Qatar’s banking sector continues to maintain its progression due to the banking’s government dependence-related business and its domestic economy. However, Simon Watkins writes that Qatar arguably has a long way to go before it can compete globally.
According to a report issued by the Qatar National Bank (QNB) at the end of September, pretty much everything in the state of the Qatari banking sector is looking highly positive. “While the banking sector in several countries across the globe continues to face difficulties, Qatar’s banking sector continues to maintain its growth momentum across a range of performance indicators, while at the same time maintaining good asset quality,” are the precise words used at the top of a recent QNB press release on the subject. The key question here is to what degree this success is actually only a function of the country’s fabulous hydrocarbon wealth (an environment in which it could be argued that virtually any bank could prosper, even Spanish ones) or whether it is a product of a truly outstanding banking system per se?
In its most recent judgment on Qatar’s banking system as a whole – including both the conventional and the Islamic elements – major ratings agency Moody’s certainly highlighted that there is limited pressure on asset-quality and healthy capitalisation levels, as well as stable deposit bases, significant liquidity buffers, and strong earnings potential – very good. This view is backed up, of course, by the headline figures: the overall assets of banks in Qatar grew by 10.7 percent during the year up to August 2012 to reach QR772.6 billion, compared to QR698.0 billion at year-end 2011, according to the latest data by the Qatar Central Bank (QCB). Asset growth was driven mainly by the increasing loans that grew by 18.5 percent to QR479.7 billion for the sector.
On the other hand, though, these supportive factors are counterbalanced for Moody’s by a high degree of dependence on government-related business and on the domestic economy. “The economy is undiversified and heavily reliant on the oil and gas sector, and credit-risks relating to exposures to the construction and real estate sector,” underlines the agency. Again, the official figures from the QCB bear this out: the public sector, and principally government agencies and semi-agencies, was the main driver of loan growth, increasing by 35 percent in the year to August 2012, to QR201.3 billion. It accounts for the majority of loans in Qatar, and its share has grown from 22 percent (QR35.9 billion) in 2007 to 42 percent (QR201.3 billion) as of August 2012. Indeed, according to the central bank, the financing of large capital investments in developing the country’s infrastructure has been the key driver of public sector loan growth, and government agencies, semi-government agencies and large corporates. Engaged across economic sectors, these are expected to continue to be the main driver of loan growth, given the large development programme and infrastructure projects underway and to be implemented in the short to medium term.
Government influence
In many ways, Qatar’s larger banks are acting as an arm of the government’s overall social and economic strategies, highlights Sam Barden, chief executive officer (CEO) of SBI Markets in Dubai, functioning as conduits for various infrastructure projects in the same sort of way as, for example, the European Investment Bank (EIB), German Development Bank (KfW), or the big Japanese banks, French banks in the 1980s and 1990s, and the big four Chinese banks. “Unfortunately, this type of banking style does not normally tend to turn out well, either for the banks – which often function below par in a pure banking sense, or the public ends up bailing them out,” he says. Indeed, Barden adds, state-directed lending, as has been occurring in Qatar as well in recent years, has – arguably, although not much – has been a root cause for the fundamental deterioration in a legion of such banking operations (numerous bankrupt Japanese banks that were later forced to consolidate). The top four Chinese banks, also have used smaller banks as similar state conduits, to such a degree that a recent report by PwC overdue loans at China’s top 10 banks soared by 333 percent in the first six months of 2012 to CNY489 billion (QR283 billion).
Clearly, given the slowing state of the country’s economy, it is a lot more likely that this mountain of loans will become officially non-performing than not. And China, of course, had and has a lot more natural resources across the board than Qatar. We mentioned Spain earlier, and the single most important factor in the swathes of red figures that have hit their balance sheets – investment in the real estate sector – is evident as well in those of Qatar’s banks, even by official central bank figures.
“Loans to the real estate and construction sectors increased by 10.2 percent during the year up to August 2012, as activity in this sector continues to pick up,” states QNB.
So, strip out the sovereign wealth, and how does Qatar’s banking system compare to the better of its international banking peers? Certainly, it was not subject to the same casino-style of banking that was highly prevalent in conventional banks in the developed world. However, when comparing like with like, conservative conventional banks in the West with conventional banks in Qatar – the latter appears to be lagging, thinks Barden. “Qatar’s conventional banking practices are like those in the 1950s in the United States or United Kingdom,” he says, “they have yet to catch up, because with Qatar’s wealth they don’t have to do anything better.”
For a start, says Cyril Garbois, head of Middle East Financial Institutions Practice for AT Kearney, in Dubai says, the number of banking products and revenue per customer in the Gulf Cooperation Council (GCC) remains relatively low compared to developed markets. “For banks to increase their share of wallet, customer satisfaction is key, yet studies show that GCC banks generally do not seem to consider customer satisfaction a priority,” he says. Based on AT Kearney’s research, the GCC banking sector (and thus Qatar’s) has three main areas upon which to focus to improve customer satisfaction levels. Firstly, underlines the firm, salespeople are often poorly prepared and have little understanding of the products they are selling. This is even more pronounced in Islamic banking, where customers may require additional explanations of Shari’ah-compliant product structures. “There is a need to improve responsiveness, as customers do not receive a call-back within the promised time, if at all,” highlights Garbois. Additionally, customers often do not receive important information about a product before purchase – for example, discovering extra charges after a sale – and this typically results in severe, lasting damage to brand loyalty, says AT Kearney.
To compound this negative profile, customers encountering problems often have limited call centre or website service options and are repeatedly referred from one department to another. “Secondly,” adds Garbois, “many bank processes in the GCC are still manual, involving a multitude of documents and layers upon layers of decision makers. Redesigned processes can yield significant efficiency improvements, in some cases reducing resource requirements by fifty percent.” Finally, he concludes on this point, outsourcing and offshoring provide options for centralising business processes, improving service levels, and increasing control, and these are still a relatively new concept in the GCC, although some regional banks have successfully outsourced less complex functions to India and Egypt.
“A structured approach to procurement – analysing spending and identifying savings for both strategic and operational costs – can reduce costs by up to thirty percent in some categories” closes Garbois.
This article first appeared in TheEDGE 4.11, November 2012.
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