COvER STORy

REGULATIONS, RESTRICTIONS AND COMPETITION

B A N k S E x P L O R E N E w wAy S T O P R O f I TA B I L I T y

T
50 QATAR TODAy
QT-Oct_2011.indd 50

he fundamental function of a bank is to keep peoples savings safe and use this pool to provide credit for others who wish to borrow. For this service, the bank is entitled to a nominal profit margin on what it charges the borrower against what it gives out in interest to the saver. Ultimately, its a balance of risk and if a banker cannot keep his portfolio in the black then he is not doing his job. Somewhere along the line, the job's definition became so ambiguous, it was abused, and the hangover of this is now all too obvious in key markets. Last month, the Financial Times (FT) reported that Siemens withdrew half a billion Euro from a large French bank and deposited it at the European Central Bank (ECB), which brought the sum total of similar transfers by Siemens to 6 billion. This was in the wake of the US Federal Reserve (Fed) lending dollars to the ECB to help it lend to stuttering European financial institutions that couldnt get a loan off any other bank. When massive enterprises like Siemens are losing faith in the large banks and the Fed is lending to the ECB then theres something wrong. QNB Capital, here in Qatar, believes that more needs to be done to directly address Europes sovereign debt issues, which are the root cause of the problem'. They intimate that this could involve cutting ECB interest rates, creating Eurobonds backed by all Eurozone countries, expanding the ECBs Italian and Spanish bond-buying programme, or moving towards greater fiscal union in the Eurozone. The three former measures would help drive

october 2011

9/28/11 7:32:27 PM

BANkS ExPLORE NEw wAyS TO PROfITABILITy

By RORy COEN AS ThE IMf hOLD ThEIR ANNUAL MEETING IN wAShINGTON, QATARI BANkS ARE LOOkING AT ThE fISCAL ISSUES IN EUROPE AND ThE US AND BREAT hING A COLLECTIvE SIGh Of RELIEf ThAT ThEyRE NOT SUffERING fROM CONTAGION OR INDEED fROM ThEIR OwN SLOPPINESS IN ThE MARkETS. AfTER A fEw MONThS Of ShOCk AND DISTRESS TOwARDS ThE END Of ThE LAST DECADE, ThEyRE NOw OPERATING wITh A hARMONIC MIx Of CONfIDENCE AND CAUTION.

REGULATIONS, RESTRICTIONS AND COMPETITION

down borrowing costs for some of the indebted countries, they say, but this would only be a short-term solution, giving these countries breathing space to reform their fiscal situations. QNB Capital maintains that despite the increased accessibility to dollar liquidity provided by the worlds central banks, the move does little to address the underlying concern about the ability of European banks to withstand a sovereign debt default. Until this is more directly addressed, the appetite of banks for lending and investment will remain restrained. The measures are merely a precautionary step that will shore up and insulate the banking system in case of a sovereign default in Europe rather than an emergency response to immediate dollar funding requirements. So why are European banks not lending to each other? They are most probably frightened that they will go bust and will not be able to pay the money back. They are frightened that the other banks may not have been totally honest in revealing their balance sheets. Fears of a liquidity crunch force them to hoard cash, whilst the threat of regulation requires them to hold more capital. The trust

element between them is gone. There is that sense that we are in a period of extreme uncertainty and unpredictability which is evident from studying the financial markets. The era of cavalier and speculative betting has ended and every decision is now thoroughly scrutinised. Performing Banks However, banks in Qatar have been relatively unaffected by the ongoing issues in Europe and whilst there is a call for global regulation, this is coming from the parties which stimulated the problems in the first place. Banks in Qatar and the Middle East region in general have enjoyed sustained periods of growth and satisfactory yields since 2008, for various reasons. Qatar Financial Centre Regulatory Authority (QFCRA) CEO and Chairman, Philip Thorpe, explained that there is a wide-scope permit for international financial firms to conduct their business in the local Qatari market which distinguishes it from other financial centres in the region but the caveat is in the type of work the

