Introduction
The economy of Qatar is primarily dependent on petroleum and liquefied natural gas. These contribute to over 70% of the total revenues to the government (Central Intelligence Agency, 2016). In fact, Qatar is the third largest exporter of natural gas in the world (U.S. Energy Information Administration, 2016). For the progress of any economy, the financial sector is the backbone. It provides the financial resources for companies to expand and hence contribute to overall growth of the economy. In the current study we look at the financial markets and institutions operating in Qatar. The report provides an overview of the various types of financial institutions in Qatar and the service provided by these organizations. The report also looks into the capital markets and their functioning in the country and discusses various aspects of the capital markets such as listing, trading efficiency and depth of the markets.
Financial Institutions in Qatar
The main types of financial institutions operating in Qatar are (Financial and Banking System, 2016):
Qatar Central Bank – The QCB is the Central Bank of Qatar and has regulatory powers to oversee the activities of all banking and non-banking financial institutions in Qatar (excluding the insurance companies).
Qatar Financial Markets Authority – The Qatar Financial Markets Authority is an independent regulatory body which regulates the capital markets in Qatar
Commercial Banks – There are a total of 17 commercial banks operating in Qatar. Out of these, 9 are national banks, 3 are Islamic Banks and 5 are Foreign Banks (Financial and Banking System, 2016). The commercial banks serve the role of financing various sectors such as industries, agriculture, consumer activities, etc. These activities help the country in achieving economic growth.
Exchange Companies – Exchange companies cater to the need of foreign currencies or precious metals exchange to different types of customers such as individuals, corporates, small businesses, etc. Qatar has about 17 exchange companies (Financial and Banking System, 2016).
Insurance Companies – Insurance companies in Qatar offer coverage against different types of risks such as accidents, health, liability, fire, etc. Qatar has around 10 insurance companies operational which cater to the above mentioned needs of the customers (Financial and Banking System, 2016).
The banking system in Qatar is quite sound and the banks are required to maintain capital adequacy requirements as per the Basel III Framework. The minimum Capital Adequacy Ratio requires is 12.5% (this includes both Tier 1 and Tier 2 Capital) and the total Tier 1 Capital requirement is 10.5% (this includes the Common Equity Tier 1 Capital and any additional Tier 1 Capital) (Qatar Central Bank, 2014).
Fund raising in Qatar
Fund raising in Qatar is carried out by either listing the company in Qatar Stock Exchange, raising finance through Treasury Bills (T-Bills) or bonds issued by companies or Government. Companies operating in different sectors are listed in Qatar Stock Exchange. Some of these include companies in Banking and Financial Services, Consumer Goods, Industrials, Real Estate, Telecom, Insurance, Transportation, etc (Qatar Stock Exchange (a), 2016). Companies in corporate sector raise finance through stock markets to fund their growth and Qatar authorities and government related agencies look to finance various development related projects by issuing Sukuk, which are Shariah compliant bonds and an important source of financing in Islamic nations. The Government of Qatar is currently looking to raise sovereign Sukuk issue to strengthen state finances due to low oil and gas prices and fund its fiscal deficit of $12.8 billion (Narayanan and French, 2016).
Initial Public Offerings in Qatar
Initial Public Offering in Qatar is done on the Qatar Stock Exchange. Companies that list on the Qatar Stock Exchange possess advantages such as higher profile, availability of options with respect to financing, valuation of true worth, transparency in financial reporting, etc. However, as with other countries, companies that want to list on the Qatar Stock Exchange have to go through regulatory requirements. Some of these requirements are (Qatar Stock Exchange (b), 2016):
The Company should be Joint-Stock company and should be licensed by the Ministry of Business and Trade.
The Company should have a minimum paid up capital subscription of at least QR 40,000,000
The number of shareholders should be at least 100
The company must have been in operation and should have audited financial statements for at least three years
The free float, i.e., the minimum proportion of shares that should trade on the exchange as a percentage of the total shares should be at least 20%
The company should not have any track record of default of debt
Movement of Securities to Secondary Market
In the underwriting process, the investment bankers purchase the securities from the issuing company and then sell it to the public investors. The investment bankers take all the risk on their books in case they cannot find buyers for the securities which were purchased from the issuing company. The underwriters purchase the securities at a price less than the public offer price. This difference or spread is the compensation of the underwriters. The underwriters then offload the stock to the general public.
Secondary Markets in Qatar
In order to promote the small and medium size companies, the Qatar Financial Markets Authority has created a secondary market. The criteria for listing on the secondary markets have somewhat been relaxed as compared to the primary market so that small and medium size companies can also access funding to capital markets. Some of the regulatory requirements of listing on alternative secondary market are (Qatar Stock Exchange (b), 2016):
The share capital of the company should not be less than QR 5,000,000
The number of shareholders should be at least 20
The company must have been in operation for at least one year prior to listing
At least 75% of its capital should be invested in core business operations
Parallel Networks
Trading in Qatar Stock exchange is primarily through brokers. A person has to first open an account with the brokerage firm. Once the account is active, people can place orders to the broker through phone or through internet platforms. There are over 10 registered brokers with the Qatar Stock Exchange (Qatar Stock Exhange (c), 2016). All the brokers have to comply with the membership requirements laid out by the Qatar Stock Exchange
Trade Timings in Qatar Stock Exchange
Trading in Qatar Stock Exchange is carried out through registered brokers. Customers can place orders through phones or through the internet portals provided by the brokers. The Qatar Stock Exchange is open from Sunday to Thursday, with Friday being a holiday. The trading hours for Qatar Stock Exchange are from 9:30 AM to 1:10 PM. The pre-open is at 9:00 AM and ends at 9:30 AM.
