The Qatar Central Bank wrote to the banks operating in Qatar earlier this month requiring conventional banks that also undertook Islamic banking operations to close their Islamic banking operations by the end of 2011.

Several conventional Qatari and international banks have Islamic banking operations, and this decision could potentially have a significant impact on their business. Reports indicate that many banks did not anticipate this development, and are looking to the Qatar Central Bank to clarify how this decision would be implemented in practice, particularly in relation to long term Shari'ah-compliant financing. The Qatar Central Bank is expected to publish more detailed guidance shortly.

Although those affected conventional banks are naturally concerned about decreasing revenues, the existing Islamic banks in Qatar are likely to substantially benefit from this decision with a projected increase in customer numbers. Unsurprisingly the share prices of Islamic banks such as Masraf Al Rayan and Qatar Islamic Bank increased significantly following this announcement.

This communication follows an earlier Qatar Central Bank decision in August 2010, which sought to limit the Islamic finance operations of conventional banks in Qatar. In particular, it:

  • prohibited conventional banks from opening new Islamic branches;
  • restricted a bank's funding through musharaka and mudaraba transactions to 5 per cent of the bank's Islamic finance operations;
  • and required the assets of the Islamic banking operations to be limited to 15 per cent of the bank's total assets.

Through its latest decision, the Qatar Central Bank may be seeking to ensure that Islamic banking and conventional banking become entirely segregated to ensure greater compliance with Shari'ah principles.

Additionally it has been suggested that this action was taken to address what might be considered the unfair competitive advantage that conventional banks have over their Islamic counterparts in terms of being able to offer Shari'ah-compliant products at a lower cost to customers due to their ability to access cheaper sources of funds than their Shari'ah compliant counterparts.

In addition, it seems that the Qatar Central Bank intends to exercise greater control and scrutiny over Islamic banking operations.

At this stage it remains unclear how conventional banks would in practice comply with this decision by the end of this year. Reports indicate that banks may apply for separate licences, or open separate Islamic banks in order to continue their Islamic banking operations. In addition, Qatar Islamic Bank, the largest Islamic bank in Qatar, has stated that it may consider purchasing the Islamic banking portfolios of conventional banks. It is possible that this decision could lead to greater consolidation in the Qatari banking sector.