Qatar’s resilient banks double-down on innovation
With deposits replenished, the country’s lenders are gearing up for some bold new growth strategies.
Qatari banks have spent the past couple of years demonstrating their resilience. With liquidity conditions normalising, confidence returning to the market and broader macro-economic conditions looking brighter, lenders are giving fresh attention to expanding into new areas.
The stabilisation effect set in last year, when the county’s reserves recovered after the blockade, and the outflows in foreign funding were reversed. These now comfortably exceed the levels seen in May 2017. International reserves and foreign currency liquidity reached $50.4 billion at the end of the first quarter of 2019, compared to the May 2017 level of $45.8 billion – the month before the embargo was imposed on Qatar. Crucially, non-resident deposits that had declined in the wake of the embargo are running well in excess. pre-blockade levels.
Qatari banks enjoy robust liquidity, with a liquid-asset-to-total-asset ratio of 29.7%.
Domestic credit grew in the double digits in 2018, while deposits are also recovering strongly. As a consequence, domestic banks are becoming more ambitious in their overall lending strategies. Diversification is not just being seen in the increasingly varied geographic make up of non-resident deposits, but in banks’ decisions to actively widen their loan portfolios in tandem with the Qatari government’s promotion of private enterprise as an engine of the economy.
The IMF, in its Article IV assessment of Qatar’s economy released in June 2019, notes that Qatar’s banking sector remains healthy, reflecting high asset quality and strong capitalisation. The Fund highlights the uptick in non-resident deposits (which increased by 23% in year-on-year terms by December 2018) and foreign bank funding (also up by 23%) which helped banks increase private sector credit by 13% by December 2018. Broader investor confidence is supported by more than $300 billion in financial assets held by the Qatar Investment Authority, the country’s sovereign wealth fund.
There is reason for optimism going forward, as acknowledged by international ratings agencies. Qatari banks enjoy a stable outlook despite the ongoing blockade as the crisis-related pressures on commercial banks’ funding have eased, Fitch Solutions noted in its 2019 report on Qatar.
Fitch said that investors were assured by the Qatari authorities’ demonstrated willingness and ability to support the local economy, most notably through placing large amounts of foreign currency deposits with local banks to mitigate funding pressures over the second half of 2017 and the first half of 2018.
Qatar has repeatedly demonstrated its ability to raise money on the international debt capital market at low yields, even when it has no direct need to do so. In March 2019, it raised $12bn in bonds, with demand reaching $50bn – taking advantage of opportune market conditions. With a healthy fiscal surplus, the country has not had to resort to the bond market out of necessity, but out of choice.
Meanwhile, private sector credit demand is poised to stay healthy as the Qatari economy revives. About three-quarters of Qatar’s banking system’s balance sheet growth is attributed to rising domestic credit activity.
Banks will have to continue to keep a close watch on their loan exposures, including to areas such as the real estate sector where some market challenges have emerged. However, the banking sector’s loan quality remains strong by regional comparison, with the non-performing loan (NPL) ratio averaging below 2%.
The Qatar authorities are committed to bolstering regulatory and supervisory frameworks. All Qatari lenders comply with IFRS 9 reporting standards, which came into effect at the start of 2018. The banks maintain a risk reserve at 2.5% of total direct credit facilities, and IFRS 9 implementation did not have a substantial impact on banks activities, since their capital adequacy ratios were already above the minimum levels set out by the Qatar Central Bank. The IMF notes that the country’s Financial Stability and Risk Control Committee is fully operational and has been meeting regularly to assess financial stability and inter-regulatory co-ordination.
The Qatari authorities are continuing to enhance the liquidity management framework. The IMF notes with favour that Qatar Central Bank has developed an analytical framework to help guide the conduct and implementation of liquidity forecasting.
Under Qatar’s Second Strategic Plan for the financial sector, covering 2017-2022, the authorities are focusing more on deepening domestic financial markets with a view to promoting savings, offering borrowing and investment opportunities, and achieving greater financial inclusion, particularly for women and small and medium enterprises (SMEs).
Fresh attention is being given to the benefits of new technology. Under the Second Strategic Plan, FinTech is envisaged to play a key role as the main tool for achieving the country’s long-term development goals for the financial sector. The Qatar Central Bank has been working on a FinTech strategy for some time, and has prepared regulations that would foster innovation in financial technology. A dedicated FinTech section will oversee such developments by introducing a regulatory sandbox – using Qatar’s technological ecosystem of Qatar to support a successful growth of FinTech.
The strategy envisages FinTech playing a key role in forging new financial instruments that will both improve financial inclusiveness in Qatar, and skills too. FinTech could for example play a role in increasing lending to Qatar’s SME sector.
FinTech gained further traction in October last year, with a joint initiative between the Qatar Financial Centre (QFC) and B-Hive, a European collaborative innovation FinTech platform based in Belgium, to develop the country’s FinTech sector. The two will a work closely to discuss the latest trends in disruptive technologies, legislation and other data, as well as the organisation of global activities to further promote the industry in both countries. The agreement will also see the QFC and B-Hive contribute to the growth of FinTech-related communities by engaging with start-up support institutions as well as financial institutions and regulators.
Qatari banks are also proving themselves to be innovators in their own product developments. Commercial Bank of Qatar, for example, has developed a 60 seconds digital remittance service which credits beneficiary accounts in over five countries in less than a minute. The bank previously outsourced its technology to India, but has brought it back in-house through the creation of wholly-owned subsidiary, Commercial Bank Innovation Services. This is now focusing on innovative digital products to its services, including upgraded mobile banking applications and remote cheque scanning.
The country’s lenders have proven their resilience over the past couple of years; now is the time for banks to build on those strengths and fashion new ways of building their balance sheets and supporting the Qatar economy’s ambitious diversification effort.