Doha Tech Angels, Qatar’s first private angel investor fund that targets early-stage start-ups.

An October 2021 report by QFTH on the state of fintech in Qatar identified four main areas to promote expansion: payment technologies, such as remittances and payment gateways; regulatory technologies, including digital identities, sandbox initiatives, and risk management and compliance; Islamic finance, including takaful (Islamic insurance) tech and smart contracts; and SMEs, with focus areas such as trade and supply chain financing.

QFTH launched its Wave-1 incubator and accelerator programmes in 2020. Some 500 applications were then received for the Wave-2 programme, with 22 competitors selected to go forwards in April 2021. The first two iterations saw 40 fintechs graduate from the programme, and the third wave began in October 2021. Those selected for the accelerator programme are eligible for up to $100,000 in direct funding and $250,000 in in-kind support.

Qatar’s fintech ecosystem also includes Islamic fintech operators. The segment is poised to expand at a compound annual growth rate of 19.6% between 2021 to 2025, reaching $2.5bn, up from $849m at the close of 2020. Indeed, the 2021 Global Islamic Fintech Index released by research and advisory firm DinarStandard ranked the country 10th out of 64 Islamic fintech markets, noting the country was home to a “fast-maturing” ecosystem.

Outlook

Qatar’s banking sector is set for expansion, facilitated by the post-pandemic recovery; a series of large-scale transport and energy infrastructure projects; and the 2022 FIFA World Cup, which is set to attract more than 1m visitors. Investment in fintech has positioned Qatar to be a leader in both the conventional and Islamic segments. This has been supported by an established and innovative start-up ecosystem, which benefits from an active network of accelerators, incubators, VC funds and angel investors; as well as a regulatory framework tailored to the specific needs of the tech community.