Mar 24 2013

Yet another step to strengthen Islamic banking in Oman

By Samuel Kutty Yet another step to strengthen Islamic banking in Oman Photo Credit:Reuters/Mohamad Dabbouss
Since the beginning of the launch Islamic banking in the Sultanate, numerous conferences and workshops have been conducted to delve deep into the structure of Islamic finance and explore the themes of its emergence in Oman. But the recent Oman Second Islamic Banking and Finance Conference witnessed vital issues relating to Islamic banking and industry being deliberated upon and decisions being taken by the authorities concerned.

Although the conference delved deep into improving the regulatory infrastructure and supporting harmonisation and linkages among different jurisdictions, the most important announcement was restriction on the entry of foreign Islamic banks into Oman. Hamood bin Sangour al Zadjali, Executive President of the CBO, has been very clear that Islamic banking in Oman is in its initial stages and entry of a foreign bank into Oman to operate on Islamic finance will hinder the growth prospects of the indigenous banks.

He said on the sidelines of the conference: "Islamic banking in Oman is still new and needs some time to achieve its main objective. This has resulted in remarkable activity in the banking sector and has forced many licensed commercial banks to increase their capital to open independent Islamic windows to operate alongside the two licensed Islamic banks".

Ever since the Royal Decree amending the banking law to allow the inclusion of Islamic banking was announced, competition has been seen tough among the local banks themselves. Apart from the two fully integrated Islamic banks -- Bank Nizwa and al izz bank -- the country's biggest commercial banks have also set up their own Islamic banking windows. Bank Muscat has established Meethaq for Islamic financial services while National Bank of Oman has set up Muzn for sharia-compliant business.

Bank of Sohar, BankDhofar and ahlibank have also built Islamic banking infrastructure. Whether the two new lenders can gain market share amid this backdrop of competition with the conventional banks will determine the future shape of Islamic banking in Oman, the last of the Gulf countries to permit this form of lending without receiving interest. It is timely and warranted a decision that the apex bank turned down the requests by Arab and other Gulf banks to start Islamic banking operations in the Sultanate.

It may also be noted that Oman took the decision to allow Islamic banking in the country at a time when Bahrain and Dubai were vying for the title of being the regional hub for Islamic financial services in the region. While the capitalisation of Islamic banking in the Sultanate presently stands at RO 500 million, Ernst & Young forecasts Islamic banking assets in the Middle East and Africa to double to $990 billion by 2015 from $416 billion in 2010.

While picturing a positive outlook for 2013, the agency's Global Islamic Banking Centre, finds Islamic banking assets with commercial banks in the Gulf Co-operation Council at $445 billion at the end of 2012, up from $390 billion in 2011. This represents a 14 per cent year-on-year growth, which is considerably lower than the five year average of 19 per cent.

Qatar was the fastest growing market where Islamic banking assets are expected to have grown by more than 23 per cent during 2012. While Islamic banking assets with commercial banks in the GCC grew by 14 per cent in 2012, conventional banking assets grew by only 8.1 per cent - indicating the relative resilience and potential of the industry.

According to Ashar Nazim, Partner, Global Islamic Banking Centre, Ernst & Young, "Inability of most Islamic banks to generate accurate data and on time remains a serious concern for the management, the board as well as the regulators. Where such information is available, the analysis remains very rudimentary and has not really translated to a true competitive advantage."

In comparison to their conventional banking peers, Islamic banks remain technologically disadvantaged as software systems are primarily designed for financial institutions based on conventional banking frameworks.
While the industry regulators are looking to tackle this issue, it remains a concern for the industry leading to significantly higher operational and commercial risk. Global Islamic banking assets with commercial banks are now at $1.55 trillion at end of 2012 and projected to exceed $2 trillion by 2015.

© Oman Daily Observer 2013

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