The Contribution of the Qatari Financial Sector to the Economy and Government Policy of Economic Diversification

I. Introduction

Qatar, akin to many other Middle East nations, has had a tumultuous economic history. Qatar remained under British rule until 1971 (Qatar Central Bank, 2009a). After the country attained independence from Britain in September 1971, the country implemented a number of reforms in the financial sector which caused major changes in the internal and external sectors of the economy (Edo, 1975). Qatar, in its efforts to aid the economy by integrating it with the global economy, joined International Monetary Fund in 1972 which opened up the financial sector wider. One of the most important features of the economy has been the dominance of oil and gas related businesses. Qatar commenced oil exports in 1949 and since then oil and gas have fuelled the economic growth in the country. Qatar’s need for banking was realised as soon as the country began embarking on large scale exports. Being under British rule, the country witnessed the entry of a number of British banks in 1950 (Qatar Central Bank, 2002). However after independence, the country’s central bank encouraged domestic banks and regional banks to establish presence in the country. Through careful policy implementation, the regional banks have been allowed to play a major role than foreign banks. Besides, subsequent policy changes have also allowed financial intermediaries, insurance companies and money exchange companies to come into existence. The objective of this chapter is to analyse the role of financial system of Qatar and its contribution to the economy of Qatar.

II. Role of Financial Sector in the Economy

The financial system of Qatar is composed of commercial banks, insurance companies, money exchange companies, fund management companies and financial intermediaries such as security and money market brokers, financial advisors, insurance brokers and investment banks. Banks are the most important micro units in the system. The central bank classifies banks into national banks, specialised banks, Arab banks and foreign banks (Badr-el-din and Ibrahim, 2007). While national banks are owned predominantly by Qataris, Arab banks are those that are established in other Arab countries. Foreign banks are those that have origin outside the region. Specialised banks include banks incorporated to perform special functions such as industrial development. Some of the national banks are identified specifically as Islamic banks as they run business strictly in compliance with the Shariah Law (Hassan and Lewis, 2007). This section of the dissertation analyses some of the roles of economic importance played by the members in the financial ecosystem. Because of the important role played by banks, this section tends to lay emphasis on banks rather than other players in the financial sector.

1. Driver of Economic Growth

The banking subsector in financial services sector has been a major driver of economic growth for Qatar. The primary function of a commercial bank is to facilitate the flow of funds. Specifically, banks attract deposits from customers and lend them to the borrowers. This role of banks is very crucial, particularly in a country like Qatar where major projects are mostly long term in nature such as real estate, construction, oil and gas facilities etc. This role of banks as a facilitator of credit is the most important means through which they drive economic growth (Jacoby, 2007). However, banks also contribute to economic growth through direct and indirect employment generation. While direct employment generation happens through the engagement of human resources to perform banking functions, indirect employment generation is performed through usage of human resources by businesses that have availed bank credit. The phenomenon of money multiplier leverages the money in circulation and results in economic growth (Mishkin, 2007). Besides credit facilitation, banks also contribute directly to economic growth through value-added services such as collection and issue of financial instruments, safe keep of deposits, etc. Banks and other financial service providers employ qualified personnel who in turn contribute to the economic output through their consumption and investment activities. Banks also facilitate exports and imports through provision of trade finance and value-added services such as document collection and forfeiting. This role is important particularly in a country like Qatar where the total value of trade (imports + exports) is 90.12% of the GDP (Qatar Central Bank, 2009b). More importantly, the ratio has been increasing YoY at a rapid pace as can be observed from the graph below:
The ways in which financial sector contributes to the GDP of Qatar is discussed and analysed in detail in the next chapter of this dissertation.

2. Monetary Policy Channel

The financial sector, particularly the banking subsector, represents the main channel through which the monetary policy formulated by the central bank gets transcribed into action. The Qatar Monetary Authority pegged the national currency Qatari Riyal (QAR) to the US Dollar at the rate of 3.64 QAR per US$. This has remained unchanged since 1980 (Johnston and Swinburne, 1999). Because of this fixed currency peg, the monetary policy changes in Qatar closely resemble those carried out by the Federal Reserve in the US (Meissner and Oomes, 2008). The inflation in Qatar has been in double digits due to the sharp run-up in asset prices before they pulled back in 2008. Following graph shows the percentage change in Consumer Price Index during recent years.
Qatar Central Bank (QCB) implements a number of monetary measures including changes in Repo rates, changes in interest rates, open market operations etc., However the quantity of money in circulation gets influenced by the monetary policy changes made by the QCB through changes in lending and deposit rates carried out by the commercial banks in the country. QCB also influences the credit practices of the banks and so can alter the quality of lending (Lybek and Morris, 2004). Following chart shows the movements in various interest rates along with the repo rate.
It can be observed that the short-term interest rates including overdraft rate, bill discounting rate, rate on credit for less than 1 year etc. are altered by banks to match the changes in repo rate. This function performed by the banks ensures that the monetary policy changes get translated into changes in quantity of money in circulation. This is an important monetary role played by the banks. Changes in interest rates also indirectly affect variables such as insurance premiums, brokerage rates etc., which are determined by other players in the financial sector (Mahadeva and Sinclair, 2005). Thus financial sector helps the QCB to bring about effective changes in the monetary condition of the country. In other words, the financial sector micro units act as the conduits through which the effects of monetary policy changes trickle down to the final consumer in the economy.