october 2011

QATAR TODAy 51
9/28/11 7:32:28 PM

QT-Oct_2011.indd 51

COvER STORy

REGULATIONS, RESTRICTIONS AND COMPETITION

B A N k S E x P L O R E N E w wAy S T O P R O f I TA B I L I T y

commercial banks are allowed to carry out. QFCRA regulated banks do not have the right to conduct retail banking activity in the local market, in terms of accepting deposits and providing loans or credit to individuals. This was due to the Authority's certainty that there were enough financial institutions operating in Qatar which were able to cope with markets need for retail banking functions. Speaking to Qatar Today, newly appointed CEO of Standard Chartered Qatar, Charles Carlson, said: Qatar Central Bank (QCB) is on top of all the major regulatory changes that are ongoing here at the moment. However, theres a huge debate in Europe and US about global regulatory changes as youd expect after the crisis in 08 they dont want that to happen again. However, the verbosity of the debate is not as much in the east as in the west. There is no pressure on a country like Qatar to push for it; they have their own culture of banking and ways of doing things which is working. Because [Standard Chartered Qatar] do our business exclusively in Asia, Africa and the Middle East, he continued, we have no exposure to European sovereign bonds. Our Head Office is in the UK but more than 80% of our revenue comes from abroad, from markets such as Qatar, as we have been in the Middle East region for 150 years. We have doubled our growth since 2008 and the results just announced were the ninth consecutive first half-year of growth, which is unique by itself given the bigger picture for international banks. Country Manager, Mashreq Bank Qatar, Howard Kitson echoed this: I dont think theres any significant exposure by Qatari banks to Greek bonds for example. Theres going to be a ring fencing of assets and the bond holders rights. Qatar has overseas investments which are very public, but these wouldnt be directly linked to a Greek default. QNB Capital notes that the implications for the Gulf of a Greek default are mixed. On the negative side, it could spark a fresh credit crunch in European banks, increasing the cost of financing globally, including projects in the Gulf. Also, if the crisis further knocks the already weak economic growth, then oil prices could fall. More positively, a weaker Euro would reduce the cost of imports to the Gulf, which sources much of its capital and consumer goods from Europe. Low asset prices may provide buying opportunities for GCC private and sovereign investors, as they did in 2009. Meanwhile, Doha Bank says that it has overcome negative sentiment and tighter regulations by providing innovative products to satisfy their customers needs. They signed up with the Qatar Development Bank (QDB) for the Al Dhameen programme, which is a Credit Guarantee scheme to help finance Small and Medium Enterprise (SME). The programme will cover SMEs in eligible sectors with revenue of QR40 million or start-ups requiring investment of QR10 million. Doha Bank Group, CEO, R. Seetharaman said: We saw a net profit of QR702 million for the first half of 2011, which represented a growth of 14.3% (QR615 million) for the same period last year. Net Loans and Advances increased to QR27.7 billion from QR26.6 billion in the same period last year, while deposits increased by 7.2% from QR27.2 billion to QR29.2 billion which is evidence of the strong liquidity position of the bank. Exposure to Credit There are many theories regarding the most prudent way to

