Barwa Bank's acquisition of Al-Yusr may pave way for more transactions

Other banks affected include the Al-Islami window of Qatar National Bank (QNB), the largest bank in the emirate; Commercial Bank of Qatar; Doha Bank; HSBC Amanah; Ahli Bank; and Al-Khaliji Bank, which together with Al-Yusr have 16 Islamic banking branches in Qatar between them. Only one bank, HSBC Amanah has confirmed that it will cease its Islamic banking window operations in Qatar, rather than selling them off.
However, according to Amjad Hussain, partner and head of Islamic finance at Eversheds, the UK law firm which advised Barwa Bank on the acquisition, more such transactions involving the IBWs may follow.
In fact, Eversheds, which is the only international law firm to have a dedicated Islamic finance team in Doha, already has other due diligence mandates from IBWs, which could lead to further acquisitions by Islamic banks.
The remaining Islamic banks in Qatar are Qatar Islamic Bank (QIB), the largest Islamic bank in the state; Qatar International Islamic Bank (QIIB) and Masraf Al-Rayan. The Islamic banking sector has a 20 percent market share of the total banking industry in Qatar, which has four dedicated standalone Islamic banks.
“This is the first purchase of an Islamic banking window by an Islamic bank in Qatar, and also the first deal of its kind in the region.
As a result the transaction threw up a number of interesting legal, operational and Shariah based challenges. We were pleased to find a solution that worked for all stakeholders and allowed us to execute the deal within a very tight timeframe,” explained Hussain in an interview.
The market was perhaps taken by surprise when the CBQ issued its directive, especially by the short grace period to implement its provisions. The central bank at the time reportedly justified its directive by stressing that it fits in with its new regulatory regime for Islamic banks which is based on guidelines issued by the Islamic Financial Services Board (IFSB) which are specific to Islamic banks and different to those applicable to conventional banks per se under both the old Basel II and the proposed new Basel III frameworks.
It was way back in 2005 that the QCB allowed conventional banks to launch Islamic Banking Units (IBUs), which have contributed to the growth of the sector and to the profitability of the banks, and which have attracted an estimated customer base of just under 100,000.
There has been some speculation about the reasons behind and the seemingly arbitrariness of the issuing of the directive. Some bankers stressed that the Qatari regulator felt that there was unfettered co-mingling of conventional and Islamic funds within the IBWs which consequentially comprised the Shariah compliance of the Windows.
This suggests that there must have been some serious cases of breakdowns in the Shariah compliance governance of these windows.
However, Eversheds’ Amjad Hussain rejects any notion of arbitrariness in the action of the CBQ in issuing the directive.
The action, he contends, is “part of a wider process of supporting and shoring up the banking industry in Qatar. You have to look at it in the context of the proactive approach of the central bank during the recession when it helped a number of local banks to remove some of the toxic debts that they had exposure to. The CBQ is also making sure that there are enough opportunities for all the market players.”
Previously, the Islamic banking windows were barely competing because of co-mingling issues and because they were able to offset overheads through the conventional banks. There was a feeling that the market was not as transparent as it could be. In addition to regulatory issues, the central bank had to deal with two separate businesses dealing with different banking activities — Islamic and conventional.
“I believe competition was an issue, because the pure Islamic banks were seen to be at a disadvantage. The IBWs at the conventional banks were able to use backroom services in their banks. There were also regulatory and corporate governance concerning how manage different banking platforms under one roof which is what the conventional banks were trying to do. This resulted in a culmination of issues which the CBQ is trying to address in its efforts to improve out the banking sector,” said Amjad Hussain.
Eversheds, which has a proven expertise in M&A (mergers and acquisitions) transactions especially in the region, not surprisingly won the mandate through a tender process. The total value of the transaction is not known but IBQ’s Al-Yusr business is seen as a well run, medium-sized business.
Hussain is confident that the acquisition, which was completed in record time, could lead to good opportunities for Barwa Bank, which is now in a position to accelerate its growth and expansion plans in the local market and position itself as one of the leading Islamic banks in Qatar. The deal was approved by the CBQ and the customer transfer process has already begun.
This transaction is primarily retail led, because the business the main focus of the Al-Yusr window is consumer finance with a bit of corporate financing.
There were alternative options which the CBQ could have pursued. For instance, the CBQ could have allowed the IBWs to convert into fully-owned dedicated subsidiary Islamic banks. This option apparently was explored by the central bank. Another option was to consolidate all the IBWs into one mega Islamic bank.
The market is keenly awaiting developments at QNB Al-Islami, the Islamic banking window of Qatar National Bank (QNB), which is by far the largest of the windows and also bigger than the balance sheet of the smaller Islamic banks in Qatar.
One option would be for QIB to acquire QNB Al-Islami, which would then make QIB one of the top three largest Islamic banks in the world in terms of balance sheet. That would be an M&A “made in heaven,” although the possibility of its happening is slim.
The signs are also that CBQ is not keen to open the financial services market to foreign players such as Al-Rajhi Bank, which recently started operations in Kuwait and Jordan; Kuwait Finance House and Dubai Islamic Bank. The CBQ has not issued any new banking licenses in recent times, and most international banks operating out of Qatar do so through the Qatar Financial Center (QFC).
As the first such transaction to be closed in the region, albeit under Qatari law, there were some legal and other regulatory challenges which Eversheds successfully navigated through within the provisions of existing Qatari legislation. The initial challenge was how to interpret the law in respect of this first type of transaction and how to work within the existing laws.
“The IBQ window was not a separate legal entity. As such, its assets and liabilities were a part of the conventional bank. We therefore had to consider how best to separate and then package and transfer these assets and liabilities. There were also challenges concerning transition services that were required post completion to serve the transferring customers.” said Hussain.
He agrees that the legal architecture for Islamic banking and finance in this part of the world is still developing and evolving and that there are still some laws that need more clarification in various jurisdictions.
However, he emphasizes that there was nothing unduly restrictive in terms of the Qatari law which came out of this particular Islamic finance transaction.
Apart from the issues relating to separation of assets, the other major challenge was the Shariah treatment of the transaction and the transfer of each asset and liability.
Hussain is confident this was a good acquisition in terms of the Islamic finance business proposition which fits in with Barwa Bank’s strategy going forward. It is a little too early to say where this acquisition will put Barwa Bank in terms of ranking as an Islamic bank, but one thing for sure it makes the bank a serious player in the market.
The underlying footprint of this window and its synergies with Barwa Bank is what clinched this deal otherwise the transaction would not have gone ahead. Indeed potential similar deals have floundered because of a lack of such synergies.