Corporate GovernanCe

Has anytHing cHanged?

tHeres Hardly a Hotter topic in tHe world of finance rigHt now tHan corporate governance. tHe issues wHicH are plaguing tHe industry in europe, tHe us and in otHer large markets Have tHeir roots in bad corporate practice loose control and poor understanding of financial risks wHicH didnt pay off. qatar today tries to find out wHy for a country wHicH wasnt Heavily affected by tHe global crisis is tHere a need for qatar to keep up witH corporate governance standards determined by outsiders? qatar is criticised by some outsiders for its poor standards in tHis arena and seen to be ignoring international best principles in many areas yet it avoided mucH of tHe turmoil and profligacy witnessed in countries wHicH brag about tHeir etHical standards and principles. so is it a case of trying to be proactive instead of reactive?
by rory coen

corporate governance

Have our banks learned tHeir lessons?

c o v e r s to r y | o ct o b e r 2 0 1 2 | qatar today

50

tHe

last time the Basel Committee issued a set of Core Principles for Effective Banking Supervision, the global financial crisis struck within two years. That was circa 2006. Just six years on from that with all that happened in between delegates met in Istanbul on September 13 and 14, 2012 for the 17th International Conference of Banking Supervisors to determine their next course of action. Drawing on lessons learnt during the financial crisis that began in 2007, the Bank for International Settlements (BIS) an entity which serves central banks in their pursuit of monetary and financial stability declared that their revised Core Principles core principles for effective banking supervision and the associated core principles methodology, which were published recently represented a significant step forward from the Basel Committees 2006 principles. They also reflected key advances in regulatory thinking in recent years that included, amongst other things, fostering robust market discipline through sound supervisory practices in areas of corporate governance, disclosure and transparency. Just under two years ago, the Qatar Financial Centres Regulatory Authority (QFCRA) and Thomson Reuters Governance, Risk and Compliance rounded up some of Qatars most prominent personalities in the industry to discuss the issue of corporate governance in Qatar, the region and beyond. Attendees included Risk Management Director at Qatar Central Bank (QCB) Mohammad Al Thani; Doha Bank CEO R. Seerathaman; HSBC Qatar CEO Abdul Hakeem Mostafawi; Standard Chartered CEO David Godwin; Michael Ryan CEO of the QFCRA; and executives from the Qatar Financial Markets Authority (QFMA), Qatar Exchange and Dubai International Financial Centre Authority. Their exchange of views was frank and to the point and they chiselled out a consensus on what needed to be done on a national, regional and global scale to curb the escalation of unethical corporate practice.

Raising the baR

the impoRtance of a moRe effective and functional boaRd is a topic of gReat inteRest in the Region and much effoRt is being eXeRted heRe.
ABDUL HAKEEM MOSTAFAWI
ceo hsbc QataR

global financial crisis gave a profile to the fact that there were weaknesses in the financial system an important one being in the way in which financial firms were being governed, said George Pickering, Managing Director of Policy and Enforcement at the QFCRA. Self-examination by both the industry and the regulators about how to strengthen corporate governance became a priority. Since that time, the three regulatory agencies here in Qatar QCB, QFMA and QFCRA have strengthened the standards that they expect of their firms and have raised the bar within their individual/independent mandates, he continued. But is this bar still hopelessly lingering beneath the unethical and greedy calls being made by boards that put risk ahead of reason in their pursuit of greater profits, bonuses and dividends? There was an infectious greed which transcended the guidelines that were issued. How long will it take this infection to wear off? Have corporate governance standards kept sufficient pace with the ever-changing business environment? Abdul Hakeem Mostafawi, CEO of HSBC Qatar said at the roundtable two years ago that it is very important that corporate governance plays a part of a culture rather than part of a business. We need to go back to the ABCs of corporate governance and first define them and then standardise them to make them simple to understand. KPMG Middle East and South Asia Chairman, Jamal Fakhro believes that standards have most definitely improved, but business has become more complex and the rules are unable to match the complexities in many key areas. I would say we are doing much better than 15 years ago, he said. We have rules and regulations here in Qatar. We have a corporate governance code, and companies and regulators are taking it seriously. But how effective are guidelines? Arent we back to the same problems as before? Fahkro was honest in his assessment of this. Are we following guidelines absolutely? No. Are we following them to a high level? Yes. Are there loopholes? Yes. Are they major? No. Regarding the recent scandals, he continued. They have nothing to do with regulation, because people start to lose values - they become greedy. They are willing to do anything to make money. I would say the current regulations have been written to definitely minimise fraud. You cant ever say that you wont have fraud in an organisation or you will never have scandals. Regulators and auditors are discovering acute discrepancies faster than before. It may have taken two or three years a decade ago; now its a matter of months. Regulators have quite a bit of influence over firms through the supervisory process, said Pickering. It also helps to have things