handle your capital during a period of intense growth. Strike while the iron is hot or if you have it, spend it, were the popular rallying cries of institutions pre-2008, but tighter regulations by the QCB in the aftermath of the economic crisis retarded these sentiments. However, its important that entrepreneurs and businesses arent totally dissuaded from taking a risk with credit, whatever about the uncertainly in the global markets. Regional Economist at HSBC Qatar, Simon Williams, said: Credit is a key ingredient in any growth story. Its the means by which long-term investments can be funded by short-term savings, and the channel that allows the economy as a whole to be lifted by infrastructure focused capital spending plans. During the 2003-08 boom, credit growth ran too hot, due in part to the dollar-peg, he continued. It took a couple of years for the sector to recover from the downturn that followed, but when I look at the Qatari banking sector now it does feel like conditions are normalising. Dont confuse this, though, for a return to the easy funding environment that prevailed pre-2008. Those days are gone for good. Kitson said: There was a contraction in the amount of credit given out in 2009 compared to 2008 that was a massive boom here and then obviously the international markets contracted and there was a squeeze on liquidity and rates between banks. Interest rates shot up as there wasnt much money in the system, but now, were seeing banks willing to lend more freely, interest rates are coming down and its actually becoming very competitive again. Savings account interest rates have fallen, currently were offering 2.75% on the easy saver account maybe you could shop around and get better or worse. However, given the current economic climate and the fact that were pegged to the dollar, its likely that were going see further falls in interest rates as weve seen monetary easing over the past six months and we predict even more going forward. HSBC outlined that banks play an important role in any economy to ensure companies have sufficient liquidity to operate, but in a booming market like Qatar it is even more important as access to credit is key to ensuring the success of any project. This can be as simple as issuing guarantees so the project owner shares the risks with the contractors to providing more complicated receivables backed financing arrangements. For good customers access to credit has been easy given the large number of well capitalised banks who operate in the Qatar market, all of whom are looking to build their balance sheets with high quality assets. Carlson at Standard Chartered agrees with this sentiment: There are some very strong banks in Qatar there are seven full licenses so its not so much a question of people having access to credit in this market. However, the Central Bank is very sensible on your requirements to have security its not a free lunch; credit is something which has to be done within the terms of the regulations but if you have a good proposal that makes sense, then I dont believe that you would have a problem in getting the required amount. You have to understand this, explains Carlson. We have long standing relationships with customers; the whole credit process works by knowing the owners and the managers of businesses. Its very personal before you get into the financials its personal because its about credibility and character. Good banks dont lend money in the absence of certain things youre in the risk

52 QATAR TODAy
QT-Oct_2011.indd 52

october 2011

9/28/11 7:32:28 PM

whEN I LOOk AT ThE QATARI BANkING SECTOR NOw IT DOES fEEL LIkE CONDITIONS ARE NORMALISING. DONT CONfUSE ThIS, ThOUGh, fOR A RETURN TO ThE EASy fUNDING ENvIRONMENT ThAT PREvAILED PRE-2008. ThOSE DAyS ARE GONE fOR GOOD.
Simon williamS,
regional economist at hsbc qatar

business, so you actually have to start with having the credibility of the ownership of the people. If we have an ongoing relationship with certain people, sometimes we come up to them with ideas: Heres a new opportunity we say. Qatar is a net exporter of capital so not only do we support Qatari companies for their ambitions within Qatar, but also outside the country. Our role here is if Qatari companies want to look to East Africa or elsewhere in the Middle East or Asia, we may have proposals. If we know these clients and know where they want to grow, we can come up with a proposal. Its not just domestic, its international as well. Doha Bank reports that there has been a surge in credit approvals in Qatar in 2011. Credit Facilities have grown by 14.7% until August of this year; retail lending by 13.9%; Real Estate lending by 25.8% in the same period. In light of these promising recent developments, QFCRA C hairman, Philip Thorpe, is keen to push for a single regulatory body to really open up the tremendous opportunities presented by the countrys growth and investment plans.

Qatars current financial regulatory structure is far from ideal. While the QFC benchmarks and delivers international standards, other areas of the domestic marketplace remain less well regulated, or in some areas, not regulated at all. The Government has long recognised the importance of establishing a comprehensive, integrated and effective regulatory framework, and in 2007 announced its intention to establish a single integrated regulator for the State of Qatar, an objective which it remains committed to. The benefits of a single integrated regulator are considerable and include ensuring consistent high standards across all markets and increased growth opportunities for financial services in Qatar. In time, such an initiative will also aid the diversification of Qatars economy; reduce uncertainties and administrative costs for financial market participants," he outlined in the QFCRA 2010 Annual Report. Personal lending regulations The QCB have inhibited the procurement of a credit card from your bank or any other bank, by forcing your sponsor to accept liability should you default, something which many sponsors dont accept.

