I- QCB’s Role in Promoting Financial Stability
Qatar National Development Strategy 2011-2016 indicates that development mainly relies on four pillars, one of them being the sustainable economic prosperity. In this regard, one of the challenges stated in Qatar National Strategy 2030 resides in "selecting and managing the path, which helps to achieve prosperity and to avoid economic imbalances and unrests". Providing economic stability is a prerequisite to urge investors to make long-term commitments to expand the productive base. Although any economy is inevitably exposed to crises, chronic or long-term fluctuations, including extreme financial distress situations, may adversely affect the economic activity. The State of Qatar may be one of the few countries where the fluctuation waves did not result in undesirable consequences, as it was the case in some economies, which essentially rely on natural resources exports. Through its national vision and development strategy, the Government is fully aware that, if development is slowed down in the hydrocarbon resources sector, the sound macroeconomic policy supporting a stable environment will play a crucial role in the expansion and prosperity of the non-hydrocarbon sectors. In this regard, and in line with the State’s policy, vision and strategy, Qatar Central Bank seeks to promote and maintain financial stability in Qatar through the adoption of a two-pronged policy:
The first axis is geared towards preventing the system from being exposed to unacceptable risk levels. Preventive measures emphasize regulation and supervision of banks and other financial institutions on a regular basis, so as to facilitate early detection of weaknesses in the financial system.
In spite of supervision and vigilance of highest order, it is impossible to completely cushion the financial system against all types of risks. Therefore, the second axis is remedial in nature as it seeks to contain the crisis at the earliest possible and prevent contagion.
On the other hand, QCB constantly ensures financial stability by setting the appropriate financial environment, and constructs and monitors solvency and financial soundness indicators on a regular basis.
II- Credit Control
Past experiences highlight the need for central banks and other concerned authorities to be vigilant to financial sector developments. Excessive exposure to vulnerable sectors needs to be contained with minimal effects on the growth prospects of the economy.
In view of the hike in real estate and share prices, and heightened speculative activities in these two sectors in Qatar over the past period, QCB has taken certain precautionary measures to limit the exposure of banks to these sectors. Certain restraints were put on credit extended to finance real estate and financing share purchase was prohibited. In this context, QCB strives to maintain balance between the development needs of the country at this stage, and financial stability. These measures are designed to protect the interests of depositors and promote stability in the banking system in the first place. These measures also contribute to combating inflationary pressure and promote macroeconomic stability, and therefore, sustainable economic growth.
QCB regulations also support credit risk management, pay adequate attention to loan quality, follow up on bad debts, and accumulate adequate provisions for them. These regulations are as follows:
A. Credit Facility Classification Categories:
Banks operating in Qatar should evaluate credit facilities accounts and classify them on a regular basis, as per the standards set for each category in the following manner:
1- Performing Credit Facilities: The accounts whose holders are committed, in general, to fulfill their subsequent obligations in conformity with the due dates and agreed conditions. Accordingly, there are neither indications nor evidences that such account holders may not completely fulfill their commitments as agreed upon. Such accounts are classified mainly into two categories:
1/1 Low Risk Credit Facilities: The accounts whose holders have strong financial positions, sufficient financial resources and cash flows, and good banking reputation. Additionally, they do not have weakness indicators.
1/2 Special mention Credit Facilities: Such accounts are subject to any of past due payments less than three months, or they have been specially mentioned due to the weakness indicators arising from the customer's financial positions or affected by the market circumstances or any other problems in the industry, etc.
B- Non-Performing Credit Facilities:
Such accounts do not fulfill their commitments in conformity with the due dates and agreed conditions for a period of three months or more, or there are indicators or evidences that such account holders are not able to fulfill their commitments as agreed upon. Such accounts are classified according to three following categories:
Non-performing credit facilities are classified, in accordance with one or more of the following classification indicators:
•Customer has defaulted to pay one of the installments of the loan or similar finance receivable for a period of three months or more.
