Qatar Financial System - Case Study Example

Qatar Financial System

Introduction

Financial market of Qatari is made up of people and firms trade commodities, security money and among other fungible valuable items (Seznec, 2007). The economy is one of the major contributors to the Arabs GCC economies. Trade in the market is at prices reflecting demand and supply, as well as, a low transaction (Presley & Wilson, 2001). Securities include bonds sand stock while commodities entail agricultural products and precious metals. A market is an aggregate of potential sellers and buyers for certain services and goods and the transactions among them (Tsen, 2007). However, the term markets most of the times refer to exchanges and then parties that facilitate the financial security trade. Qatari financial market is the leading in the region and also a major world’s competitor in Islamic banking. The financial market is growing at a high rate that is outpacing its rivals. The system comprises of Islamic Financial Systems (IFS) with Islamic banking, insurance, and financing segments which are rapidly expanding (Vaithilingam et al., 2006). The expansion is highly facilitated by the urge of serving a larger market adequately and also to suit the components of Islamic investment. Qatari’s regulator is determined in establishing the nation as an Islamic finance center. Additionally, connecting to Qatari’s vision 2030, as well as, the FIFA (2022) World Cup has put high expectations on the financial market’s future performance (Wilson, 2003).

Qatar Financial system encompasses all financial institutions, instruments, and markets. The system is off late supported by policies of the government relating to free market principles. The system comprises of financial intermediaries who are financial institution working in the financial market (Abdulrazag et al., 2013).

Qatari Central Bank

Qatari Central Bank legal authorization for national currency issue happened in 1993. The bank was given a charter to the bank for other banks, as well as, the government. Additionally, the bank has the mandate of monetary policy management in the country (Mansur, A. and Delgado, 2008). The paid capital owing to the central bank is raised in the development line that is witnessed by banking and the national financial sector. Also, the central bank regulates and controls commercial banks operating in Qatar whether domestic or foreign. The bank as well carries out monetary and fiscal policies to generate equilibrium of the economy (Kandah,2002).

Qatar Exchange

Qatar Exchange was formerly known as Doha Securities Market. The market initialization was in 1995 by law No 14 where it started its activities in 1997 May 26th. In the year 2005, September 14th, Law No 33 for the same year altered by law #14 for the year 2007 which established Financial Markets Authority of Qatar alongside Doha Securities Market (Nafi, 2013). With regards to the law, organizational and the legislative task is assigned to the Authority. On the other hand, executive functions regarding stocks, as well as, their transfer, ownership and financial settlements among brokers are granted to the security exchange of Doha. The exchange markets come into a new chapter from the time of the issuance of 2009 law No 33 (Mansur, A. and Delgado, 2008). The law transformed Securities Markets of Doha into a stock company that is joint while using the name; Qatar Exchange. The intention was for international investment. For the achievement of this goal, a decision to create a partnership was made with a 20% shareholding for Euronext holding (Presley & Wilson, 2001). Afterwards, Qatar Exchange took a step of operating under the name initiated on 21.6.2009. Financial Markets Authority of Qatar (QFMA) is a governmental body that is independent and it acts as securities markets regulator of the country. QFMA sets a strong groundwork intended in creating a capital market that is world-class for Qatar State hence making it be at the leading financial markets position in the area (Seznec, 2007).

Commercial Banks

Qatari market has fourteen commercial banks. Among the banks are trade banks of the nation with two being Islamic banks. All the banks operate locally over 114 branches. Some of the banks are; Qatar National Bank, Commercial Bank of Qatar, Arab Bank, United Bank LTD, Mashreq Bank, Doha Bank and others. The banks receive demand and time deposits from its clients. The banks further employ the amount in credit creation. Banks also act as agents of the central bank and other financial intermediaries such as insurance companies (Tsen, 2007).

Exchange Companies

The companies perform a significant role to attain local needs of precious metals, and foreign currencies meant various purposes. The reasons include those related to meeting economic transactions that are non-visible. Necessities are achieved via distinct customs either traveler’s checks or cash. Moreover, draft checks deposited at overseas premises of companies that apply technology that is advanced of remittance at fast rates. Qatar has around 16 exchange companies. Some of the corporations are Gulf Exchange, Al Doha Exchange, National Exchange and others.