october 2011

QATAR TODAy 53
9/28/11 7:32:29 PM

QT-Oct_2011.indd 53

COvER STORy

REGULATIONS, RESTRICTIONS AND COMPETITION

B A N k S E x P L O R E N E w wAy S T O P R O f I TA B I L I T y

OUR INDUSTRy AND PRODUCT ExPERTISE hERE MATChES ThE GROwTh ASPIRATIONS Of QATAR, fROM OIL AND GAS TO ThE PROPOSED GOvERNMENT SPEDNDING ON INfRASTRUCTURE, whERE wE hAvE STRONG ExPERIENCE If wE ALL GET ThIS MODEL RIGhT ThERELL NOT JUST BE GROwTh fOR US hERE IN QATAR, BUT ThE BANkING SECTOR AS A whOLE.
charleS carlSon,
ceo, standard chartered qatar

It is also not possible to acquire a credit card from a financial institution where your salary is not transferred. They also moved to set an upper limit for personal car loans banks and financial institutions would henceforth only be permitted to lend 80% of the value of a car, with consumers required to put up a down-payment for the remaining 20%. Regulations like these aim to protect a number of stakeholders, say HSBC. Higher provisions due to customer default have impacted many banks since 2008. Customers have struggled to repay their debts, so there regulations protect consumers as well as banks against over exposure and help consumers to manage their liabilities. Seetharaman said that these recent regulations can discipline the customer instead of inhibiting him. Kitson explained: These are per QCB guidelines and are a good thing really. They simply mean your bank should be focused on you and if theyre not giving you what you need then you can have your salary paid to a more diverse bank, who do understand your requirements. The employer only needs to be aware that you are taking the

credit facility. But in terms of settlement, the employer, should you leave Doha, will make sure your end-of-service benefits are paid to your bank to compensate for the facilities you have taken they may not cover the complete debt, but the employer is not liable. Meanwhile, Carlson says: If you move to the UK or US, any place where you have no credit history, you wont be able to acquire a credit card. You have no credit history in these countries. This situation is no different to what any foreigner would experience going into these countries. Innovation With such competition and restrictions in Qatar, there seems to be a need to innovate to gain that competitive edge. It might be a very simple thing like having an efficient customer service and client focus. New regulations do inhibit banks to offer certain products and services and with a drag on risky business, there really is a place now for innovation in banking. In general, banks will need to run efficiently as an organisation, and offer high service standards in order to compete. Other opportunities as business continues to recover will also help balance any impact from these regulations.

54 QATAR TODAy
QT-Oct_2011.indd 54

october 2011

9/28/11 7:32:31 PM

ThERE wAS A CONTRACTION IN ThE AMOUNT Of CREDIT GIvEN OUT IN 2009 COMPARED TO 2008. hOwEvER, NOw wERE SEEING BANkS wILLING TO LEND MORE fREELy, INTEREST RATES ARE COMING DOwN AND ITS ACTUALLy BECOMING vERy COMPETITIvE AGAIN.
howarD kitSon
country manager, mashreq bank qatar

The key industries in Qatar for operating globally are oil and gas, mining and metals, telecoms, and power, says Carlson. What makes us industry experts is we hire people in the oil and gas sector for example who are actually qualified engineers, who have worn the hard-hat as it were. Years later, they get into finance, banking, so we send these guys to talk to clients in the sector they know. They speak the same language; they can understand each other and speak as equals understanding the industry you are working in is critical these days. For three years in a row, Mashreq have won the Global Finance award for the best retail banking online service, said Kitson. Its user-friendly, safe, you can access your accounts from multiple destinations as well as on your mobile. HSBC has a full scale Corporate Cash Management infrastructure in Qatar, comprising on-ground specialist Sales, Product and Client Management teams, working under the umbrella of the Payments & Cash Management business unit. This is a unique offering to HSBC for which the bank has been consecutively winning some of the most prestigious awards in the Cash Management World.

