Qatar central bank tells banks to shut their Islamic windows

The announcement by the Central bank of Qatar that conventional banks with Islamic windows must close these units by the end of the year is creating a lot of uncertainty. There are few details about what will be permitted and what will not for banks to either spin off these units into stand-alone subsidiaries or as independent banks operating under their own Islamic banking license. Here are a few bits of commentary, after a few points from my latest newsletter where I took a stab at offering my own thoughts.

From my newsletter (to subscribe, enter your email address on the left side of the blog):

"I think this is somewhat short-sighted for Islamic banking because it reduces the competitive pressures from conventional bank's Islamic windows which force all Islamic banks to adopt best practices that multinational financial institutions use to efficiently offer their banking products.
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On the other hand, there could be some benefit to the Islamic banking industry if the wholly Islamic banks are able to increase their market share and thus also increase their size. Many Islamic banks have been less efficient because of their relatively small size compared to conventional banks. This means that there are fewer customers across which they can spread their fixed expenses.
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It will be interesting to watch how conventional banks in Qatar push back against rules that force their divestiture or closure of their Islamic windows and whether any decide to either spin off their Islamic units into stand-alone Islamic banks or sell them to wholly Islamic banks. If they choose to do the latter, it could speed up the growth in the size of the acquiring Islamic banks and, if the acquisitions can be integrated in quickly, could speed up the growth in Islamic banks.

Reuters reports:

"But it was still unclear whether the central bank will allow conventional banks to spin off their Islamic businesses into standalone units.

Seeking an Islamic banking licence would be an option, said a banker at a major Qatar-based lender, if it was clear one would be granted. Without that certainty, "the bank is in limbo," he said.

A licence to open a standalone Islamic bank would allow the banks to retain their customers and appease critics within the Islamic finance industry who say there is not enough governance in the current structure to ensure sharia compliance.

The National reports

"HSBC is in talks with Qatar's central bank as fears emerge that a recent order to close some Islamic banking operations in the country will hit lenders' revenues."
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"'We are communicating with the Qatar central bank to seek clarification on this issue,' said a spokesman for HSBC Amanah, the Islamic division of Europe's largest bank."

The Peninsula reports

"Conventional banks, in keeping with Qatar Central Bank’s directive, have stopped opening new accounts and dispensing loans at their Islamic banking units ahead of closing down these operations by the year-end."

"But customers of these units, whose numbers run into thousands, are worried, wondering what would happen to their accounts and debt-servicing. The possibility of the affected units being converted into commercial bank branches is not ruled out, reliable sources point out."

The Business Times in Malaysia offers a quote:

"The central bank’s directives will help separate Islamic from non-Syariah resources in the banking sector,” Manoj Kulkarni, the head of credit research at brokerage SJS Markets Ltd in Hong Kong, said in a telephone interview yesterday. “It will also attract more Islamic banks to the industry. However, it’s not good news for conventional banks, which stand to lose revenue.”

UPDATE (2/8): There is a supportive article from 2002 by Sheikh Taqi Usmani (ht Islamic Finance Resources) on the development of Islamic windows at conventional banks that is interesting in light of the new Qatar central bank rule.