tHe

in legislation and rules. Shareholders and other stakeholders are also more concerned about it and more involved in making things better. In Qatar and the GCC, corporate governance standards are being strengthened they were probably lagging a few years back in best practice standards compared to some other countries, particularly in Europe and North America. Abdul Hakeem Mostafawi saw a shift in pattern last year due to an increase in general awareness in the corporate world. He felt there was no appetite to return to the days of taking risks for the sake of it. We have seen a positive change over the past year and witnessed that most companies are changing the business culture to have more effective corporate governance. This progress is due to an increase in general awareness as well as renewed action to review and implement best practices. The Hawkamah Institute for Corporate Governance has done outstanding work in this regard. And in the words of Dr Nasser Saidi [Executive Director, Hawkamah Institute]: corporate governance is a journey. There are drastic regulatory reforms which will remain as core for all businesses. No one will be allowed to return to old habits as it will not be tolerated and there is no risk appetite for this. We all agree that implementation of corporate governance principles is an indication of a sound and effective management system in any financial or non-financial institution. Robust corporate governance standards have been issued by QCB for banks and financial institutions since 2008. Similarly, QFCRA and QFMA have also issued guidelines to the entities that they supervise, added Mostafawi.

RegaRding the Recent scandals, they have nothing to do with Regulation, because people staRt to lose values they aRe willing to do anything to make money.
JAMAL FAKHRO
kpmg middle east and south asia chaiRman

aS

a guide to betteR pRactice

mentioned by Mostafawi, early this year, the QFCRA released its Guide to Corporate Governance for QFC-authorised firms. This is exactly what it is: a guide. Adherence to the principles contained in the Guide is voluntary and non-binding. However, it is the intention of the QFCRA to review the status of the Guide after it has been in use for a period of time, to determine if compliance with any of the principles should become mandatory by the establishment of specific rules, it states. When designing the guide, the QFCRA drew on global standards and principles issued by such international organisations as the Organisation for Economic Cooperation and Development (OECD), the International Association of Insurance Supervisors (IAIS) and the BIS. It also took into account governance standards developed by other relevant regulatory authorities in the region and by the other two bodies in Qatar the QCB and the QFMA. They say this is pretty much it the culmination of months of research and study. The QFCRA regulates banks through a set of rules, explained Pickering. Our rules deal with the key issues including authorisation, how a bank sets itself up, approved individual processes, prudential regulations and conduct of business. Throughout our rules and our enabling legislation, there are already very clearly outlined responsibilities for the board, the roles of directors and the roles of senior management. Although we felt that it was a very robust

framework for corporate governance, a year ago we developed a set of guidelines as a companion to our legal framework in order to give a higher profile to corporate governance. It provides in one single place the principles that weve developed which are fit for purpose in Qatar. It outlines the roles and responsibilities of the board of directors, senior management and other important stakeholders. Because its a guide, it doesnt have the same legal standing as rules, but we asked our firms to do a self-assessment of their own corporate governance against these guidelines. The QFCRA, as part of its ongoing supervisory process, is using the guide as a framework for discussion with financial institutions undertaking regulated activity in the Qatar Financial Centre. Just last month, the QFCRA issued a set of proposals which were aimed at strengthening the QFC regulatory regime. The proposed rule changes are aligned with the recently revised core principles set out by the BIS for banks and the IAIS for insurance companies. They clearly outline the responsibilities and roles of boards of directors, particularly with respect to risk management and control procedures and important factors such as the remuneration policies of firms. For instance, boards will be expected to be more actively involved in making sure that the remuneration of senior management is linked to the longstanding performance of the firm.