Economic Outlook HSBC remains positive about the outlook for emerging markets, where they expect continued growth in the rest of Asia-Pacific and Latin America and take comfort from the focus of the authorities on managing inflationary pressures. In the Middle East, the outlook for the GCC economies is also positive. In the developed world, growth in the US and Europe is likely to remain sluggish as long as the impact of high debt levels and government budget cuts weigh on economic activity. In the UK, there are concerns that regulatory actions being contemplated and the ongoing regulatory uncertainty will constrain the supply of credit to the real economy and contribute to sub-par economic growth. Carlson has a very positive outlook for Standard Chartered and the banking industry as a whole in Qatar: Our industry and product expertise here matches the growth aspirations of Qatar, from oil and gas to the proposed Government spending on infrastructure, where we have strong experience. If we all get this model right, therell not just be growth for us here in Qatar, but for other banks as well, which is healthy for customers and the economy as a whole.

october 2011

QATAR TODAy 55
9/28/11 7:32:33 PM

QT-Oct_2011.indd 55

COvER STORy

REGULATIONS, RESTRICTIONS AND COMPETITION

B A N k S E x P L O R E N E w wAy S T O P R O f I TA B I L I T y

US DOLLAR UNDER RIyAL PRESSURE

ThE QATARI RIyAL hAS BEEN fIxED AT 3.64 TO ThE US DOLLAR SINCE JUNE 1980. ThIS PEG hAS PROvIDED AN ANChOR fOR MACROECONOMIC POLICy AND A REfERENCE POINT fOR STABILITy AND CONfIDENCE. QATAR IS APPROAChING A CRITICAL TIME IN ITS hISTORy AS ThE DRIvE TO DIvERSIfy By 2030 GAThERS PACE NOTwIThSTANDING fIfA wORLD CUP 2022 AND ThE POTENTIAL Of ThE 2020 OLyMPICS BEING STAGED hERE.

r
56 QATAR TODAy
QT-Oct_2011.indd 56

ecent fiscal issues in the United States has freshened speculation on whether the Qatar Central Bank (QCB) would consider unpegging from the US dollar. This is not a new debate in the region, as the peg has met with equal amounts of support and sceptism from the rest of the GCC States as well (all currencies pegged to the US dollar). The unpegging discussions gained momentum around the time the GCC common currency move was initiated with experts offering a solution of pegging the common currency to a basket instead of the US dollar. The GCC common currency move is in a state of flux at present, but the US dollar peg is now open to more critical scrutiny. The US credit rating was recently cut by the rating agency, Standard & Poors, for the first time ever. There is the same amount of jobs in the US economy today as there were in 2000, and yet the population has grown by almost 9%. About 45% of the unemployed havent had a job for six months. These are significant figures and questions, because if America is not creating jobs, then their economy is going nowhere. Yet, QCBs Governor, Abdullah Saud Al-Thani, said in September, that he saw no good reason not to keep the Qatari Riyal pegged to the US dollar. He intimated that Qatar is confident it can keep inflationary pressures contained while maintaining the longstanding currency peg, despite the US dollars recent weakness. He continued that the QCBs monetary policy was focused on managing the short-term inter-bank interest rates with a view to sustaining the peg, and any weakening of the dollar might not cause any severe pressure on inflation in Qatar given a lower inflationary environment here, adding that the consumer price index (CPI) inched up by a modest 1.9% in the year to July 2011. He expects the Qatari economy to grow by 15.7% in 2011. Doha Bank Group, CEO, R Seetharaman, explains why unpegging would still be some-

october 2011

9/28/11 7:32:33 PM

QATAR-US fOREIGN TRADE wAS CLOSE TO $3 BILLION IN 2010 AND ThE U.S wILL CONTINUE TO BE A MAJOR TRADE PARTNER fOR QATAR. CONSIDERING ThE CURRENCy RISkS AND ThE REALIGNMENT NEEDED fOR fISCAL AND MONETARy POLICIES fOR QATAR, IT IS MORE PRUDENT TO BE PEGGED TO DOLLAR
r. Seetharaman,
doha bank group, chief executive officer,