•The agreed payments of the other types of direct credit facilities are past due.
•The limit granted for the other direct credit facilities is not renewed without submitting any acceptable reasons.
•The balance exceeds the limits granted for the other credit facilities by 10% or more without submitting any acceptable reasons.
•The borrower group has doubtful or bad accounts that have negative effects on the customer.
•Insufficiency of sources for repaying the full value of the debt and interests, as well as the insufficient collaterals.
•There are insufficient repayments to the overdrafts and overdrawn accounts that meet the nature of the account or the agreed conditions.
•There are gaps in the contracts and the supporting documentations, which prove the bank’s right of claim on customer’s obligations.
•There are evidences of the customer's insolvency or deterioration in the financial position, issuing of judicial verdicts against him, confiscating his properties, any other evidences of insolvency.
The credit facilities shall be classified as one of the credit facilities below if one or more of the mentioned indicators occurred, according to the default periods, knowing that provisions shall be created for each category, in accordance with the following:
|1- Special mention credit facilities
With regard to bad debts processing, QCB has allowed banks to exclude the debts with 100% provisions from their balance sheets one year or more following their being classified as bad debts without any reimbursement of the original amount or the interests with the availability of one or more of the following conditions:
1- No funding resources to collect the debt, including customer’s bankruptcy or insolvency with no resources, collaterals or guarantees from others to execute thereon.
2- The customer left the country and cannot be found or sued, with no guarantees, financial resources or properties in Qatar.
3- Available documented evidence approved by Qatar Central Bank according to which the bank is incapable of collecting the debt and therefore, there is no use of keeping the same in the balance sheet.
- The banks should record the debts excluded from the balance sheet in a systematic register, along with all related papers and evidentiary documents and follow up on their collection.
- The banks that wish to exclude bad debts from their balance sheet, in accordance with the conditions described above shall notify the Central Bank of these debts at the end of the year according to the model specified for this purpose after obtaining the approval of the Board of Directors and the auditor’s viewpoint. These banks may exclude those bad debts if they do not receive any objection from the Central Bank within one month from the date of notification.
- In the event where a bank wishes to write off one of the excluded debts definitively, whether from the balance sheet or the systematic register of excluded bad debts (as a result of the bank's decision of the futility of claiming the debt or as a result of the waiver of the same or the forfeiture of the bank’s right to legal claim), QCB shall be notified through the approved forms, and shall not have any objection in this respect.
QCB also obliges national banks to form a risk reserve from the net profits thereof, which should not be less than 1.5% of the total direct credit facilities granted by the bank and its branches and subsidiaries inside and outside Qatar, according to the consolidated balance sheet, after deduction of the specific provisions, suspended interests and deferred profits for Islamic banks, with the exception of the credit facilities extended to the Ministry of Economy & Finance or the facilities guaranteed by the said Ministry and credit facilities granted against cash collaterals (with lien on cash deposits).
C- Real Estate Financing Controls:
In order to control real estate financing risks and reduce such risks to the lowest possible level, Qatar Central Bank re-evaluated the previous instructions and issued new regulations in October 2010, which imposed certain restrictions on real estate financing granted by banks to customers and introduced some modifications at the end of January 2011, including the following:
1-Total financing granted by a domestic bank and its branches and subsidiaries both inside and outside Qatar or granted by the foreign bank branch in Qatar to individuals and other legal entities inside and outside Qatar and whose collection risks relate to real estate risks shall not exceed, at any time whatsoever, 100% of the bank’s Tier 1 capital.
2-Real estate financing for individual customers against salaries:
The maximum limit for the total real estate financing granted to the customer whose salary constitutes the main source of settlement thereof, exceeding the ceiling of consumer financing against salary is 70% of the real estate collateral value. The period of settlement of the financing and the interests thereof (profits) shall not exceed 20 years including the grace period. The maximum limit for deductions from the customer’s salary including the financing installment, along with any obligations is 75% of the customer’s basic salary and social allowance for Qatari nationals and 50% of the customer’s total salary for expatriates, on the condition that the end-of-service salary and benefits shall be transferred to the financing bank.
