Qatar’s Islamic banks’ balance sheet are expected to grow to $100bn by 2017 in view of surge in demand for local credit to finance government infrastructure and investment projects, according to global credit rating agency Standard and Poor’s (S&P).
Moreover, the country’s Shariah-principled lenders are slated to expand overseas due to a very small bankable population, it said in a report.
“We foresee Qatar’s Islamic banks continuing to grow quickly over the next five years, reaching over $100bn on the balance sheet by 2017, up from $54bn at year-end 2012,” F Timucin Engin, S&P associate director (financial institutions) said in Doha.
Assuming that Islamic banks grow by an average of 15% over the next five years — this is significantly lower than the previous five-year average of 35%, but their asset base could exceed $100bn by 2017, Engin said, adding that this would make Qatar’s Islamic banking market the third-largest in the Gulf region, after Saudi Arabia and the UAE.
Highlighting that Qatar now has one of the fastest-growing Islamic banking sectors in the world, thanks to a surge in the demand for local credit to finance government infrastructure and investment projects, he said “we believe that this demand will endure, and therefore that the assets of Qatar’s Islamic banks will continue to grow, and their share of the country’s banking system will continue to rise.”
Finding that the key driver of growth in domestic credit in Qatar is government-funded infrastructure and investment projects, Engin said S&P understood that the government ensures that at least a portion of a large project is structured in compliance with Shariah law to enable the Islamic banks to participate.
As a result of the government’s supportive actions, the Islamic banking sector in Qatar has grown more quickly than the banking sector as a whole over the past few years, he said, observing that between 2006 and 2012, Qatar’s Islamic banks grew their domestic loans and resident deposits by an average compound growth rate of 46% and 40%, respectively, versus 31% and 23% for the entire banking system.
Consequently, the Qatari Islamic banks’ market share in domestic credit increased from 13% in 2006, to 25% at the end of 2012, while the share in resident deposits increased from 13% to 28% in the same period.
The growth of Qatar’s Islamic banks has had “repercussions” for the country’s conventional banks, S&P found. Most conventional banks except QNB lost market share to the Islamic players over the past few years, thanks to QNB’s key role in financing government infrastructure and investment projects.
At the same time, the other large conventional banks have faced significant competition from the Islamic banks, particularly in the area of retail lending, it said.
There are currently four Islamic banks in Qatar, with a combined asset base of $54.4bn as of end-June 2013.
Although there is discussion in the market about the potential launch of a new Islamic bank with a largely overseas mandate, S&P said it has not seen any tangible progress on this to date.
Observing that the lending profiles of the Islamic banks are largely on a par with their conventional banking peers, S&P said QNB and Rayan have the largest government and public sector exposures relative to their lending book (over 60% for each bank), whereas the Commercial Bank and Qatar Islamic Bank have the largest real estate lending concentrations.
However, Engin cautioned that Qatar’s small bankable population could limit the Islamic banks’ long-term growth prospects. Total population of Qatar is less than 2mn and expatriates and foreign workers represent a predominant portion of this figure. In addition, the latter group tends to have relatively limited assets in the Qatari banking system, he added.
Wondering whether the pace of growth will slow once the number of government projects falls in future, S&P said Qatar’s most active conventional banks acquiring banking assets in other regional markets, notably Turkey and Egypt.
“We see a possibility of Qatar’s Islamic banks taking a similar approach in the long term, once the credit growth in the country slows to visibly lower levels,” the analyst said.