IIRA assigns fiduciary ratings to Qatar International Islamic Bank

The fiduciary score has been assessed in the range of '70-75', reflecting strong fiduciary standards wherein rights of fund providers are adequately defined and protected.

The fiduciary score is an aggregation of scores assigned to its three sub-sections, namely Corporate and Shari'ah Governance, and Asset Manager Quality.

The fiduciary score captures the role of the management of the institution as Mudarib, the entity's governance practices and compliance with Shariah principles adopted by the bank.

Qatar is one of the fastest growing economies in the world with strong macroeconomic indicators having translated into rapid banking sector growth.A fundamental characteristic of the banking sector in Qatar is the strong support of the Qatar government which has injected capital to strengthen banks' capitalization levels and also purchased real estate portfolios of banks worth QR10.0bn in 2009.

Incorporated in 1990, QIIB is one of the four Islamic banks in the State of Qatar, with a market share of 4% in terms of country-widedeposits.

The largest shareholder of the bank is the Sheikh Thani Bin Abdullah Al-Thani family, a prominent business family in the State of Qatar, while the other significant shareholder is the Qatar Investment Authority (QIA), the investment arm of the Qatar Government.

Ratings assigned are primarily driven by robust asset quality, a low administrative cost structure and consistent operating profitability. Ratings also draw on sponsor strength and the strong possibility of support available to the bank if needed. Business diversification both in terms of fund sourcing, asset selection and cultivating ancillary sources of income would add to the institution's resilience. Focused growth in financing to the public sector is planned to broaden the portfolio's sector-wise composition, which currently features significant concentration in real-estate based lending.

While deposit concentration is high, liquidity profile of the institution is considered adequate in view of sizeable liquid assets in relation to deposits. However, maturity mismatch in the short term is significant.

The bank has issued a 5 year Sukuk in Oct'12 to address the same while another Sukuk programme has been approved by the bank's Annual General Assembly Meeting in March 2013. With significant growth in the financing portfolio in 2012, risk adjusted capitalization levels have witnessed a decline. Internal capital generation has remained limited on account of a high dividend payout ratio. While remaining adequate, capital adequacy ratio may therefore decline on a timeline basis and over the short term as the portfolio grows, barring external equity infusion and/or increased retention.

The assigned fiduciary score incorporates QIIB's well developed corporate governance framework which is supported by a sound risk management infrastructure, financial planning process and well articulated systems and controls. At the same time, active oversight pursued by the board and a stable and experienced management team have been critical to the financial progress achieved by the bank. Composition of the board could be broadened to enhance representation of all shareholders and for inclusion of independent directors. Recently, the number of directors has been increased to 11 to further enhance the role of board committees.

The bank has an eminent Shari'a Supervisory Board (SSB). Overall role and functioning of the SSB was found to be satisfactory. The same could be enhanced in areas such as designing and increased participation in Shari'a related training and establishing a degree of contact with the bank's staff through various means including branch visits.

Strengthening the staffing of Shari'a control functions to ensure adequate segregation of responsibilities, and further internal research in the area of product development will lead to diversification in the investment mode mix. Returns paid out to UIAH have trended downwards over the last three years.

However, these remain in line with investor expectations and prevailing rates offered by other Islamic banks. A mechanism of smoothing returns and absorbing losses by way of a formalized policy, and as required by IFSB standards will ensure greater protection of Investment Account Holders.