Conventional vs. Islamic Financing

Posted on May 7th, 2012

Qatar may seem small, geographically, but in commercial terms it is a rising giant. Qatar's banking sector is in rude health, as evidenced by the Gulf emirate's position as the regional leader in terms of bank lending growth. Qatar's banking sector is monitored by the Central Bank of Qatar (QCB) that handles redemption of the country's currency, controls monetary policy and monitors the banking system. Qatar, where conventional and Islamic banks operate, has a buoyant and increasingly diverse banking sector catering for the needs of all kinds of customers. Additionally, the estimated 15-20% annual growth rate of Islamic services has encouraged conventional banks to open Islamic branches or Islamic windows to accept Islamic deposits and operate Islamic finances. However, this overlapping nature of non-Islamic and Islamic activities is set to end, which will have a significant impact on the banking sector development.

In fact, new rules for Islamic banking in Qatar released by the Central Bank on August 29, 2011 prohibit conventional banks from allocating more than 10% of issued capital to Islamic banking operations and from opening additional branches for Islamic banking. There is also a limit on Mudharabah (profit-sharing) and Musharakah (joint ventures) to 5% of a bank’s total Islamic operations. This has changed the way conventional banks offer Shariah-compliant services and likely boost the performance of banks that focus solely on such services. Moreover, Qatar’s banking regulator has asked conventional banks in the country to close down their Islamic banking branches by the end of 2011. Such action is still under process.

The message seems to be that banks can either focus on conventional or Shariah-compliant banking, but not both. The regulations will most directly affect the leading conventional banks for which Islamic financing constituted a key driver of growth and profits, and those close to the limits established by the Central Bank will likely have to increase deposits elsewhere.

Conventional banks and their Islamic branches took immediate measures and are rigorously convincing the depositors and customers to either convert their Islamic accounts into conventional ones or close it permanently as the dormant accounts will not bear any returns on the depositor’s money.

Between QCB aim to segregate Islamic and conventional activities in order to improve the effectiveness of monetary policy, which will also enable the introduction of different liquidity management instruments for the two types of activities, and which will probably lead to the orderly growth of Islamic banks in Qatar from one side, and between the willingness of the conventional banks to maintain their large share of the appealing Islamic business segment from the other side, new QCB regulations are expected to be issued in order  to avoid a ruthless rivalry between Islamic and conventional banks which will eventually harm the steady expansion of Qatar’s banking sector.

By Judes Abboud – Senior Associate – Al Misnad Law - In Association with the Law Offices of Khalifa Al Misnad