corporate governance

Have our banks learned tHeir lessons?

c o v e r s to r y | o ct o b e r 2 0 1 2 | qatar today

52

The draft rules also require the governing body of a QFC-authorised firm to approve and establish a formal governance framework; risk management and internal controls framework and a remuneration policy. In addition, the draft rules propose a new control function for internal audit for QFC insurers, QFC banks and QFC Islamic banks, and a new requirement for QFC banks and QFC Islamic banks to have a risk management function. The Basel Committee issued 39 new assessment criteria which govern authorities assessment of how closely banks adhere to the principles, the most important additions being in risk management and supervisory practices. The latest revision goes back to the roots of banking supervision, Teo Swee Lian, Co-Chair of the Core Principals Group, said in a statement on September 14. Lian, the Monetary Authority of Singapores Deputy Managing Director, highlighted the emphasis on a forward-looking perspective through early intervention and the application of a more effective risk-based approach as important elements of the new principles.

rectors. So what have firms in Qatar being doing recently to catch up with international best practice? Mostafawi believes that there are certainly still challenges ahead for Qatar, namely in attracting qualified board members who have the capabilities and experience to handle the risk function, but it is getting there. I believe our banks have the proper people sitting on the board, which will cover business as well as risk, although there is room for improvement in the risk culture, which is evolving by the day. Getting qualified personnel for boards still remains a challenge, however. We have seen the recent inception of qualified people and calls for changes in board appointments in corporates. Regarding his comment from two years ago, about the lack of independent directors who come in from outside and give critical feedback, Mostafawi said: We have not seen any real material change since then, but this will be encouraged to change again in the months to come. The latest IMF country report emphasised the importance of recruiting credible and knowledgeable people in these positions

is QataR lagging behind inteRnational standaRds?

durinG

the round table discussion two years ago, Mostafawi said that one of the things we dont have in this region is independent directors who come in from outside the business and give feedback on different elements of the business model. Michael Ryan, CEO of the QFCRA, noted that it was critical for regulators to be confident that bank boards had defined and fully understood their responsibilities, especially in the context of the financial crisis. At the same time Nasser Saidi, Executive Director, Hawkamah Institute for Corporate Governance, cited a study which examined every board member of every listed company in the GCC to measure family interconnection. If everybody knows each other, and everybody is sitting on five different boards, and they are doing business with each other, then even the concept of non-executive directors and independent non-executive directors gets thrown out the window, he said, before urging the regions financial industry to push efforts to address such conflicts. Pickering picked this up: International best practice over the past 15-20 years is leaning away from boards that are controlled by insiders and large shareholders. One of the objectives, which can be challenging to meet, is putting together a board of directors comprising those who are directly involved in its ownership and management of the business with independent directors who are knowledgeable and independent thinkers. For small countries, such as Qatar, its difficult to find people who qualify for the role of independent directors. Independent directors shouldnt be on dozens of boards; they should be independent of the day-to-day business and not be involved in other companies which are closely aligned. I know, from my previous experience in Canada, it can be a challenge for firms to find good independent corporate di-

foR small countRies, such as QataR, its difficult to find people who Qualify foR the Role of independent diRectoRs.
GEORGER PICKERING

managing diRectoR, policy and enfoRcement, QfcRa.