3-Real estate financing to other categories of customers:
The maximum limit for the total financing granted to the customer shall not exceed 60% of the real estate collateral value and the settlement period shall not exceed 15 years including the grace period. These two ceilings may be increased up to 70% and 20 years in case regular cash flows are transferred to the bank through official assignments covering the settlement installments in full including the original amount and the interests (profits) during the settlement period.
The following shall be exempted from the above ceiling for the purpose of calculating the ceilings:
-Real estate financing granted to the Ministry of Economy & Finance or the guaranteed part thereof.
-Real estate financing against cash deposits retained at the bank. Shall be excluded from real estate financing the amount equivalent to 100% of the retained deposits value in QR or USD or 90% in other foreign currencies.
-Real estate financing against unconditional irrevocable bank guarantees issued by banks classified in the first or second category according to QCB instructions.
-Real estate financing granted to individuals against salary within the consumer financing limits (not exceeding QR 2 million and 6 years for Qatari nationals and QR 400,000 and 4 years for expatriates).
D- Credit Concentrations:
- Credit facilities granted to a single customer’s borrower group must not exceed 20% of the bank’s capital and reserves.
- Credit facilities granted to a major shareholder’s borrower group must not exceed 10% of the bank’s capital and reserves.
- Total investments and credit facilities granted to a single customer’s borrower group must not exceed 25% of the banks’ capital and reserves.
- In all cases, credit facilities granted by all banks to a single customer and his borrower group must not exceed QR 3 billion.
The following shall be exempted from the above regulations:
- Credit facilities granted to the Ministry of Economy & Finance and the Government institutions and guaranteed thereby.
- Credit facilities guaranteed by cash deposits.
- Credit facilities guaranteed by unconditional bank guarantees, which may be automatically renewable by a bank or financial institution with a sound financial position. The guarantees must be encashed on maturity of loan/finance or must be automatically renewed until the maturity of the loan/finance.
- Bid bonds.
- Credit concentration of total exposure to financial institutions.
- Total exposure should not exceed the following credit concentrations ceilings at banks and financial institutions as a ratio of Tier 1 capital: this includes deposits, loans and indirect obligations.
First Category Banks
Banks and financial institutions rated (for long-term) at not less than A3 (Moody’s) and A- (Standard & Poor’s) or their equivalent, and the national banks in the GCC countries (Onshore banks) rated at not less than (Baa2) category.
Second Category Banks
Banks and financial institutions rated at less than Baa2 (Moody’s) and BBB (S&P)
Third Category Banks
Banks and financial institutions of those countries that set constraints on transferring the foreign currencies, and banks rated at less than the Second Category or whose capital adequacy ratio is less than the minimum adopted by Basel II Committee.
-Banks should not exceed the following investment ratios:
•Total investments in equity participations, except subsidiaries, should not exceed 30% of the bank’s capital and reserves while investments in a single company should not exceed 5% of the bank’s capital and reserves. On the other hand, total unlisted investments should not exceed 15% of the bank’s capital and reserves.
•Total investments in bonds and debt securities and Islamic financing Sukuk should not exceed 30% of the bank’s capital and reserves while investments in a single entity or a single mutual fund investing in debt securities should not exceed 5% of the bank’s capital and reserves. Total unlisted investments should not exceed 15%.
•Total investments in portfolios, mutual funds and other investment products should not exceed 10% of the bank’s capital and reserves while investments in a single portfolio or a single mutual fund should not exceed 3% of the bank’s capital and reserves.
•Investment in subsidiaries:
-Total investments and funds in a single company should not exceed 25% of bank’s capital and reserves.
-Total investments and funds in all companies should not exceed 40% of bank’s capital and reserves.
•Investments in real estates and fixed assets (Islamic Banks):
-For trading purposes, should not exceed 30% of the bank’s capital and reserves.
