Qatar, says a recent World Bank report, is the world's eighth richest country in terms of natural resources and GDP growth. Its massive North Field Gas Project is one of the largest on earth. And the demand for capital in Qatar to finance downstream and other associated projects is increasing. Qatar is also one Gulf state that is de facto promoting the development of a dual banking system, and is highly proactive hi promoting Islamic banking and finance. Here Mushtak Parker discusses the development of the Islamic banking sector in Qatar with Abdullah Al-Attiya, Governor and Chairman of Qatar Central Bank (QCB).

In many respects Qatar should be an ideal market for Islamic finance. It is a capital hungry country — especially for its huge North Field Gas Project and the associated downstream activities in the fertilisers and petrochemicals sectors.

It is hardly surprising that Abdullah Al-Attiya, Governor and Chairman of Qatar Central Bank (QCB), is bullish about the potential for Islamic banking and finance, not only for Qatar's two Islamic banks — Qatar Islamic Bank (QIB) and Qatar International Islamic Bank (QIIB) — but also for regional and overseas players.

"We have two Islamic banks in Qatar, one of them (QIB) is the third largest bank in the country in terms of deposits  and the other (QIIB) is the last of the national banks. Islamic banking is a very important industry in Qatar and its growth is larger than that of the conventional sector," stressed Governor Al-Attiya in an interview with Islamic Banker.

Both QIB and QIIB are licensed and supervised by the Qatar Central Bank (QCB), which sees Islamic banking and  finance as complementary to conventional banking. "Our law stipulates that QCB can regulate Islamic banks under a special legal and regulatory regime. We have developed this regime at the Central Bank in terms of capital adequacy ratios in line with the 8 per cent minimum ratio of the Basel Capital Adequacy requirements. We have also developed guidelines for various exposures — investment and real estate — that are suitable for Islamic banks."

Governor Al-Attiya dismisses any suggestions of management and operational problems at QIB, which has seen three general managers in as many years. The Qatar Central Bank, he added, co-ordinates closely with QIB as it does with all the other national banks in the emirate.

"QIB has changed management for personal reasons. It has nothin, to do with bank financial strength anc soundness. QIB did have exposure to tie collapsed Bank of Credit and Commerce International (BCCI), but it has more than adequate, if not extra, provision against this exposure - currently about 163 per cent provisioning against this exposure. QIB has received 24.5 per cent from the BCCI receivers so far. We estimate that the bank will receive about 40 per cent. The bank is co-ordinating with the Central Bank to liquidate non-earning assets and investments. As such, QIB is doing very well generally. They have been talking to professional bankers to join them. QIB has come a long way in proving its viability and profitability, stressed Governor Al-Attiya.

Qatar is surprisingly accommodating regarding the free entry and free exit of financial institutions. Officials, however, point out that the Qatar economy is relatively small. It cannot sustain too many banks, simply because the market size small. Nevertheless, Governor Al-AtUya is adamant that "we (Qatar) are not ruling out any free entries. But I think that the two Islamic banks QIB and QIIB, plus the regional Islamic banks, are adequate it satisfy the current requirements of the customer base in the country and region. Islamic banks have to diversify investment portfolios to meet the various needs of customers. This is a challenge for all Islamic financial institutions."

Qatar, however, does have huge proven reserves of natural gas and is a medium-sized player in OPEC. It is also promoting a number of downstream activities such as fertilisers, petrochemicals and other industries. As such, Governor Al-Attiya agrees that the demand for capital in the emirate is still huge. Qatar has gone to the conventional market a number of times to develop the North Field Gas Project. But will there be opportunities for branches of Islamic finance for the projects of Qatar Gas and Petrochemical Company (QGPC), for instance?

"Our role is essentially that of a supervisor. We do not plan the investment pluis of companies. However, we do encourage all our banks to play a role in contributing to the industrialisation of Qatar," he explained. With talk of over US$165bn worth of Islamic funds globally, Governor Al-Attiya sees big potential for the sector. Already in Qatar the market share of Islamic banks is increasing. The same scenario is being repeated in the rest of the Gulf states, most notably with the recent launches of First Islamic Investment Bank (FIIB) and the Abu Dhabi Islamic Bank  (ADIB).

Is Qatar promoting a dual banking policy like that in Malaysia? The Government has a neutral position. There is no discrimination. We are welcoming Islamic banking as well as conventional banking activities. Both have to be regulated to meet the necessary international requirements. I feel that the two systems are complementary to each other, each providing different services to customers. There are many global customers who like to deal with Islamic banks, which have to be there in terms of pricing, efficiency and product diversification. The fact that there is no  uniformity of operations in Islamic banking is a major problem, although the gap is shrinking," says Governor Al-Attiya.

He sees a role for Islamic banking in government financing — to help finance deficits, directly or indirectly, or in infrastructure projects or trade. The future challenge is to develop Islamic capital markets and to provide longer-term financing.