Insurance Companies

Insurance division is one of the core banking and financial system components. As daily life complexity increase, insurance demand as well increases. The necessity for insurance, however, is most vital for economic activities where loss and risk rates have are at high levels. Insurance covers go an extra mile of covering health, land, sea accidents, fire, and general accidents. Qatar has nine insurance companies where 4 are branches or agency of foreign or Arab insurance corporations, and the other 5 of them are national. Some of the firms are Qatar Insurance Company, Gulf Insurance Company and Arabian Insurance Company (Al-Muharrami, 2010).

Financial Markets Types

A financial market designates any marketplace within which sellers and buyers take part in assets trade including derivatives, currencies, bonds, and equities. Financial markets have trading, fees and cost basic regulations, transparent pricing, and determination of market forces that influence security prices (Al-Muharrami& Mathews, 2009). Here are some of the components of Qatar financial market.

Capital Markets

In a capital market, institutions and individuals trade financial securities that are bonds and stocks. Entities both in the private and public segments as well do frequently sell stocks on this capital markets with intentions of funds rising. Hence, the market is comprised of both the secondary and primary markets (Vaithilingam et al., 2006). The government as well trade in the market.

Stock Markets

The market is a platform where investors to sell or buy shares of companies trading publicly. The sector is among the most vital zones of an economy. In the markets, investors access the ownership a slice of businesses while corporations access funds for operations and investment. The potential of gains depends on the future performance of the company. The market has two zones; that is the primary as well as the secondary market (Wilson, 2003).

Bond Markets

The term bond refers to a debt investment where an entity (Government of the Corporation) seeks loan amounts from an investor with a fixed rate of interest and a predetermined date of maturity. Bonds are used by companies or the government to finance investments or projects (Kandah, 2002). Bonds are like securities as investors can buy and sell them.

Money Market

The market is a segment of the financial market where highly liquid financial instruments short maturities are purchased and sold. Money market grants participants a channel for lending and borrowing for short periods less than a year. The market’s instruments are together with repurchase agreements (Repos), federal funds, commercial papers, treasury bills, banker’s acceptance and certificate of deposit. Investments on the money market are as well called cash investments (Abdulrazag et al., 2013).

Spot/ Cash Market

Investment in the market may either result in big gains or loss. Products are sold instantaneously with immediate delivery and payment (Nafi, 2013). Contracts in the markets are effectively executed immediately, and prices are settled on the spot depending on the prevailing market prices. The market is unique from other markets as prices are determined at the spot. However, the market is delicate and complex, and it is unsuitable for traders who are inexperienced. The market is dominated by institutions like corporate investors, limited partnerships and hedge funds (Mansur, A., and Delgado, 2008).

Derivatives Markets

The market’s value is generation depends on the underlying assets. Derivatively refers to a contract, in which the price is determination is by market prices. The market invested help in speculation to avoid risk. Common derivatives are together with contracts-for-difference, swaps, options, futures and forwards.

Forex Market

The market involves a system where currencies are traded among financial institutions excluding small parties of trade and retail investors. Further, the market includes interbank trading which occurs in the accounts of the banks involved. Globally, the market is then biggest of all liquid markets (Presley & Wilson, 2001).

Primary and Secondary Markets

A major market offers new stocks for companies wishing to go public. Trading in the primary market is known as an Initial public offer. Governments, corporate and other groups acquire financing by issuing equity or debt securities. New issue markets in Qatar are influenced by underwriting groups who among them are investment banks. Underwriters set an initial price range for a particular security following which the security’s sale to investors directly. The issuing firms receive financial proceeds from security sale for investments (Seznec, 2007).

In the secondary market, investors repurchase assets or securities from among themselves rather than issuing companies. The Exchange and Securities Commission (SEC) list stocks before the primary issue on the Organised Stock Exchange of Qatar, after which they move to the secondary market. In the market, bulk exchange takes place daily (Al-Muharrami, 2010).

Trading of securities

With technological advancement, investors no longer use the over the counter security markets. Prices of securities continuously fluctuate to reflect distinct economic movements including the foreign exchange rates, interest rates, inflation and financial status of the company to whom the securities belong. Investors create an online account for trading through an investment bank and purchase stocks of their choice. The purchase is made by depositing some amounts in the stocks accounts (Tsen, 2007). Upon login to the account after some time, investors get to see the stocks that have appreciated and those that have depreciated. The investors can thus sell the appreciated ones for capital gain. However, clients may request the sale of some securities upon a certain rate of appreciation to the trading officers in an investment bank. An investor claims to sell the assets, and they get to the market for interested buyers to purchase. Online trading takes place throughout and the prices keeps changing (Al-Muharrami & Mathews, 2009). Technology has made it easier as there is automated trading software with which an investor sets what to buy and sell at what rate and once the rates are hit, the software automatically sells or buys on behalf of the clients (Wilson, 2003).