Stock Trading in Qatar
Stock Trading in Qatar Stock Exchange is carried out through the brokers. The client places the order to the broker either through the phone or through internet stock trading portals. The broker then transfers the order to the stock exchange where they are placed in a Central order Book and the order is matched through algorithm and a trade takes place. The order matching in Qatar Stock Exchange is done on a price-time priority which means that orders with the best price are matched first and when two orders are of same price then the order which was entered earlier gets higher preference.
Security Dealers and Market Makers in Qatar
Market Makers provide liquidity to the market and stand ready to buy and sell stocks at any time. The presence of market makers enhances the confidence of both traders as well as investors as their presence can absorb any sudden shock in the markets due to sudden withdrawal of liquidity. While the Qatar Stock Exchange functioned in a typical way, the exchange has realised the importance of market makers and has introduced their presence through sponsored access (Holley, 2013). This means that domestic and international participants can access the market without holding their own membership. This step is seen as an important step by the Qatar Stock Exchange to boost liquidity and increase the confidence of the investors to participate in the market.
Buying and Selling in Qatar Securities Market
The buying and selling in the Qatar Stock Market is purely determined based on the supply and demand of shares, like any other market. When there is a demand for shares of any company, its price goes up as buyers want to purchase this stock and sellers try to push this value higher by offering at higher price. All the trade happens through Central order Book and matching of trade takes place through a matching algorithm. The Stock Exchange performs the clearing function and depository function which includes clearing and settlement of securities.
External efficiency in Qatar Stock markets
A stock market is called efficient when the price of any stock of a company fully reflects the available information of that particular company (Malkiel and Fama, 1970). The Qatar Stock Exchange maintains strict standards of governance and has proper rules to suspend or cancel trading when the respective company fails to comply with the Stock Exchange rules (Qatar Stock Exchange (d), 2010). Hence, by proper monitoring the trading activities, the exchange ensures that all trading obligations are met and a fair and efficient stock market is maintained. Hence, it can be said that the Qatar stock market is moderately efficient with respect to availability of information and the prices on the exchange reflects fair value. The Qatar Stock Exchange is also included in MSCI emerging markets index and this further contributes to the efficiency of the Qatar Stock Exchange (Reuters, 2014).
Internal efficiency in Qatar Stock markets
Trading in Stock Market in Qatar is carried out through brokers who act as an interface between stock market and the investors/traders. The brokers charge a small fee for providing this facility to the investors/traders and provide the option of trading through phone or internet portals. For example, only QR100 is required to open an account. The fee charged is commensurate to the service provided by the brokers and enhances the demand and supply. This is evident from the increase in the number of transactions carried out by all the brokers registered on the Qatar Stock Exchange. Hence, due to low account opening and transaction charges, it can be said that Qatar Stock Exchange is strongly internally efficient and enhances demand and supply and encourages more participants to participate in the stock market.
Depth of Qatar Stock Market
The depth of a stock market is the market’s ability to absorb large market orders without affecting the price of the security. Most of the stock markets in the developed countries like US, UK, Japan etc. have market depth and can withstand large market orders (Brennan and Subrahmanyam, 1995). Even though Qatar Stock Exchange is a developing market, it does not have the depth as is seen in the developed markets. As on 16th March, a total of 19.4 million shares were traded on the QSE with a value of QAR 444 million as compared to 1.6 billion shares traded at NASDAQ. Hence, it can be said that the Qatar Stock Exchange is not very deep and there is room for speculation in the Qatar Stock Market.
Recommendations
The financial markets of Qatar are modestly developed and have room for significant improvement when compared to financial markets of the developed countries. For a nation to progress, its banking, financial system and capital markets need to be robust and should support the growth of the economy (Alfaro et al., 2004). Hence, few recommendations for financial markets in Qatar to support economic growth are as follows:
More capital market participation should be encouraged by the financial regulatory bodies. Currently the stock market operates only between 9:30 AM to 1:10 PM. The Qatar Financial Markets Authority can look to extend the trade timings till 4 PM to encourage awareness and participation from a wider range of public
The debt market in Qatar is very small. The presence of a well-established debt market indicates ease of borrowing from the debt market for companies to finance their growth (Berger and Udell, 1998). Hence, setting up a more sophisticated debt market needs attention from the financial regulatory authorities.
The range of financial products is very less in Qatar Stock Exchange. The exchange can make the market more liquid by introducing more financial products like derivatives (futures and options), exchange traded funds, trading of bonds, etc.
The awareness for mutual funds is very low in Qatar. So for risk-averse investors, mutual funds can be proposed as a way of disciplined investing while extracting the benefits of equity returns and minimizing the risk.
The commodity and currency market also needs to be strengthened. For currencies, the market regulator can provide approval for trading the Qatar currency with different currency pairs to facilitate price efficiency.
The market regulators can also look to institute mechanisms to promote alternate source of funding like private equity, venture capital, etc.
Conclusion
In the current study, an overview of the financial system of Qatar is carried out. Initially, the role of various financial institutions is discussed. The report then explores various types of financing options available to companies in the Qatar market. Moving ahead, the report discusses the capital market of Qatar and its various aspects in detail. Finally, recommendation on improving and expanding the existing structure of financial markets is provided. The current study has been quite interesting and has provided valuable insights on the functioning of financial markets in Qatar.
References
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