Qatar's move to make conventional banks close their Islamic banking operations highlights a lack of transparency in the Gulf Arab state, bankers said on Monday. Qatar's central bank ordered conventional banks to stop offering Islamic banking services by year-end, but gave no direction on whether banks can apply for separate Islamic banking licences.
The news hit conventional banks' shares on Sunday, while Islamic lenders Qatar Islamic Bank and Masraf al Rayan soared as investors speculated that conventional banks would be forced to sell their Islamic assets to their fully Islamic competitors.
"This is lacking in transparency. To not make it clear creates an unlevel playing field for everybody, for investors and for those observing the Qatari economy," said John Sfakianakis, chief economist at Banque Saudi Francais.
The Qatar central bank was not available for comment.
Affected banks include international lender HSBC and the country's largest bank by market value, Qatar National Bank (QNB). HSBC has said it will seek further clarification from the central bank.
Analysts project that QNB, with Islamic finance representing 11.6 percent of its total assets, will be the most severely impacted if it is forced to quit Islamic banking.
Doha Bank's DOBK.QA chief executive told Reuters the country's fifth largest lender would not face a major hit as 89 percent of its total deposits were in conventional banking.
Goldman Sachs estimated that if QNB and Doha Bank were able to sell off their Islamic business at book value, it would have a 10 percent negative proforma impact on their valuation.
Both companies' shares will remain under pressure amid the uncertainty, analyst Waleed Mohsin said in a research note.
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.
"It requires some effort but it's much easier to set up a subsidiary of a conventional bank than converting a conventional bank into an Islamic institution," said a banker at a UAE-based bank with Islamic operations. "It's a three- to four-month job."
He said an Islamic subsidiary would be able to establish its own identity and distinct Islamic products without being forced to consider the views of a conventional bank, which are sometimes at odds with stricter Islamic law.
"This is the right step towards promoting housekeeping, accountability and governance (in Islamic finance)," he said.
Analysts said Qatar's move may also spur other central banks to adopt similar measures as the near $1 trillion industry seeks to approve oversight of its Islamic banking operations, though Bahrain's central bank said it would continue to allow conventional banks to set up Islamic operations.