Efficient stock markets should reflect timely information and have a sufficient volume of traders daily. The stock market of Qatar is inefficient, and it requires some improvements. Deeper information need to be fostered by encouraging the companies listed to provide more timely and detailed information (Vaithilingam et al., 2006). Moreover, additional analysts and brokers should be getting into the markets. Furthermore, the trading volumes of securities are not satisfactory. Qatar restricts foreign investors thus, lowering the volumes trading in the market. Relaxing the restriction will attract more investors who will aid in making up the market. More listing is in the pipeline with the new market venture for SMEs. More listing increases competition, price efficiencies and increased trading volumes (Abdulrazag et al., 2013). IPO are based on fixed pricing in the GCC as opposed to other traders. Finally, Literal market development such as block-holding where the investors who are shareholders of a company access some information secretly and can negotiate for prices distinct from that in the market. Qatar regulators are discussing the issue to ensure fairer block-holding like the developed markets (Kandah, 2002). The above shortcomings seek for more speculation by the investors when trying to buy or sell stocks on the market.

Roles of financial market

Funds in a financial system flow to borrowers (those how to have funds storage) from the lenders who have funds surplus. The funds movement is either indirect, market-based or direct financing. Finance is the main important section in an economy (Nafi, 2013).In Qatar, financing is essential to a firm and organizations have the opportunity of deciding on what kind of financing to seek as per the needs. For instance, financing via stock markets is ideal for businesses with constantly changing advances in technology or whose firm’s management has some little consensus (Mansur, & Delgado, 2008). Stock markets check the sensibility of management’s view. Financial intermediaries solve moral hazards and adverse selection issues amongst borrowers and lenders. There is a formality through which bad and good are differentiated (Presley & Wilson, 2001). Thus, economies with well-developed capital markets and banking sectors are advantageous.

Additionally, it is through financial markets that economic stability is achieved in a country. Inflation levels, discount rates, prices and money supply are regulated by the system. Through Open Market Operations, the Central Bank of Qatar stabilizes the economy’s money supply by buying securities from the public to increase the money supply and buying them back when the money supply is extremely high (Seznec, 2007). The Central Bank is the regulator of commercial banks it is determined the banks’ lending and borrowing rate limits. Further, the Central Bank set a reserve ratio for banks which determines the level of credit creation of the banks. High reserve ratio lowers the amount of credit created. When the cash reserves in a banking institution are less, they can borrow from other agencies at a predetermined rate by their regulator. A stable economy is healthy, and it stabilizes the prices of commodities.

Insurance Regulatory Authority in Qatar oversees the business in the sector. The organization works hand in hand with other to ensure a mutual coexistence in financial businesses (Tsen, 2007). Deposits for insurance premium are made through the banks. Insurance Companies collects a pool of funds to reduce a particular risk loss. The amounts are invested in capital and money markets for capital gains and to earn interest for insurance companies. Insurance reduces the intensity of loss for investors hence encouraging investment without fear of loss.

Money markets would solve the liquidity problem of investors if they were to invest in the capital market. Investors may add more funds or pull out their money as they need them. The most beneficial are that investors through the money market can trade both within Qatar and internationally (Vaithilingam et al., 2006). Also, future prices may be predetermined and contracts set at fixed future price under the speculative measure. The market solves the currency risk for investor and also foreign exchange risk (Wilson, 2003).

Qatar national economy is developing at a high speed. New investments are sprouting out and growing to solid medium and small enterprises. Today, financial houses are focusing much to these firms as they have a promising growth and sustainability and financial stability and are the majority in the economy. Investment in SME assures continuous revenue for the companies (Al-Muharrami, 2010). For instance, Banks will target for SME’s loans of QR10m ($2.7m) which is far much high as SME seek a loan ranging between QR1m-2m ($274,100-548,200) which banking institution would not consider. Where banks are not doing business, finance houses have come in to fill the gap. Additionally, Qatar is the sixth country in making it important for industries to go global. The group including Turkey, UAE, Malaysia, Saudi Arabia, Indonesia and Qatar accounts for 80% of the assets in the global Islamic Banking with an expected growth rate compounded of 19.7% by 2018. Most importantly, The banks regulations are based on the teaching of Islam incorporated together with the standard banks a regulation (Al-Muharrami & Mathews, 2009).