السماء لا تمطر ذهباً ولا فضة One Gram

Personal preference: AA would remove the "l" above.  3:160

No, AA hasn’t branched out into pharmaceuticals. 

An article in Gulf News caught my eye “Buy Property in Dubai with Crypto-currency.” 

“OneGram will go live in June next. Investors in MAG properties will purchase OneGram to the value of the property and receive a 5 per cent discount on the property price as a result. The OneGram will then remit to MAG according to the payment plan, which is 35 per cent over six to nine months and 65 per cent on completion at the end of 2019”

At first blush this sounds like a great deal.

Assume you want to buy that corner unit in برج أوهام for AED 3 million.  Right off the bat you’ve saved AED 150,000.

But a closer look indicates that the deal may not be as sweet as the result of patience. 

Let’s look at the Shari’ah whitepaper prepared by OG’s advisor, AlMaali Training and Consultancy, specifically at the fee discussion on pages 16-17.

First, there is a 10% purchase fee equal to the amount of OG one wants to buy.  That’s 10% of AED 2,850,000 (95% of AED 3 million).  Or AED 285,000.   Oops, we now appear to be AED 135,000 in the red.  (AED 150,000 less AED 285,000)

But as they say “wait there’s more”.  There’s also a 1% transaction fee for another AED 28,500 for a grand total of AED 163,500. 

Thus, we’ll pay AED 3,163,500 for our AED 3,000,000 apartment. 

And as per the above quote, we’re required to pay 100% of the price to OG up front who will then carefully safeguard 65% of our funds until 2019 (roughly two years) when MAG is owed the money.  No interest paid I suppose since this is an “Islamic” financial instrument.  No need for any present value calculations even if based on "profit rates" as opposed to interest rates.

Despite all this, we can take comfort from using an innovative new Islamic financing tool and helping a deserving firm make a nice profit.  Can’t we? 

If you’re wondering, the 10% entry fee is used for the following purposes:

1. 5% (or 50% of the total fee) for long term business development. 
2. 1.5% (or 15% of the total fee) for marketing costs. 
3. 1.5% (or 15% of the total fee) for operations –gold transport, fee for offering spot price, storage, insurance. 
4. 2% (or 20% of the total fee) for salaries.

The 1% transaction fee is allocated as follows: 

1. 70% to buy additional gold to back each OG token.  What this means is that over time more than one gram of gold will back each token.  Of course, if you sell your OG, you don’t share in this benefit. The chap who buys from you does unless some how you can work that future benefit into the selling price you receive. On that basis, the business logic of this mechanism escapes AA.   If one uses OG as a medium of exchange, the benefit of this feature would appear to be small.  If one were getting OG tokens for free as a “miner” or perhaps in some other way (founder), this could be quite attractive. Having said that another Dubai-linked gold cryptocurrency Currensee has a similar mechanism, though 80% of the their 1% transaction fee will purchase additional gold.  Interestingly their maximum transaction fee appears capped at USD 10.  Currensee whitepaper page 9. 
2. 10% for operations and development.  The whitepaper has an error here and in the next two categories.  It states 2.5%, though from the numbers provided example it’s clearly 10%. 
3. 10% for charitable contributions. 
4. 10% for the “miner” reward with the caveat that under Shari’ah there can be no guaranteed returns.  It’s unclear what this is all about on two fronts.  First, the whitepaper describes the “miner” as the “investor”.    Second, if this is truly a transaction fee, it would seem that it would be perfectly halal.

There’s a different version on the allocation of the 1% transaction fee in the English “whitepaper” written by I.M. Khan in categories 2 to 4 above.  On page 6 the operations and development fee is 25% (Currensee takes 20%) and the charitable deduction and mining fee (here clarified as a fee for blockchain processing) are each 2.5%.  In IMK’s estimation the transaction fee is “minimal” compared to “traditional banking” (page 2). 

Analyst disclosure:  In all AA’s personal traditional banking relationships I pay no more than a flat USD 45 fee for a payment.  This is with both OECD and non OECD banks. The firm I work for has an even smaller cost. 

All OG’s fees—set on transaction amounts--look like a sweet deal for someone but perhaps not necessarily investors in OG.

By comparison Bitcoin’s transaction fees are a flat per transaction fee not a percentage of the amount.  Recently, there was a bit of a hue and cry over a temporary spike in Bitcoin’s transaction fee to USD 26.  At OG, you could move USD 2,600 equivalent for that fee!  If you wanted to move more, the OG fee would be higher.  

Bitcoin transaction fees vary by demands on the capacity of the (Bitcoin) Blockchain, resulting from what appears to be a rather small maximum size per “block”.  If one is not in a hurry to complete a transaction, one can simply offer a lower fee and wait until the higher fee offering transactions have cleared. As might be expected “miners” prioritize transactions based on the block processing fee they will earn.  

