Qatar warns of sharia finance risks

April 24, 2011

The Qatar Central Bank has banned sharia banking departments within conventional banks from operating in Qatar.  I overlooked this story when Shariah Finance Watch highlighted it in February (and apparently Creeping Sharia, to which my access is unfortunately blocked at the moment), and just came across it through an email message.  

There are several nuanced factors behind the QCB’s decision–an unfortunate one of which is the desire to protect purely sharia banks from the competition presented by conventional banks with Islamic services.  But in their announcement in February, the QBC also went out of its way to note the substantial risks posed by sharia investing, pointing especially to the sharia departments’ lack of capital adequacy.  QBC also called the Islamic financial concepts of mudarba, murabaha, mushareka, istisna and ijara “quite risky.”  Notably, the QBC observed that banks with mixed conventional and sharia operations are more difficult to audit because the two types are subject to different accounting standards.
Are we beginning to see the acknowledgment within Gulf circles that sharia finance isn’t all it’s cracked up to be, or are we seeing a budding argument for the wholesale replacement of convential banks by sharia banks in the Middle East to allow for a single accounting standard?  The political winds of the Arab Spring suggest that the likelier outcome is a deepening of Islamization of governments and economies.
From The Peninsula:

DOHA: Qatar Central Bank (QCB) yesterday justified its decision to close Islamic arms of conventional banks and said separate capital adequacy norms were on the anvil for Islamic banks.

The regulations being put in place will be based on the guidelines issued by Malaysia-based Islamic Financial Services Board (IFSB), the QCB was quoted as saying by the Qatar News Agency (QNA).

These guidelines are different from the ones that are applicable to commercial banks under Basel 2 and 3.

The IFSB is amending its capital adequacy rules. “It would, thus, be very difficult for commercial banks with mixed operations to simultaneously follow the two sets of separate directives,” the QCB said.

It specified several other reasons for its controversial decision, saying it is too difficult to supervise and monitor Islamic and conventional operations of commercial banks since they get ‘mixed up.’ It implied that ‘mixed’ operations could lead to problems in auditing, consequently providing scope for manipulation.

Islamic financing carried more risks than conventional financing, said the QCB, describing the major Islamic financing tools—Mudarba, Murabaha, Mushareka, Istisna and Ijara—as ‘quite risky’, the regulator said.

Transactions that involve these financing instruments are, for example, buying and selling of stocks (Mudarba), buying consumer items like cars and ‘selling’ them to customers (Murabaha), sale where commodity is transacted before it comes into existence — ordering a producer to manufacture a specific item for a buyer (Istisna), partnership between a bank and its customers in a project or trading (Mushareka—which is non-existent in Qatar) and Ijara (leasing).

The above financing is made from customers’ deposits which carry fixed rates of profit (margin) so it is difficult to fully protect the rights of depositors, according to the QCB.

The regulator also talked of ‘complications’ in analysing financial reports of banks with both Islamic and commercial operations saying the reports cannot be filed applying a single set of international standards.

The QCB said legally it was difficult to separate the capitals of Islamic and conventional banking units if they are carried by a single operator.

‘Mixed’ operations also adversely impact the use of monetary policy instruments with efficiency.

The QCB said it was easier for it to manage liquidity in the country’s monetary system more efficiently if Islamic and commercial banks operated separately.

Inefficient management of liquidity can lead to undesired inflation and frustrate free market policies of a country.

The QCB finally admitted that the operation of Islamic branches of conventional banks was posing ‘fierce’ competition to the Islamic banks.

Moreover, Article 1 of Law Number 33 of 2006 that regulates the banking sector says that Islamic and conventional banking operations should be separate, said the QCB justifying its decision to close the affected arms.

The affected units would, however, be allowed to ‘manage’ their Islamic assets after the deadline of closure (the year-end) as a portfolio, or they could partly sell them off to Islamic banks, the QCB said. And the branches could be converted into conventional banking units after 2011, the regulator said.

But the banking industry remained unconvinced by the central bank’s ‘arguments’ with critics describing the reasons cited by it to close down the affected units as ‘lame excuses’.

“There is nothing new about what the QCB is saying with regard to mixed operations of conventional banks. In many countries around the world, including some neighbouring states, commercial banks are operating Islamic branches,” said an industry insider not wanting his name in print.

The banking regulators in these countries are efficiently managing the so-called mixed banking operations. “So what’s the problem with the QCB?

And the fact that the QCB itself is admitting that it is ‘incapable’ of monitoring what it calls mixed operations clearly shows its failure as a regulator.

“It’s a lazy organisation. They don’t want to do hard work as its counterparts in many other countries. They want simple banking operations so they can relax,” said another critic.

“The QCB has utterly failed in transparency test. It is not telling us what prompted it to order the closure of the affected units in the first place. Moreover, it does not explain why it has not been able to manage and monitor the mixed banking system so as to prevent any wrongdoing that led it to order the closure of the concerned Islamic arms,” he added.

“So the problem is not with the mixed banking system but with the QCB itself,” said the critic.

“It’s a big joke that the same regulator which allowed commercial banks to have Islamic arms is now citing the law saying that it does not allow the two systems to co-exist in a single bank.”

Why, when the law was enforced in 2006 did the QCB not take any steps then to disband the Islamic units of conventional banks? Why it has suddenly woken up from slumber to take action without notifying the banks and the people at large in advance, ask critics.

The QCB, perhaps, didn’t want a public debate on the issue and looking for an easier way out, issued the diktat overnight.

And by admitting that the affected units were giving a tough time to the Islamic banks, the QCB has emerged as a partial state agency, said still another critic.

One comment

  1. Actually when someone doesn’t know after that its up to other people that they will help, so here it takes place.

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