The banking sector in Qatar has a long and chequered history. The need for banking in the country first arose due to the need to finance the exploration of hydrocarbon in 1949. Till 1954, Eastern Bank (presently, Standard Chartered Bank) was the only bank operating in Qatar. As the economy diversified, the need for finance increased and with it, the need for banks as well. Reflecting this development, the British Bank of the Middle East (acquired by HSBC), the Othman Bank, (formerly Grindlays Bank, acquired by Standard Chartered), and the Arab Bank began operations in Qatar in the 1950s, following by the Lebanese Bank, (now Al-Mashreq Bank) in 1960. With the economy dependent entirely on foreign banks, a need was felt to ensure the creation of domestic banks that could serve the growing financing needs of the economy. As a result, during the mid-1960s, a number of domestic banks came into existence. The first locally-owned bank was the National Bank of Qatar (QNB) set up in 1965.
Following the oil price shock of the early 1970s, the government granted permission to create new banks periodically, such as Commercial Bank of Qatar (CBQ, 1975) and the creation of the first Islamic bank, Qatar Islamic Bank (QIB, 1982).The ensuing period has witnessed the creation of a wide gamut of banks, including a specialized bank – Qatar Development Bank – in 1997. Following several rounds of consolidation, at present, the financial system comprises of a total of 15 banks which are licensed and regulated by the Qatar Central Bank. These include: conventional banks, Islamic banks and foreign banks. Banks remain the mainstay of financial intermediation in the country, with bank asset-to-GDP being over 200 percent in 2020 as compared with 100 percent in the early 2000s.
The past two decades have witnessed not only an expansion in the size of the banking sector, but also their reach, level of services and an increased involvement of the government through the Qatar Central Bank in the regulation, direction and control of the sector in order to make it more resilient, efficient and competitive. Bank asset has grown at a compounded rate of over 15 percent over the past two decades. Likewise, loans and deposits have also expanded rapidly: loan-to-GDP and deposit-to-GDP ratios stood at around 150 percent and 125 percent, respectively, at end-2022. In terms of market shares, the share of conventional banks in total asset was roughly 70 percent at end-2019, the shares of Islamic and foreign banks were 29 percent and 1 percent, respectively.
Accordingly, the banking sector in the country has been playing an important role in fostering growth and economic development in Qatar. During the last decade or so, the banking sector has played a vital role in achieving the goals of Qatar National Vision 2030. Large infrastructure projects were financed by the banking sector, which catalysed Qatar's economic diversification process. Despite several global, regional and domestic challenges, the banking sector remained sound and resilient. Illustratively, even after the global oil price shock during 2015-2016, the banking sector maintained stable growth in capital while keeping delinquent loans in check.
The financial system in Qatar remained bank based, dominated by few banks due to historic legacy. At present, the banking system comprises of 4 conventional banks, 4 Islamic banks and one specialized (development) bank. Besides, there are 7 foreign banks operating in Qatar. In terms of asset size, the conventional banks assets constitute nearly 69 percent of total commercial bank assets, Islamic banks hold around 29 percent and foreign banks account for the rest. The ownership structure in Qatar indicates that the banking sector is largely domestically-owned. The private domestic segment comprises an overwhelming three-quarters of total ownership, with the share of public and quasi-public ownership being around 21 percent.
Prior to 2012, Islamic banking activities where provided by both Islamic banks and Islamic windows of conventional banks. In 2012, following a policy decision, conventional banks were advised to close their Islamic banking windows. Since 2012, Islamic banks recorded a Compounded Annual Growth Rate (CAGR) in asset of about 11 percent, while their conventional counterparts registered a CAGR of 9 percent. As a result, the total asset of Islamic banks aggregated to QR 544 billion in end-December 2020 out of total commercial banking asset of QR 1904 billion (or, about 29 percent of the total commercial banking asset). According to the Qatar Islamic Finance Report, the rapid development of Islamic finance in the country makes it well-placed to become a leading “interconnected Islamic finance hub” in the region. To exploit the synergies, one Islamic bank was merged with a conventional bank in 2019 to form a new Islamic banking entity.
Several mergers in the sector have taken place over the past couple of years. In an integrated reporting approach, the merger can fruitfully optimize the use of the capital stream, thereby providing value addition in long-term. As at end December 2020, supported by the merger, Islamic banks in Qatar registered a growth of nearly 20 percent over the previous year. Credit extended by these banks increased by about 22 percent, while their deposits expanded by close to 16 percent.
In terms of Basel III guidelines, the regulatory capital adequacy requirement is 10 percent, the domestic banks are under Basel II guidelines for capital adequacy requirements, but the risk-weighted capital requirements of foreign banks are based on home-country provisions.
Notwithstanding the phenomenal growth of the banking sector, there is limited careful analysis of the growth and development of the sector. The sector has witnessed multiple ups-and-downs during the past two decades, starting with the gradual increase in competition to the heydays of oil prices and the subsequent global financial crisis, interspersed with other attendant challenges such as the drop in oil prices in 2016, the economic blockade in 2017 and more recently, the Covid-19 pandemic in 2020.
The thesis aims to conduct a detailed analysis on the banking sector in Qatar from the perspective of their role in ensuring the provision of credit and how this behavior has evolved over the period, especially during certain periods of stress. The empirical research on Qatari banking sector is a under-researched area, especially with regard to bank lending and riskiness and even more, from the standpoint of their ability to withstand financial stress. In view of the dominance of banks in the financial sector, it calls for careful assessment from the analytical standpoint. Overtime, with growing size of Islamic banks, we propose to explore the response of these banks to macroprudential policies, their liquidity hoarding pattern in response to economic policy uncertainties and their financial interconnectedness, both on the asset and on the liabilities sides. From the policy perspective, these issues are quite relevant for central banks and supervisors to assess the consequences of severe market disruptions, to understand the different dimensions of systemic risk and estimate the contribution Islamic banks to the potential systemic losses.
The thesis seeks to address this gap by conducting a thorough analysis of the sector covering data from the early 2000 to the most recent. The analysis will be conducted at two levels: at the level of individual banks, both for Qatar as well as at the cross-country level for the Middle East and North African (MENA) banking sector. The individual bank-level data includes proprietary information on all banks licensed and regulated by the Qatar Central Bank (QCB), which includes conventional, Islamic and foreign banks on a quarterly basis covering the period 2002 (the first year for which consistent data is available) to 2020. The cross-country analysis involves information sourced from the Banker Database and includes data on balance sheet, profit and loss statements, and prudential variables for major countries in the MENA region, comprising both oil exporters and oil importers.
Accordingly, the thesis would comprise three independent essays covering bank lending and fragility during the financial cycle and the relevance of macroprudential policies in this regard, liquidity hoarding by banks and its evolution during periods of economic policy uncertainty and finally, the impact of financial interconnectedness on bank risk and returns. The first two essays are conducted at the level of an individual country, whereas the third essay is cross-country in nature, focusing on the MENA region. A theme common across the three essays is the focus on Islamic banks as part of the analysis. This assumes relevance because most countries in the region including Qatar have a dual banking system, wherein Islamic banks coexist along with conventional ones. Viewed from this perspective, the analysis would examine not only Islamic banks, but also provide a perspective as to whether their behavior differed as compared with other bank groups. The final Chapter would seek to provide some policy insights that arise from the analysis. Judged thus, the thesis is expected to provide useful insights on the banking sector. The proposed thesis would thus seek to contribute to three distinct, but interconnected areas of banking: financial stability, liquidity behavior and financial interconnectedness.
| Date of Award | 2023 |
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| Original language | American English |
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| Awarding Institution | - HBKU College of Islamic Studies
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