-For leasing purposes, should not exceed 30% of the bank’s capital and reserves.
-Total real estate investments including fixed assets should not exceed 40% of the bank’s capital and reserves.
Country Risk Concentration
- Banks should not exceed the following ceilings of credit risk concentration for each country as a percentage of the bank’s capital and reserves:
| (0% risk-weighted countries according to Basel II framework) 250%
First Category Countries
(20% to 50% risk-weighted countries according to Basel II framework) 100%
Second Category Countries
(More than 50% risk-weighted countries according to Basel II framework) 50%
Third Category Countries
The Gulf Cooperation Council (GCC) countries shall be excluded from the above-mentioned ceilings. When calculating the credit facilities for measuring the country risk, the outstanding balance or the ceiling granted, whichever is higher, should be taken into consideration.
Consolidated Supervision on banks
Qatar Central Bank obliges all national banks to apply all the ceilings and supervisory ratios on the consolidated level of the Bank and its group (branches and subsidiaries both inside and outside Qatar). QCB also expands its onsite and offsite supervision to include the bank and its group inside and outside Qatar.
III- Preserving the Banking System Liquidity and Solvency
Law No. 33/2006 empowers QCB to perform certain functions in order to ensure the liquidity and solvency of the banking system in Qatar. Some of the functions performed by QCB are given below:
1.QCB may, in emergency situations, grant loans and issue obligations to financial institutions not exceeding 50% of the bank’s capital and reserves, when such loans or obligations are necessary to support the bank’s liquidity.
QCB may extend the maturity of these loans or obligations based on a reasonable plan specifying the measures and procedures that financial institutions must adopt in order to meet the financial requirements set by the Bank.
2.Support banks' liquidity through Repo transactions with the Central Bank and other mechanisms specified by the Bank.
3.Issue instructions to the banks prescribing conditions or financial ratios, which all banks must adhere to, in order to ensure their liquidity and solvency, including liquidity ratio and credit ratio, in addition to the instructions issued with regard to the bank’s liquidity management in both regular and unusual circumstances. QCB shall also assess the liquidity management risks at each bank, in accordance with these requirements. In this regard, the Central Bank obliged all banks to apply the capital adequacy ratio according to (Basel II), based on specific executive instructions with a minimum ratio prescribed at 10% compared to 8% specified in the agreement.
4.The QCB may decide to put any financial institution under the temporary management of QCB if such institution become endangered of insolvency.
The financial institution shall be deemed endangered of insolvency in the following circumstances:
-if it is ceases to pay its liabilities on maturity.
-if it loses half of the balance of rights of the shareholders or if it violates the order of sufficiency of the capital as prescribed by the bank, unless there is a plan to cover the required sum of this deficit within the period specified by the bank.
-if the financial institution in the state of origin is endangered.
5.Stipulate auditing rules and principles for banks operating in Qatar.
Accordingly, each bank is required to appoint a chartered auditor registered in Qatar with the approval of QCB, who in turn has to ensure that the operations of the bank are in conformity with the provisions of the various laws and regulations governing the same.
6.Conduct periodic on-site inspection of any bank or at any time, if it considers such inspection is necessary, and ensure that the bank is in sound financial position and is in compliance with the provisions of QCB’s law and regulations. Furthermore, QCB may prescribe urgent measures to banks that are considered to be in poor liquidity and solvency position.
7.Do the continued off-site evaluation to assess the situation of banks and its financial developments, and assess the compliance of the supervisory ratios and ceilings, and through automated systems directly with the banks, provides the QCB with different types of off-site reports on a monthly basis.
IV- Oversight & Supervision of other Financial Institutions
In addition to the oversight and supervision of banks, certain rules and supervisory instructions apply on the other non-banking financial institutions like investment companies, finance companies and exchange houses. These rules and instructions aim to regulate the licensing, organization and risk management of these institutions and their impact on the financial system.