Wednesday, May 02, 2012

Has the QCB directive had an impact on Islamic banks?

A Reuters article describes the seemingly limited benefit for Islamic banks from the country's central bank decision to force conventional banks to close their Islamic window.  The country saw: 
There was little sign of the expected flow of money into Qatar's Islamic banks last year; their total assets grew 35 percent, according to central bank data, but that marked a slowdown from 39 percent expansion in the previous year. [...] Meanwhile the performance of Qatar's conventional banks improved; their assets grew 23 percent in 2011, up from a 16 percent rise in 2010. The biggest negative impact, Moody's predicted, would be felt by the country's largest lender, Qatar National Bank. But assets at QNB jumped 35 percent last year and its return on assets actually improved slightly.
There are far too many different factors in play to definitively conclude that the QCB central bank ruling either had no effect or perversely helped conventional banks, but there is also no conclusive data suggesting that Islamic banks saw a huge growth in Islamic banking business.  

The ex ante goal of moving Islamic finance business was premised on the potential leakage between Islamic and conventional assets, an important question for regulators of conventional lenders which operate Islamic windows.  However, the way it was implemented was not ideal and could be viewed as being a regulatory hand out to the domestic Islamic banking system, whether or not this was the original intent.  

The directive forced conventional banks to fully divest their Islamic windows, but was later loosened to allow the banks to continue to service Shari'ah-compliant loans, as long as no new loans were extended.  As a result, there were few sales of Islamic windows to Islamic banks, which would have resulted in more transfer of depositor accounts (an important source of funding for expanding the assets of Islamic banks).  It is likely that many customers at Islamic windows were given a choice: move your account to an Islamic bank, or have it automatically converted into a conventional bank account (any first-hand experience about whether or not this is the case would be appreciated, email me at  

Many Islamic banking customers may prefer Islamic banks, but will not go to any length to avoid conventional banks, so an easier conversion from an Islamic account to a conventional account (compared to the time-consuming process of opening a new account and closing the old one, with the time needed to change automatic deposits and withdrawals) led to their money not moving to the Islamic banks (which would be reflected in Islamic banks' growth rates holding steady with previous years, which the high level data show). 

Perhaps undertaking the central bank directive in a different way could have encouraged greater adoption of Islamic finance.  An alternative way that the split between conventional banks and Islamic windows could have been accomplished would be to require the Islamic window to be completely separated into a subsidiary of the conventional bank, with its own banking license (as a full fledged Islamic bank).  This would have allowed the conventional banks to retain the Islamic banking business, while providing regulatory separation  between the two units.  This would retain continuity for customers, while also giving the conventional banks an 'out' if they decide the separate entity is not worth keeping.  They can always sell it and do so much easier than with an Islamic window that is still regulated with the conventional parent. 

There are many lessons that we can learn from the experience of the QCB and their directive to separate conventional and Islamic banking.  Key to learning more will be more detailed analysis of the impact of the directive itself on the trajectory of the Islamic banking industry in Qatar. 

Below are links to my previous posts on the QCB directive:

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