As to entry prices, Bitcoin has a typical trading bid/ask spread which fluctuates with market conditions and is not a fixed percentage cost. 

Second analyst disclosure, AA is not recommending Bitcoin as a superior investment but merely pointing out the difference in fee structure.

It should be noted that OG has ongoing operating costs regarding the storage, insurance, etc. of the physical gold that Bitcoin which is backed by air does not.  Whether its other costs are justified or not, الله أعلم 

OG’s fees may appear higher than market, but surely one can’t put a price on adherence to one’s faith.

Interestingly, OG also offers a Russian language copy of the whitepaper, but no Arabic version.  Apparently OG sees an opportunity to market to the legions of Muslim investors in the RF.   

What is the Qatari Banking Sector’s Foreign Currency Exposure? Part 4 – Consolidated Annual Financial Reports “Approach” Continued

AA Puts the Finishing Touches on His Analysis

Earlier posts here, here,  here, and here.

With all the caveats in the preceding post, let’s look at a series of charts which I’ve compiled from the FYE 2016 annual reports for 7 Qatari banks.  Recall there are 3 banks (AlAhli, AlKhaliji, and IBQ that don’t provide full geographical analysis of assets and liabilities) and one bank Development Bank of Qatar that has a relatively miniscule positive NFA position and so I’m not inclined to spend time analyzing it.

Before we begin, one important note.  I will be comparing consolidated data as of 31 December 2016 to QCB data as of that same date in what follows  Keep in mind that since 31 December 2016, QCB data shows a QAR 79 billion reduction in TFL (USD 21.7 billion), and a QAR 41 billion (USD 11 billion) reduction in NFA.  For a net decrease in the negative NFA position from USD 47.7 billion to USD 36.6 billion equivalent.

Qatar Banks NFA 31 Dec 16
Consolidated Financials  - QAR Billions
BANKS	TFA	TFL	NFA	NFA-USD
QNB	278	355	-77	-$21
QIB	25	37	-12	-$3
CBQ	43	53	-10	-$3
MAR	16	13	3	$1
DOHA	10	9	1	$0
BAR	11	5	6	$2
QIIB	2	6	-4	-$1
TOTAL	386	478	-92	-$25

1. MAR = Masraf al Rayan and BAR = Barwa Bank. 
2. As per the QCB’s statistics, the NFA position was a negative USD 47.7 billion equivalent at 31 December 2016.  Using consolidated financials, the NFA position was negative USD 25 billion at that same date.  While this is based on a sample instead of the population, it’s unlikely that the remaining banks have a negative net foreign position anywhere approaching USD 23 billion.  As per QCB data, the QDB has a miniscule though positive NFA exposure equivalent to some USD 84 million.  Because total liabilities (foreign and domestic) of the first three banks equal QAR 112 billion (some USD 31 billion). It’s highly unlikely that they have foreign liabilities equal to 74% of total liabilities.  And also if they have such FL, they probably have some amount of FA to offset them. 
3. On that basis and subject to the caveat about the free transfer of assets between overseas entities and Qatar, particularly for subsidiaries, it certainly looks like the Qatar banks aggregate position (onshore and offshore) is even more manageable. 
4. One can also look at other measures of this exposure. If we look only at banks with negative NFA, they owe some QAR 102 billion (USD 28 billion). 
5. If we look at a base worst case (because we lack data on three banks), consolidated financial derived TFL are QAR 478 billion (USD 131 billion) which is higher than QCB’s TFL of QAR 447 billion (USD 123 billion). 

But what is the exposure to Other GCC countries, which would include the GCC 3?

Qatar Banks NFA  31 Dec 16
With Other GCC States
Consolidated Financials - QAR Billions
BANKS	TFA	TFL	NFA	NFA-USD
QNB	32	24	8	$2
QIB	9	28	-19	-$5
CBQ	10	14	-4	-$1
MAR	3	7	-4	-$1
DOHA	10	9	1	$0
BAR	5	2	4	$1
QIIB	1	5	-4	-$1
TOTAL	71	89	-18	-$5

