Nov 04 2012

'Development of a vibrant sukuk market crucial for Islamic banks'

By A. E. JAMES Muscat: Oman's market regulators should develop a vibrant sukuk market for helping the proposed Islamic banks to invest their funds and the government to raise debt funds for infrastructure projects, said an Islamic banking expert here.

When the Islamic banks start operations, the deposit growth (or growth on the liability side) will be much higher than the anticipated growth in asset side and the Sharia-compliant banks will find it extremely difficult to invest their deposits, if there is a lack of Islamic debt instruments like sukuks in the financial system.

"In the initial years, the deposit growth will be phenomenal and a lot of money will come to Islamic banks, and they will be burdened with the challenge as to where to invest that fund. The availability of products where the banks will be able to invest immediately is rather limited.

"The growth will happen on the liability side much faster than on the asset side and there will be a problem in managing excess liquidity,- Khalid Yousaf, director of Islamic Finance Advisory Services at KPMG, told Times of Oman.

Yousaf, an expert in Islamic finance in the region, added that there are regulatory restrictions on banks to invest their money abroad (in Islamic financial institutions).

The Omani banks' foreign exchange exposure is limited to 40 per cent and there are restrictions on single exposure as well, he said.

"This is one of the challenges we have been trying to highlight to the Central Bank of Oman (CBO) and the Capital Market Authority (CMA).-

To resolve this problem, there is an urgent need to float sukuks or Islamic debt instruments.

Yousaf said both capital market debt instruments like sukuk and Islamic banks should grow side by side.

"Otherwise, Islamic banks will have a problem. The only alternative is to leave that (deposit) money with the CBO, earning nothing. How long can they sustain their operations?- Yousaf asked.

Moreover, he said, some of the Islamic banks are taking their staff from the market paying a premium due to shortage of people and huge demand for Islamic banking professionals. "Somehow, they have to meet that expense in the long-term as efficiently as possible.

The only way to do that is to find other attractive opportunities where the money can be invested.

Developing a vibrant sukuk market is also important for government to raise money for funding infrastructure projects in a Sharia-compliant manner. "The government of Oman has got commitment to infrastructure projects in excess of $35 billion, which is more than 50 per cent of the country's gross domestic product (GDP). So far, the government has been able to meet those commitments through its own resources, thanks to high oil prices.

Of course, the oil production has also been increasing over the years. Now, what is available to the government (for funding these projects) is sukuk instrument. They can help divert liquidity available from Islamic banks into these infrastructure projects. By channelising the domestic money into infrastructure projects, the government can have a much more comfortable position in the market by having a reasonable leverage against the debt in a Sharia-compliant way.-

Yousaf expects the Islamic banks to have a 20 per cent market share in total banking assets by 2015, which is in line with the growth in Islamic banks in other GCC countries. As of now, the total banking assets in Oman are about $48 billion.

He said there is 14 per cent unbanked (those who did not open a bank account) people in Oman. This section comprises people like shepherds, fishermen and farmers (who live in remote villages and never had a need for a bank account) who just believe in cash and keep the cash under their mattresses.

This section, probably will not change their habits, and may not come to Islamic banks. "However, there will be a strong migration from conventional banks into Islamic banking. That is why seven (conventional) banks are planning window operations and only two fullfledged Islamic banks are coming. It is a defensive strategy of conventional banks.-

© Times of Oman 2012

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