Qatar's bank rescue success (page 2 of 2)

But while others took the hit on the chin, Al-Ahli's problems ran much deeper.
"Al-Ahli has historically been running into problems," says Ioannou. "Some of these problems stemmed from shareholder interference in the day-to-day functioning of the bank, which led to frequent changes at the top management level." Furthermore, the bank was involved in high-risk margin lending - extending loans to customers who used the funds to speculate.
"The bank was engaged in extensive margin lending," adds Ioannou. "A poorly performing local stock market, and sharp movements in international markets during 2000, saw a sizeable proportion of this type of lending turn bad." The problems were compounded when the bank started offering generous interest rates to depositors, at far higher levels than those offered by other banks in the market.
For all these reasons, Al-Ahli faced huge losses of 102 million Qatari rials ($28 million) - a significant sum for a small bank such as Al-Ahli. Provisions for loan losses, bad debt write-offs and provisions for the fall in the value of investments reached $38 million. The loss was covered by reserves, but this led to a 35 percent fall in the bank's net worth, to little more than $50 million. Such poor performance undermined confidence in the bank and there were fears that depositors would withdraw funds en masse. To avert this, QCB signed a $28 million guarantee agreement to cover any potential "black holes" in the bank's accounts. "If the central bank had failed to intervene, Al-Ahli bank might have gone into receivership," says Ioannou. "Confidence in the local market and in the authorities would have been lost which might have led to political repercussions."
For the time being, al-Attiyah's emergency surgery appears to have worked, and Al-Ahli is off the critical list. But what are the wider implications for the Qatari banking community? Most bankers agree that the incident will have a lasting legacy that will be felt throughout the Qatari banking industry.
The entire sector suffered under the non-performing loan fallout from the late 1990s, and the central bank has already responded by insisting that all banks be more honest about revealing bad debts, rather than concealing them on their balance sheets as assets. "Responsibility lies with management and board members to reveal the extent of their exposure and the quality of their loan assets," says central bank governor Al-Attiya. "There is too much name and face lending." This approach has been welcomed by analysts. "The separation of the management of the banks from their owners is crucial to strengthen their independence and transparent functioning," says CI's Ioannou.
Early indicators suggest this new medicine is working. The central bank's tough approach led most Qatari banks to report a fall in profits for 2000, but the sector showed signs of recovery in 2001 as the government finally began spending its oil revenues following the sharp rebound of crude prices since mid-1999.
Perhaps most important of all, Qatari banks are realizing that they now operate in a very different world to the one that existed before the incident. Qatar has moved from being a country with low liquidity to one with surplus liquidity, and that will force banks to adjust their strategies. "Qatar has transformed itself from being a recipient of capital into a generator of capital," says Ioannou. "If Al-Ahli is to survive, it will need to place more emphasis on trade finance and off balance sheet activities, in particular treasury and asset management. Once Al-Ahli is restructured it will find itself operating within a totally different environment."