3. Socio-Economic Role

Qatari banks have played an important socio-economic role by extending banking services to the businesses in the region thereby stimulating entrepreneurship among the local population. These banks have also nurtured local talent through employment and have improved the employability of the population through training and development programmes. This has contributed to increase in productivity of the local population which in turn has improved their earning capacity. It can be observed from the chart given below that the labour productivity in Qatar has been the fastest growing among comparable GCC economies.
With a per-capita GDP of US$93,204.05, Qatar is one of the wealthiest countries in the entire world (EconomyWatch, 2009). The banks and financial intermediaries provide significant levels of wealth management services to the population in the country.
One of the noteworthy socio-economic roles played by the financial sector is as an employer of female workforce. It is identified that about 1/3rd of the total workforce in Qatar banks are females (Qatar Statistical Authority, 2008). Qatari banks have about 31% of their employees drawn from female population while European banks in the country have a higher percentage (46%) of females in their workforce. About 22% of the workforce employed by foreign insurance companies is females while the percentage is lower at 14% and 16% for Qatari insurance companies and Arabic Insurance companies respectively. The national average for female employees among the workforce is much lower at 12%.

4. Important Player in Diversification Policy

Qatar’s economy, just as any other economy in the region, is dependent on oil and gas to a great extent.
It can be observed from the chart given above that the contribution of oil and gas sector has been consistently over half of the total GDP during recent years. However, since 2005, the government of Qatar has embarked on a careful but conscious implementation of a policy to diversify its resources into non-oil sectors, particularly real estate and construction. This has contributed to observable yet small declines in the relative share of oil and gas sectors and increases in the relative share of other sectors in the economy. The share of other sectors increased to 42.68% in 2006 and to 43.36% in 2007. Qatar is part of the emerging economies in the region such as Bahrain and UAE which share the same initiative to deploy the resources created through oil income in developing other sectors so that economies would become more diversified and could withstand any decline in oil revenue resulting from increasing use of alternative fuels around the world. However in 2008, mostly due to record oil and gas prices, the contribution of oil and gas sectors increased steeply to 61.69%.
The above chart shows the change in distribution of credit facilities between 2004 and 2008. It can be observed that services sector was given a major boost in lending along with along sectors. Contractors and real estate sectors were also treated better than other sectors. On the other hand, public sector companies saw the least increase in credit during the five year period. This shows the implementation of diversification policy by the banks as required by the government of Qatar. Other than the diversification of resources and income, the other kind of diversification that has been encouraged by the government has been in the form of private sector expansion. This is discussed and analysed in detail in the next chapter of this dissertation.

5. Investor in Domestic and Foreign Markets

Banks and other financial institutions have been contributing to the economy through an increase in capital investment in the country in building up capacities and asset bases. The following graph shows the domestic investments of banks in Qatar between the period 2004 and 2008.
These investments as shown above are essentially in financial instruments. It can be observed that during the 5 year period, the investments increased 92%. The total domestic investment of banks in Qatar in the year 2008 was QAR 22 billion. Besides, the banks have also been investing significant resources in fixed assets as they have been expanding their operations. Following graph shows investments in fixed assets undertaken by banks during the same five year period.
The total fixed asset investment undertaken by all banks together was QAR 3 billion in 2008. This was an increase of over 136% from the QAR 771 million seen in 2004. This increase in capital expenditure by the banks have added to the economy’s capacity building efforts on one hand and have contributed to the growth of allied industries on the other hand. Banks have also been active investors in international markets. The banks in Qatar have an active portfolio of financial instruments issued by entities present in foreign countries (Qatar Central Bank, 2009c). These investments though do not have the multiplier effect which domestic investments typically have, have contributed to dilution of risks emanating from concentration of domestic assets in the portfolio. Following graph shows the extent of foreign investments by banks in Qatar.
The total foreign investment by banks in 2008 was QAR 26.8 billion. This was an increase of over 129% from the QAR 7 billion seen in 2004. It can be observed that the banks hold a larger share of their portfolio in the form of foreign instruments rather than domestic instruments. This is due to limited nature of investment opportunities that are present in the nascent financial markets of Qatar.
The role of banks and other financial institutions as investors in domestic markets helps to increase the overall level of capital expenditure in the country and have a multiplier effect which benefits other industries as well (Frank et al., 2007). On the other hand, the investments in foreign economies by banks help to diversify their asset bases.

