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ViewpointJanuary 28 2013

Oman hopes to open Islamic finance floodgates

Oman's late introduction to Islamic finance will work in the favour of the country's bank, as they can learn from the examples of others, says HE Hamood Sangour Al-Zadjali, governor of the country's central bank.
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Oman hopes to open Islamic finance floodgates

Until recently, Oman had been the only one of the six Gulf Co-operation Council (GCC) states that prohibited Islamic finance on the grounds that no distinction should be drawn between Islamic and conventional banks. However, in May 2011, Qaboos bin Said Al Said, the sultan of Oman, issued a royal directive overturning this ban and authorising sharia-compliant services in the country.

The U-turn was prompted by the desire to tap the demand for sharia-compliant products and services that is currently being met elsewhere in the Gulf, resulting in a liquidity transfer from Oman to other countries in the Gulf. It is estimated that equivalent to $11bn-worth of Omani rials are currently deposited in GCC Islamic banks, much of it in the United Arab Emirates and Bahrain.

“The sultanate took the decision to allow Islamic banks and windows in 2011. While some appear to be surprised at this decision, many within the country and outside have been very excited about it,” says HE Hamood Sangour Al-Zadjali, governor of the Central Bank of Oman.

“The sultanate is at a crossroads in its economic march. Islamic banking is expected to attract friendly investments from inside the country and abroad, particularly where large project funding is involved. Such investments have added attractions such as improving technology, best practices and the enhancement of competition and efficiency. Hence, the introduction of Islamic banking in Oman should be seen as a positive development.”

Rapid action

The royal decree issued by Sultan Qaboos bin Said entitles conventional lenders to open Islamic windows, and it also approves the establishment of standalone Islamic banks. “To date, the central bank has granted licences for two standalone Islamic banks – Bank Nizwa and Al Izz Islamic Bank,” says Mr Al-Zadjali. “Six of the local conventional banks will also establish windows soon.”

In May 2012, Bank Nizwa attracted $1.77bn in an initial public offering of 40% of its capital, 11 times the sum that it was planning to raise – a measure of the pent-up demand for Islamic banking. The bank launched its services in January 2013. Al Izz Islamic Bank is currently under formation and is due to start business in mid-2013.

Meanwhile, on January 16, 2013, National Bank of Oman became the first conventional bank to launch an Islamic banking window. The same month, the central bank awarded a licence to Bank Muscat, Oman’s biggest bank by assets, to open seven Islamic windows by the end of the year.

“The decision to allow Islamic banks and windows in the sultanate has been very well received in the market," says Mr Al-Zadjali. "This is evident not only in the proceedings of various seminars and programmes being conducted on awareness and understanding, but also from enquiries from abroad for investments and the like. It is expected that [this will provide a boost for] both retail and corporate banking.” 

Late-mover advantage

Oman wants to take advantage of its late initiation into Islamic banking by offering a unique model that will be a combination of the best available models from across the world, rather than a copy of any single model.

“We should appreciate that Islamic banking is evolutionary in many jurisdictions. While a few countries have exclusive Islamic banking, many have introduced it over a period of time. Also, there have been mid-term appraisals, with attempts to change the model so that it co-exists with conventional banking,” says Mr Al-Zadjali. “When drawing up the sharia governance framework, we have looked into practices elsewhere and norms recommended in accredited standards set by the Islamic Financial Services Board and Accounting and Auditing Organization for Islamic Financial Institutions.

“Banks need to have their own sharia supervisory boards to provide guidance and oversight on sharia compliance. An Islamic banking window is conceived to be a dedicated Islamic banking branch, so that even though it may be part of a conventional bank, a co-mingling of funds needs to be avoided. It is a 'bank within a bank' model and emphasis needs to be placed on operational segregation and minimising and mitigating interface, restricted to some support services.”

High standards

The Central Bank of Oman approved a new regulatory framework for Islamic banks in December 2012. The new regulations cover areas including banks’ liquidity management, the administration of sharia scholar boards that oversee Islamic financial institutions, and the operation of conventional banks’ Islamic windows.

Islamic financial experts have been quick to observe that the regulations appear to be considerably stricter and more detailed than those in many other countries, helping to set higher standards for the industry.

“Central bank senior officials and consultants worked together to draft the regulatory framework. And there has also been input from wider market consultation, too,” says Mr Al-Zadjali. “In order to be a source of advice to the central bank on related matters and overall harmonisation, a high level sharia supervisory board will also be set up by the central bank.”

Accounting firm Ernst & Young (E&Y) has forecast that a successful roll-out of Islamic banking infrastructure could see the industry in Oman gaining up to $6bn in Islamic assets over the next few years. Total banking assets in Oman in 2010 were estimated to be $42bn. E&Y has also forecast that as new opportunities open up, Islamic banking assets in the Middle East and Africa could double to $990bn by 2015 from $416bn in 2010.  

“Many reports indicate healthy growth prospects. Some studies by others indicate that Islamic banking in Oman will grow to reach between a 10% and 20% market share in less than five years,” says Mr Al-Zadjali. “But we would like to wait and observe the launch, initial progress and normalisation of the market before we assess growth indicators. But it is a fact that Islamic banking has been particularly booming recently and has now become more popular than ever before in terms of size and reach.”

HE Hamood Sangour Al-Zadjali, governor of the Central Bank of Oman.

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