thing the Central Bank should not be looking seriously at. Qatars major source of revenue and contribution to current surpluses mainly comes from the sale of hydrocarbons, oil and natural gas. As these and Qatars major foreign investments are denominated in dollars, it protects Qatar from currency risk. The fixed exchange rate vis--vis the US dollar has kept domestic interest rates closely in line with those prevailing in the US. However recently we have seen a worrying challenge to the US dollar mainly on account of concerns in the US economy. Despite this, Qatar and other GCC countries will continue to be pegged to US dollar; the monetary policy of Qatar is accordingly realigned based on the actions by the Fed. In August 2011, the QCB cut its overnight

deposit rate to 0.75% from 1% and axed the overnight lending and repo rate to 4.5% from 5%, a day after the US Federal Reserve decided to keep the rates low for another two years. This is the third time in a year Qatar has cut rates. In August 2010, the Central Bank had cut its deposit rate by 50 basis points but left other rates unchanged. Given the fixed parity between the riyal and the dollar, QCB short-term interest rate policies have had to be subordinated to the fixed exchange rate policy. As such, QCB overnight interest rates are closely related to its counterpart on the dollar, the Fed funds rate. The reduction in key interest rates should, in theory, enhance credit off take, especially to the private sector due to lower funding costs, which should add vigour to local lending.

Consider the discrepancies in variables such as interest rates, employment and inflation between the US and Qatar? No job growth in the US in August. Inflation: Qatar: 1.8%; US: 3.8%. Interest Rates: Qatar: 4.5%; US: 0.25%. Qatar-US foreign trade was close to $3 billion in 2010 and the US will continue to be a major trade partner for Qatar. Considering the currency risks and the realignment needed for fiscal and monetary policies for Qatar, it is more prudent to be pegged to dollar. Is the US Dollar still fit to be the Worlds Reserve Currency? In the global market currently, apart from dollar, the major currencies are the Euro, Pound and Yen. However we notice

october 2011

QATAR TODAy 57
9/28/11 7:32:35 PM

QT-Oct_2011.indd 57

COvER STORy

REGULATIONS, RESTRICTIONS AND COMPETITION

B A N k S E x P L O R E N E w wAy S T O P R O f I TA B I L I T y

TAG ThIS

that the economies pertaining to these countries are neither stable nor do they indicate stable growth. On the contrary, some of these economies also have stakes in US treasuries. Arab economies are expectProS: ed to have close to $470 billion in US bonds and the assuming the qatari riyal is valued higher at the time of depegging and continues to rise against us and Japan, this could bring down revenue from hydrocarbon sales for GCC economies inflation pertaining to imported items (particularly food items) is in dollars. Major commodities traded in the world from europe and us. are also denominated in dollars. Recently we have the development of a qatari riyal currency market which could seen some central banks such as Japan and Switzerenable the qatari government to further consider bond issues in land trying to prevent the strengthening of their curqatari riyals instead of dollar denominated bonds. rencies. Given these circumstances, the dollar is still conS: fit to be the worlds reserve currency. exposure to significant currency risk on revenue generated from Simon Williams, Regional Economist at HSBC, hydrocarbons and on investments made overseas by qataris. wasnt so convinced however that remaining pegged development of qatari currency market may require significant alignment to the fiscal and monetary policies of qatar. it should to the dollar be the over-riding sentiment going be reviewed whether it is sustainable. forward. lack of a viable alternative. The dollar-peg has been the corner stone of monetary policy for a generation and there are no serious expectations of near term change. The peg has the US economy is diminishing, as a growing proportion of its trade offered Qatar, and the region as a whole, protection from the pronounced volatility we have seen in other emerging and capital flow shifts to Asia. Qatars economy is also likely to conmarkets, and safeguarded it against the kind of debilitating swings sistently outgrow those of the west, making the US monetary policy that might otherwise impact an economy tied so closely to the en- stance forced on it by the peg increasingly inappropriate. Qatars institutional capabilities are also rapidly evolving a decade ago ergy market. As the global economy continues to change, however, the utility it might have been difficult for Qatar to manage its own monetary. of that dollar peg will come increasingly into focus. Qatars link to Now thats no longer the case.

whAT ARE ThE PROS AND CONS Of UNPEGGING?

58 QATAR TODAy
QT-Oct_2011.indd 58

october 2011

9/28/11 7:32:37 PM