6. Facilitator of Liquidity in Financial Markets

The equity market in Qatar has been at its nascent stages. There are only 43 stocks listed and traded on Doha Securities Market, the only secondary market for equities in the country. However there are only 26 non-financial companies among the 43 listed. The total paid up capital of these 43 stocks was just over QAR 60 billion in December 2008. The commercial banks and brokerage companies perform the important role of intermediation in financial markets and bring in liquidity in the market. Doha Securities Market is itself part of the financial sector in the country and helps domestic companies raise capital from the wealthy investors in the region. As stated earlier, Qatar ranks high in private wealth and the stock market provides an alternative to the traditional real estate market as an avenue of investment. Even though the traditional family owned businesses are usually hesitant to get listed due to the disclosure requirements, the securities market represents an effort by the government to allow companies to raise capital from the public and to implement an increased level of transparency in important businesses such as banking and insurance.
The above graph shows the annual traded volume in Doha Securities Market. In 2008, the traded volume doubled to 3.89 trillion securities from the level of 1.86 trillion seen in 2006, the first year of commencement of the exchange. In spite of the surge in volumes, the number of companies listed has seen a very slow growth during this period with 4 listings in 2007 and 3 in 2008. Till March, there has been no new listing in the year 2009. Considering the sluggish response to securities trading witnessed, it can be stated that intermediation in secondary securities market is one of the least important roles of financial institutions in Qatar, at present.
The financial institutions in Qatar, particularly the banks, have been playing important roles in the economy. They act as drivers of economic growth through contribution to domestic product as well as through supply of credit to other businesses and individuals. The banks act as important channels through which the monetary policy changes by QCB get transcribed into action. The banks and financial institutions play an important socio-economic role by ensuring safe keep and responsible management of private wealth and through generation of direct and indirect employment. Banks implement the diversification policy of the government and help to reduce the overall sensitivity of the economy to oil price risk. The banks are important investors in domestic and foreign asset markets. Finally the financial institutions, including the securities market function as enablers of liquidity in capital market. The next chapter analyses the contribution of financial sector to the economy in detail.

III. Contribution of Financial Sector to the Economy of Qatar

Financial sector consists of banks and other intermediaries who are, by nature, economic units which contribute to the overall economy of the country. This economic contribution of these entities could be in direct and indirect ways. These entities are profit-oriented businesses which generate income through value-additive services provided to customers. These profits get accounted for in the national accounts of the economy. Besides, the investments made by the entities get added to the national product. One of the indirect methods in which the financial sector contributes to the economic development is through generation of employment. Another indirect channel is the supply of credit to needy businesses which in turn add to national product. This chapter discusses the various direct and indirect means and analyses the trends witnessed in three important ways in which financial sector contributes to the economy – contribution to GDP, Generation of employment and private sector expansion.

