Qatar's
Islamic banking landscape, whose operational performance was better than the
conventional peers in 2019, offers potential for further consolidation,
according to Fitch, an international credit rating agency.
"The
M&As (mergers and acquisitions) are still possible to create larger Islamic
institutions in the market," Fitch said in a report.
This
comes in the wake of Masraf Al Rayan and Al Khaliji contemplating M&A to
create the third largest Islamic lender in the country.
The
potential merger would lead to the creation of one of the largest
Shariah-compliant banks in Qatar and in the Middle East with total assets
exceeding QR164bn and shareholders’ equity of more than QR19bn.
The
proposed merger would be the second consolidation in Qatar's banking system
after Barwa Bank merged with International Bank of Qatar in 2019 to create
Qatar's third-largest Islamic bank and sixth-largest bank overall.
Masraf
Al Rayan is currently Qatar's fourth-largest bank, with a 6% share of banking
system assets at the end of December 2019. Al Khaliji is one of the smaller
banks in Qatar, with a market share of around 3% of system assets as of the
same date.
Masraf
Al Rayan has a strong relationship with the Qatari government, with loans to
the government and public-sector entities making up around 47% of its financing
book at year-end 2019; while Al Khaliji has a solid corporate business, with
loans to the government and public sector entities comprising around 17% of its
financing book at year-end 2019, according to Moody's.
Fitch
noted that within the Islamic banks, liquidity is adequate and likely to
benefit from government support if needed.
In
2019 the challenging Qatari operating environment continued to put pressure on
asset quality, although Islamic banks fared better than their conventional
peers, continuing to grow more quickly and reaching 24% of sector assets at
end-2019 (end-2018: 22%).
Islamic
banks remain mainly domestic deposit funded (74% of total funding; roughly in
line with conventional banks), it said, adding the Shariah-principled lenders
have continued to widen their investor pools, including the first issuance of a
Formosa sukuk.
The
average common equity Tier 1 ratio increased in 2019 to 15.9% owing to
"reasonable" internal capital generation, which exceeds that of
conventional banks by 190bps (basis points), according to Fitch.
The
Qatar Central Bank does not allow Islamic windows at conventional banks.
Islamic banks report in accordance with the Accounting and Auditing
Organisation for Islamic Financial Institutions (AAOIFI) accounting standards
and use IFRS standards if AAOIFI standards are not available.
A
framework of Shariah principles and standards is being introduced, including a
centralised Shariah body, covering Islamic banking products and transactions.