The decision by the Qatar Central Bank to order conventional banks in the country to close their Islamic banking operations by the end of the year — without a detailed explanation — may be harmful to the financial services industry in the country and the region.
Many international and local conventional banks in Qatar have reportedly invested in setting up Islamic finance operations which they may now have to shut-down at some cost. But perhaps of greater concern is that by not immediately providing clear reasons for the step, the central bank has created uncertainty in the financial services industry in the country — which may deter further investment.
The shares of some Islamic-only banks listed in Qatar strengthened on the news of the ban, on the back of speculation that they would be able to pick up assets conventional institutions may be forced to sell cheaply. It is expected that shares in conventional banks in Qatar will remain under pressure until the issue is resolved.
And, although it might seem unfair, given the different national regulatory authorities, the uncertainty is likely to spread to the entire Islamic finance industry, which spans the region and the world. While the Gulf is an important centre for the global Islamic finance industry, those countries in Asia, among others, also trying to win market share, will be quick to take advantage of any regulatory uncertainty that will make investors look for new destinations.
The global financial crisis showed that Islamic banking is as vulnerable to sentiment and the state of the world economy as conventional banks. While it may be within their rights, governments must at all times institute regulations and policies with a restrained hand. Without a clear and stable operating environment, both Islamic and conventional banks will suffer.