1. Contribution to GDP

The most direct form of contribution to the economy is through the value-addition generated towards the GDP. The following graph shows the contribution of Finance, Insurance, Real Estate and Business Services sectors to the GDP of Qatar.
As it can be observed from the above graph, the contribution of the entire sector to the GDP was at QAR 37.02 billion in the year 2008 at current prices. The global slowdown and the sharp fall in risk appetite of investors along with the reversal in real estate sector seen during the year 2008 affected the financial sector as a whole because of which the contribution to GDP declined from 12.32% in 2007 to 9.94% in 2008. Even though the absolute level of contribution increased at a healthy pace of 15%, the sharp decline in relative contribution is due to the sector lagging behind the other sectors in the economy. A better understanding of contribution could be had from seeing financial services as % of the non-oil and gas GDP of the country.
Following graph shows the contribution of finance sector to the non-oil and gas GDP of Qatar.
It can be seen that the contribution of finance sector to non-oil and gas GDP was increasing at a steady pace from 18.87% in 2004 to 28.42% in 2007. However the trend was reversed in 2008 when the contribution % declined to 25.95%.
While a direct contribution to GDP could be easily monitored from the national accounts, the indirect contribution of financial sector to the economic product can only be inferred from the data. One of the most important functions of banks is to channel credit to the businesses and individuals. More importantly, banks are expected to translate savings into investments. In a market such as Qatar, where investors tend to throng less volatile investments and where financial investments such as equities are less popular, banks play a very important role by taking deposits. Bank deposits are considered an alternative to real estate investments. Banks take in deposits and lend them to the businesses and individuals in need. Bank credit typically produces a much larger impact due to the multiplier effect. Following graphs shows that the domestic bank credit increased 180% between 2004 and 2008.
The expansion of credit by banks makes capital easily available and contributes indirectly to growth in GDP. However more interestingly, the banks in Qatar expanded credit at a pace that exceeded the growth in deposits. Following graph shows the total deposits and total advances along with the advances/deposits ratio.
The total advances were less than total deposits, as normally observed in most of the banks, in 2004. The advances/deposits ratio was 0.81 in 2004. However this ratio continuously increased and reached 1.14 in 2008. While the banks are required to set apart the statutory reserves out of deposits before lending, it is evident that the Qatar banks have lent to borrowers out of their own capital. This massive expansion in credit contributed significantly to the surge in GDP which on a current prices basis rose by 44% in 2008. However as the real estate turned down and other businesses suffered due to global slowdown, the banks suffered from liquidity crunch because of which the Qatar Investment Authority, the sovereign wealth fund of the government of Qatar infused capital into all major banks in the country (QNB Capital, 2009). Notwithstanding the arguments on the prudence behind embarking on relentless credit expansion by banks (Standard and Poors, 2008), it is evident that the credit expansion per-se played an important role in the sharp rise seen in GDP of Qatar during the last few years.
Banks have been instrumental in helping Qatar recover from economic slowdown through sustenance of credit supply in spite of increase in risks in lending.
It can be observed that the credit quantity which declined marginally during the last 2 months of 2008 has already started to increase in March 2009. This is quite contrary to the behaviour of banks in US witnessed during the same period. Kahn (1991) states “Fed does not control the availability of bank loans. Unexpected changes in the desired mix of loans and securities in banks’ portfolios may partly or completely offset Federal Reserve actions to restrain or stimulate the economy”. On the contrary the banks in Qatar have managed to sustain the flow of credit even during adverse economic climate. This is expected to contribute towards earlier recovery in the economy in comparison to the developed economies. Since July 2008, the ratio of advance to deposits has been consistently above 1. Thus the banks have not allowed the decline in deposits to affect their lending ability. This is helped by recapitalisation of banks in October 2008 (QNB Capital, 2009).

2. Contribution to Employment

As briefly mentioned in the previous chapter, the financial sector in Qatar plays an important socio-economic role through generation of employment. Qatar is a small country with a population of only 1.44 million. Of these 827,802 persons form the total labour force (Qatar Statistical Authority, 2007).
The graph given above shows the distribution of labour force among the various industries and sectors in the economy. It can be observed that construction sector accounts for over 1/3rd of the total labour force in the economy. Financial intermediation, which includes banks, insurance companies, brokerage houses, money exchange companies and the stock exchange and allied services accounts for a little over 1% of the total work force. Thus, in terms of total workforce the financial sector does not account for any significant percentage.
The following graph shows the break-up of overall work force by the kind of profession that they have undertaken.
It can be observed that among the work force, artists and blue collar workers form the majority. Banks and financial services firms require white collar employees for engagement. It can be observed that banks can employ only clerks, associates, professionals, senior officials and managers from the graph shown above. Thus it can be stated that among the work force only 33% can possibly be employed by a financial services company. Thus there are only 273,175 potential employees for the finance sector. Of this the banks and other companies in the sector employ 9024. Thus the percentage of eligible workforce working in financial sector is 3.3%.
The following graph shows the total number of employees at all four groups of banks and the percentage of Qataris among the employees.
Qatar Statistical Authority (2008)
The Qatari banks, as can be expected, employ the most number of employees followed by European banks. The other Arabic banks employ 412 persons while the foreign banks account for only 77 employees. It is observed that the Qatari banks have about 26% of their employees drawn from the local population. The percentage of Qataris is 18% among the employees of Arabic banks. European banks have only 10% of employees from among the local population while other foreign banks have a slightly higher ratio at 14%. The average percentage of Qataris among the employees of the banking sector in Qatar is 23%. It is obvious that the foreign banks and European banks prefer to employ non-Qataris while the Qatari and Arabic banks show a higher affinity to Qatari employees.
Qatar Statistical Authority (2008)
The above graph shows the total employees on the rolls of different groups of insurance companies and the percentage of Qataris among them. It is seen that Qatari insurance companies are the largest with total employee strength of 559. Arabic insurance companies employ a total of 56 persons while the foreign insurance companies have just 9 employees in total. Qatari insurance companies have about 16% of the employees drawn from among the local population while the Arabic and Foreign insurance companies do not have any Qatari employees on their rolls. Insurance companies have 624 employees in total.
Following graph shows the average salary paid per employee for each group of banks and insurance companies. It can be observed that Qatari banks pay the highest average salary followed by European banks, other foreign banks and Arabic banks. Among the insurance companies, Qatari companies pay the highest average salary per employee followed by European, foreign and Arabic companies. The average salary of a bank employee is QAR 175,118 while that of an employee of insurance company is QAR 165,295. The average salary employee in Qatar is QAR 94,099. The average salary per employee in financial sector is QAR 139,560. This shows that the financial sector pays significantly higher salary than most other businesses in Qatar.
Qatar Statistical Authority (2008)