1. NFA exposure to Other GCC is QAR 18 billion (USD 4.9 billion). But note that not all banks have negative NFA positions. 
2. As argued more than once in earlier posts, it’s more proper to look only at those banks with negative NFA positions.  In that case, the exposure is QAR 31 billion or USD 8.5 billion.  Still manageable. 
3. The total TFL to Other GCC (some QAR 89 billion equivalent to USD 24.5 billion) is only 19% of the QAR 478 billion in TFL. 
4. The GOQ shouldn’t have a problem providing either of these amounts and by some reports has already transferred this amount to Qatari banks. 
5. The above is based on a sample of 7 banks because the remaining banks—AlAhli, AlKhaliji, IBQ and DBQ—don’t provide the sufficient information to include them. While we are missing detailed data for four banks, it’s unlikely that their positions will dramatically change these amounts. 
6. AlKhaliji has disclosed subsidiaries with gross assets of QAR 8.9 billion (USD 2.4 billion) primarily AlKhaliji France (AKF) which appears to operate primarily through its branches in the UAE. On the asset side AlKhaliji reports some QAR 9.9 billion in assets with OGCC.  We don’t know the total FL to OGCC. AlKhaliji shows FX assets of some QAR 3.5 billion and FX liabilities of QAR 3.3 billion in its currency risk note. 
7. AlAhli and IBQ do not appear to have foreign branches or operating subsidiaries overseas. IBQ reports some QAR 1.4 billion in OGCC FA and a negative net FX position of QAR 4.4 billion in AED in the banking book so a quesstimate of their FL position vis-à-vis the OGCC is some QAR 5.8 billion.  That assumes no significant non AED funding from the OGCC. 
8. AlAhli reports some QAR 1.1 billion in FA with OGCC.  It does not report any significant FX position in AED.  Again assuming no significant non AED funding from OGCC a good guesstimate is that OGCC FL are QAR 1.4 billion.   
9. Qatar Development Bank, the missing fourth bank, doesn’t release financials but from the QCB data we can see that it is funded primarily with equity and has a positive NFA of some USD 84 million equivalent.
10. If we adjust the base worst case scenario for the above QAR 17.1 billion in estimated FL in the worst case increases by USD 4.7 billion equivalent to USD 29.2 billion.  Reasonable increases in the QAR 17.1 billion amount (say in the range of 2 -4) would still leave the base worst case at a comfortable level. 
11. Other GCC includes Kuwait and Oman. These states may be less “enthusiastic” about withdrawing their funding from Qatar.  That being said, Oman and Kuwait are unlikely to have as large positions with Qatar as the GCC 3. 
12. What this means is that for the GCC 3+1’s efforts to be successful they will need to persuade other foreign creditors and depositors to withdraw funds from Qatar.  That seems a difficult row to hoe. 

But there are some strains on the individual bank level.   For example, QIB has OGCC-related TFL (QAR 28 billion) greater than QNB (QAR 24 billion) a bank which is roughly 5 times its size. 

Qatar Banks NFA 31 Dec 16
Other GCC FA & FL to TFA & TFL
BANKS	GFA/TFA	GFL/TFL
QNB	12%	7%
QIB	38%	76%
CBQ	23%	27%
MAR	20%	52%
DOHA	94%	95%
BAR	49%	32%
QIIB	36%	71%
TOTAL	18%	18%

1. Looking solely at foreign assets and foreign funding, four banks have ratios that cause concern:  QIB, QIIB, MAR, and Doha, though on an absolute basis the GOQ could easily provide replacement funding.
2. Note the potential exposure of QIB, Doha, Barwa and QIIB to asset concentrations in Other GCC states.  If the boycott continues, this business may be “lost”.  If the GCC 3 takes steps to restrict these banks’ access to their assets in these countries, including the proceeds of the realization of those assets, by way of additional boycott steps, then much larger but still manageable GOQ support would be required. 
3. QNB on the other hand is relatively well positioned. 

But this chart measures OGCC FA and FL in terms of total FA and FL.  That tells us how important OGCC business is to their foreign activities.  But what about the importance to their total business both foreign and domestic?

Qatar Banks NFA Position 31 Dec 16
Other GCC FA and FL to TA & TL
BANKS	TA	TL	OGCC/TA	OGCC/TL
QNB	720	621	4%	4%
QIB	140	120	7%	24%
CBQ	130	130	8%	11%
MAR	92	79	4%	9%
DOHA	90	77	11%	11%
BAR	46	39	12%	4%
QIIB	43	36	2%	12%
TOTAL	1,260	1,102	6%	8%

1. QIB again “sticks” out.  Looking at details in their FYE 2016 annual report, their liability concentration in Other GCC is driven by customer deposits.  80% of QIB’s QAR 28 billion in Other GCC liabilities is from “equity of unrestricted account holders”.  There isn’t a breakdown by maturity of QIB’s TFL.  If we assume these track its other customer deposits of this nature, we can use the maturity note on page 39 of their FYE 2016 report.  According to that note, some 70% of EUAH mature within 3 months with an additional 14% between 3 and 6 months.  Assuming these maturity patterns have carried forward, then QIB could be facing some serious withdrawals. 

At this point I’ve thrown a lot of data at you.  It’s time to organize that data into key takeaways and to provide some scenario analysis of the exposure of Qatari banks to foreign liabilities and as well of the exposure of Qatar’s Central Bank to that exposure if the banks are incapable of dealing with it themselves.   That will be the topic of a future post.