to mitigate risk. The importance of a more effective and functional board is a topic of great interest in the region and much effort has been exerted in this area. Several initiatives in the region are supporting the development of competent and capable directors and executives making well-informed decisions on a firm level. The regulators are closely monitoring and issuing directives on adhering to the principles of corporate governance. This ensures professionals are appointed on the board/executive committee so they can drive corporate strategy and policies of business, he said, when asked about the potential conflicts board members may have. Doha Bank CEO R. Seerathaman made a call two years ago for whistle-blowers within the framework of accountability to add value to the quality of governance at board level or somebody from the outside with the ability to change what the management is doing. The regulators have a clear policy on whistle-blowers, said Mostafawi. QCB assists customers in investigating complaints against the financial institutions under its supervision. This is in line with the IMF recommendations to have a more robust risk assessment culture and conduct regular stress-testing of banks

are tHe retail BankS ServinG our needS?

by rory coen
do you decide where to bank? Are you more interested in earning interest on your savings or does a bank which offers convenience and classy customer service do it for you? Its probably a bit of both. Well, with most banks offering almost 0% interest rate on savings, youre going to want service with a smile. Which of the options out there can best serve your acute financial needs? Qatars retail banking segment seems to be showing signs of confidence. There are over a dozen retail banking options currently serving a population of less than two million people. Innovations in online and mobile banking, customer service and product diversity have given customers a chance to shop around. Qatars Central Bank (QCB) said last month that it wanted to keep interest rates low to support lending to the real economy, and also reported that local banks had little exposure to the euro zone. Inflation rates in Qatar remain much lower than in other GCC nations, said Sheikh Abdullah bin Saud Al Thani, Governor, QCB, last month. Qatars inflation rate will be around two to three percent this year. The Central Bank is very comfortable with current interest rates and is not concerned about hot money inflows. Lower interest rates helped to boost growth margins in 2011. With lower interest rates there was more money floating about, but inflation levels remained static. With such optimism circulating in the segment, Qatar Today caught up with three retail banks to see what they were doing to

How

competition always woRks to the advantage of customeRs, but the diffeRentiatoR is the seRvice. with the pRojected population gRowth, i believe, in the long Run, theRe will be enough foR eveRyone to caRve a niche in theiR Respective businesses.
HUSSAIN AL ABDULLAH
head of Retail banking at baRwa bank

corporate governance

Have our banks learned tHeir lessons?

c o v e r s to r y | o ct o b e r 2 0 1 2 | qatar today

54

bump up their profits and draw in more customers. The recent directive from the QCB to shut the Islamic windows of conventional banks meant that some customers were forced to close their bank accounts and look elsewhere. We asked banks how important retail banking was to their overall enterprise and how they were innovating to attract customers, from an information technology perspective, through internet and mobile banking to the security of their services.

seRvice with a smile?

CEO at Qatar Islamic Bank (QIB) Ahmad Meshari said: Retail banking is immensely important to QIB, forming as it does one of the two main strands of our operation (the other being wholesale banking). The banks commitment to the retail sector is total, and our branch expansion programme is evidence of this. Further, we see great opportunities in the expanding private banking and private asset management sectors of retail banking, so its a sector that continues to thrive for us. Customer deposits to the bank have increased to a total volume of QR33.4 billion as of end-June 2012, a growth of 26% above the figure from end-June 2011. Retail banking represents approximately three-quarters of QIBs total deposits. Providing a good customer experience is one of QIBs stated strategic goals, he continued. This is evidenced by our branch expansion efforts, our unending quest to innovate and bring new, attractive products to market. We have had a busy year in terms of the banks IT resources to enhance the security of our customers data

aCtinG

undeR the Recent Qcb Regulations, we focus on seRvice to diffeRentiate mashReQ fRom otheR banks, keeping the customeR at the centRe of ouR offeRings with bundles and wellRounded financial solutions.
HOWARD KITSON
countRy manageR at mashReQ bank