3. Private Sector Expansion

Qatar has traditionally relied on public sector for its economic growth. The banks were used as sources for funds for public sector enterprises. Realising the need to encourage private sector activity, the government has embarked on a conscious policy effort to promote private sector at the expense of the public sector. Furthermore, the promotion of Qatar as a competitive economy in spite of the lack of democracy has attracted investments from institutions and foreign entities. In tune with the government policy to diversify away from public sector, the banks have been actively promoting credit expansion for private sector.
During the period between 2003 and 2008, private sector credit as a part of the total credit portfolio of the banks increased from 54% in 2003 to 80% in 2007. Due to the contraction of global economy and slowdown, the credit off-take of private sector declined in 2008 and the percentage of credit facilities to private sector declined to 77% in 2008. Following graph shows the change in total credit and sector-wise credit between 2003 and 2008.
It can be observed that the total credit increased by 380%. The total credit to private sector increased 586% while credit extended to public sector increased only by 138%. This shows the clear push given by the banks to private sector credit in Qatar.
The public sector includes credit extended to government, government institutions, semi-government institutions and public sector enterprises which are majority owned by the government. It is observed from the graph given above that the direct bank credit extended to the government has been declining almost consistently since July 2008. The government has realised the tight liquidity condition in the market and has purposely shrunk its credit requirements off banks sharply. Similar trend is witnessed in the credit off-take of government institutions and semi-government institutions. On the other hand, the public sector enterprises have been allowed to enjoy small increases in credit supplied to them. However the overall public sector credit increase has lagged behind the increase seen in the credit extended to private sector since the economic slowdown set in.
Apart from direct credit, the banks also lend to public and private enterprises through purchase of securities issued by government and private companies. The investment of banks in government securities has been stable during the recent years. The following graph shows the investment in government-issued financial securities and private sector financial securities.
While the claims on account of financial securities issued by the government has held stable below the QAR 5 billion level, the investment in private sector financial securities has increased 119% between 2004 and 2008. This is in line with the push towards the private sector lending which the banks have been embarking on since 2003.

IV. Conclusion

Qatar is a fast growing economy which is one of the wealthiest in the world and in the region. The financial sector in Qatar has been at the forefront of growth for the economy as a whole. The financial sector, including banks, insurance companies, financial intermediaries, investment banks and fund management companies play important roles in the economy. They function as a primary driver of economic growth. Banks facilitate growth and development of businesses and encourage consumption growth through provision of credit. They channel resources to the needy ones. They also contribute through generation of direct and indirect employment. Banks function as the conduits through which the benefits of monetary policy changes influence the economy. Banks adjust the quality, quantity and cost of credit to match the policy direction set by the QCB. They also play an important socio-economic role through employment of female workforce and responsible management of private wealth. More importantly, financial sector companies are important players in implementing the policy of diversification undertaken by the Qatari government in order to increase focus on non-oil and gas sectors of the economy. Banks and insurance companies are important investors in domestic and foreign financial markets. They also add to the capital expenditure of the country through acquisition of assets. Banks, brokerage houses and the Doha Securities Market help to generate liquidity in the equity instruments of companies. The contribution of financial sector of Qatar to the GDP has been increasing steadily. The sector also contributes indirectly through credit channel. It is observed that the banks have embarked on a massive credit expansion during the recent years which could have played an important role in the steep growth seen in the national product. The banks and insurance companies also employ qualified candidates from among the work force at higher than average salaries. Finally, banks have been championing the government’s drive to increase the contribution of private sector through increased lending.