in line with the requirements of the times. These developments will help us towards our goal of increased automation, and, additionally, we have enhanced our internet, phone and SMS banking facilities. QIB is now looking a lot more solid and productive in the application of current banking technology. Our contact centre offers a variety of services to our customers and is available 24/7. You also have the option to complete your enquiries and transactions on our automated phone banking service interactive voice response. The services include general enquiries about the banks products and promotions, accounts and card balances and transactions; placing and changing maturity instructions for your fixed deposits; paying your utility bills and making card payments and transfers; and requesting cheque books and statements by e-mail or fax. QIB is currently developing its mobile banking application which will offer a range of conveniences. The application is enriched with a range of services including a branch and ATM locator as well as a currency calculator, and we will continue adding more services as we go. The application will be available on a wide range of mobile operating systems and smartphones this November. Country Manager at Mashreq Bank Howard Kitson said: We are a full service provider in the retail banking segment and have been growing at a steady rate of 30% year-on-year. We have invested heavily in technology to provide our customers with user-friendly e-banking solutions which provide flexibility to manage finances from the comfort of their homes or offices. Our online banking platform was awarded the Best Internet Consumer Bank in Qatar by New York-based Global Finance magazine for four consecutive years. Its services offer comprehensive banking and payment solutions based on individual customer preferences spanning services that include utility bill payments, local and international funds transfers, account opening, investments, loans and deposits in addition to standard account servicing. Mashreq was one of the first banks in Qatar to introduce a fully functional mobile banking service where customers can access their accounts, check balances, transfer funds, request cheque books and effectively manage their financial affairs. We have embarked on an ambitious project of replacing our existing core banking system with the state-of-the-art Flexcube platform, which benefits customers by allowing them to perform all their basic banking transactions online with just two clicks. Our goal is to continuously offer convenient banking solutions, and we are on the path to achieving that. The project was pilot-tested in Qatar and is being rolled out to other Mashreq locations around the world. Head of Retail Banking at Barwa Bank, Hussain Al-Abdullah said: Across the globe, retail banking has witnessed spectacular innovation in the commercial banking sector in recent years. The growth of retail banking, especially in this region, is attributable to the rapid advances in information technology, the evolving macroeconomic environment, financial market reform, and several microlevel demand- and supply-side factors. Retail banking business, on non-financial contribution, adds substantial brand strength to commercial banks, thereby making it significantly important to any commercial bank, and Barwa bank. We have a customer loyalty model within retail banking whereby, through our different channels, we ensure customers are delighted at the time of acquisition. Then we endeavour to deliver great expe-

rience consistently throughout this journey by way of various initiatives (financial planning, advisory, cross-sell and event invites), especially in the first twelve months of the relationship.

diffeRentiating pRoducts
rates on savings account are almost negligible across the board. Forget customer service and mobile banking, customers want their money to work while its in the bank and not sit there earning no interest. Or do they? Does customer service really matter? How big a challenge is it to attract customers when theres a 0% interest rate on savings? Barwa Banks Hussain Al-Abdullah said: With a diminutive target market and an overbanked country it is indeed challenging, but with our proactive product innovations (i.e. tweaking the working mechanism of a product and bundling it with extra benefits) we are able to manage our liability needs quite smoothly. You can present the same thing in a different way or a different thing in the same way, but what brings customers or generates loyalty is the way, i.e. your capabilities to deliver service excellence. Competition always works to the advantage of customers, but the differentiator is the service. With the projected population growth, I believe, in the long run, there will be enough for everyone to carve a niche in their respective businesses, he added. QIBs Ahmad Meshari believes its no more a challenge for QIB than it is for other banks. For one thing, if you have money to invest then there are many alternatives to savings accounts that can offer potentially superior rates of return. Secondly, as discussed above, customers place a lot of importance on finding a bank that is readily accessible and offers them a distinctive level of service. We believe that we have the right products, and we also believe we have the right team in place. Mashreq Banks Howard Kitson believes that attracting new customers is always a challenge and it requires an innovative approach. However, we have in place an Easy Saver account that offers one of the best rates in the market and it can be opened by customers online in real time. We also create special structured notes and deposits for our customers, based on their financial objectives, which offer higher returns than the normal savings account. With such products and offerings, we have been able to grow at a steady pace. In a small but growing market like Qatar, all banks are competing for a share of the customers banking needs. Under the recent QCB regulations, we focus on service to differentiate Mashreq from other banks, keeping the customer at the centre of our offerings with bundles and well-rounded financial solutions, coupled with lifestyle benefits, 24/7 convenient accessibility and excellent customer service, added Kitson.

intereSt

customeRs place a lot of impoRtance on finding a bank that is Readily accessible and offeRs them a distinctive level of seRvice. we believe that we have the Right pRoducts, and we also believe we have the Right team in place.
AHMAD MESHARI
acting ceo at QataR islamic bank (Qib)

pRivate sectoR assistance

tHereS

a drive on in Qatar to encourage entrepreneurship and promote private sector growth. But such businesses need to have confi-

dence in their banks to provide credit when they need it most. The first couple of years are the hardest for start-ups, and SMEs (smallto-medium enterprises) are always looking to grow further, so how are the banks helping these businesses get financial assistance? After assessing the trade and financing requirements of our SME customers, Mashreq offers financing solutions up to QR20 million, said Kitson. We have also partnered with QDB (Qatar Development Bank) in its Al Dhameen finance assurance programme where we offer financing facilities to new start-up ventures. Our leading product is the Small Business Loan, through which we give SMEs up to QR2 million in lending with minimum documentation - just a copy of a bank statement is all thats required. In addition, our SME relationship managers also provide customers with competitive pricing and best in class service on branch banking, transaction banking, trade finance and working capital finance, LCs, LGs, guarantees, discounting, key man insurance and other financial needs, said Kitson. Ahmad Meshari said: The Qatari authorities know well the importance of SMEs in diversifying the economy away from its current reliance on hydrocarbons, and QIB is completely aligned and supportive to this position. It is for this reason that we have developed a suite of financing products specifically tailored to the SME sector so that we may give this market the attention and support that it demands. Its certainly an area of special attention for us. According to reports, the Qatari market economy is now standing at 28%, of which 55% comes from trade and 16% from industry, so the sector is poised for big gains, said Al-Abdullah. With the awarding of the 2022 FIFA World Cup hosting rights to Qatar, the growth of SMEs is expected to further improve due to heightened economic activity in several sectors of the economy. Volumes will only increase from here as SME business confidence in Qatar reflects an extremely positive environment for business growth

corporate governance

Have our banks learned tHeir lessons?

c o v e r s to r y | o ct o b e r 2 0 1 2 | qatar today

56

QatarS BankS Have aGGreSSive riSk appetite

How mucH risk are Qatari banks exposing tHemselves to? tHe average return-on-eQuity for tHe banking industry was 19% in 2011, wHicH was a reflection on How well tHey did last year, but is it also tempting tHem to sQueeze out a little bit more, especially witH tHe Qatari governments track record of providing liQuidity and capital during periods of market turmoil? stepHanie mery carillon, director of financial services at standard & poors, looks at Qatars banking sector from a distance.

Standard

& Poors Ratings Services rank the banking sector in Qatar AA/ Stable/A-1+ in group 4 under its updated Banking Industry Country Risk Assessment (BICRA) methodology. Other countries with a BICRA group 4 score include Kuwait, Mexico, Oman, Peru, South Africa and Taiwan. Our criteria define the BICRA framework as one designed to evaluate and compare global banking systems. A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10). The BICRA comprises two main areas of analysis - economic risk and industry risk. For Qatar, we have assigned a score of 4 to the economic risk and 5 to the industry risk.

a stRong oil- and gas-based economy, but geopolitical and cRedit Risks Remain.
Our economic risk score of 4 reflects our opinion that Qatar has low risk in economic resilience, as Qatars hydrocarbon reserve contains almost 14% of the worlds natural gas making it the thirdlargest reserve in the world and 2.2% of the worlds proven oil reserves. As a result of prudent management of this natural resource

endowment, Qatar has very high per capita income; we estimate it was $111,000 (QR404,000) in 2011. Moreover, Qatar has made significant progress toward diversifying its economy despite the fact that it still depends heavily on oil and liquefied natural gas (LNG) production. We believe the economy will continue to show strong momentum, reflecting Qatars positive market dynamics and significant infrastructure development programme. High oil prices and long-term LNG contracts at fixed prices are also helping the country to secure its revenues. We also expect Qatars real estate market to recover from its sharp decline in 2009-2011, although the commercial sector still faces more risk than the housing segment. Political risk, however, heightens our assessment of Qatars economic resilience. Like other sovereigns in the region, Qatar is exposed to geopolitical risk such as a potential escalation of tensions between the West and Iran, with which Qatar shares the large North Field gas reservoir. In addition, Qatars more aggressive foreign policy stance could result in an escalation of antagonism amongst uneasy allies in the region. Institutional transparency and accountability are a further consideration in our assessment of Qatars political risk. One of the main risks for the Qatari banking sector is its exposure to credit risk, in our view. This is underpinned by very rapid loan growth (28% growth in 2011), lending and underwriting standards that we view as aggressive, and a high concentration in lending to cyclical or vulnerable sectors like real estate and construction (19% of total loans at year-end 2011 and almost 25% when contractors are included). In addition, foreign currency lending has recently increased dramatically and accounted for 47% of total loans at year-end 2011. We expect sustained lending growth over the next few years, although Qatars central bank is currently tightening regulation, which may limit business and lending growth in the short term. The banking system is also penalised by a modest payment culture, as shown by recently increased problem loans in retail despite the assignment of salaries on personal loans, something which usually protects banks.

one of the main Risks foR the QataRi banking sectoR is its eXposuRe to cRedit Risk, in ouR view. this is undeRpinned by veRy Rapid loan gRowth (28% gRowth in 2011), lending and undeRwRiting standaRds that we view as aggRessive.
STEPHANIE MERy CARILLON
diRectoR financial seRvices standaRd & pooRs

industRy Risk
industry risk score for Qatar is 5. The Qatari institutional framework is considered intermediate risk as banking regulations are in line with international standards, although we consider that supervision has some room for improvement. While the central bank could have taken more proactive measures during the global 2008-2009 crisis, the authorities identified potential problems relating to real estate or equity exposures and acted quickly to fix them. The central bank also severely tightened regulation surrounding personal borrowing in the second quarter of 2011 by capping the amount and rate at which banks can lend to an individual. We classify as high risk Qatars competitive dynamics. Even if banks in Qatar have stable market shares and barriers to entry remain high, we consider Qatars banks to have an aggressive risk appetite. The banking sectors profitability has been higher than that of other sectors of the local economy for the past few years. The average return on equity for Qatars banking sector was 19% in

tHe

2011. This high level of profitability is also the result of the low cost of labour and absence of income tax. In addition, the small size of the domestic market leads to high price competition and concentration, and pushes the banks to expand abroad. That said, strong margins and efficiency, and the absence of income tax, give them an effective cushion to face a potential increase in the cost of risk. Qatari system-wide funding is considered intermediate risk as banks rely mainly on customer deposits for funding. The banking system has a stable share of core customer deposits to loans, although the share of net external funding to loans has been increasing recently. We expect the deposit-to-loan ratio to decline further as a result of strong loan growth largely linked to the 2022 FIFA World Cup and infrastructure programme financing. This risk of decline is partially mitigated by the Qatari governments successful track record in providing liquidity and capital during periods of market turmoil. The governments role improves our score on system-wide funding for Qatar. We view the governments role as strong and believe the authorities are likely to provide extraordinary liquidity support to the banking system, if needed. The government has recently significantly increased its borrowing in capital markets. In our view, enlarged government debt is being issued to foster the development of domestic capital markets and to build up a domestic sovereign bond yield curve