Opening Oman

As the Central Bank of Oman rolls out the final regulations for Islamic banking in the Sultanate, Islamic Business & Finance spoke to Jamil Ak El Jaroudi, Chief Executive Officer of Bank Nizwa, about setting the standard in a new market

Jamil Ek Jaroudi is no stranger to establishing Islamic banks. He helped lay the foundations of Arab Finance Bank in Lebanon and he joined Bank Nizwa straight from Bahrain's Elaf Bank, where he had been since its inception in 2007 and spearheaded the opening of its first branch office in Malaysia. In Oman, however, he is venturing into unchartered territory. Bank Nizwa, still currently under formation, will be the Sultanate's first dedicated Islamic Bank. However, Jaroudi seems undaunted by the task, convinced that Oman is ready for Islamic banking.

"The exercise was started before we came in," he said. "When it was announced that Oman wanted to develop Islamic banking everyone was very excited; people were waiting for it. Since then we have had many conferences and meetings, so the creation of awareness has started. We will be building from where they have started. We will also be waiting for more Islamic banks to come into Oman, and windows will also play a role in creating that awareness. It will not be an easy exercise, but we are ready - we will be cooperating with training houses, universities and different commercial bodies, including media."

But surely, even to someone described by their peers as a 'serial Islamic bank opener', establishing an Islamic bank in a new market has unique challenges? "It's different in Bahrain," he admitted, "there was already an Islamic finance industry and we were operating like the competition. In Oman you have to work hand in hand with the regulator because there was no industry before, so there is no experience.

"You also have to work hand in hand with the clients, because there are certain taboos and dos and don'ts. Third, you have to work with the competition, so it is going to be a very major task, but it looks positive so far."

WHEN IN OMAN...

Bank Nizwa has already found itself clashing with local banking laws. "Technically we are a retail bank, but we have to deal with both because there are regulations in the banking sector in Oman that your retail banking loans have to be a percentage of the corporate loans," Jaroudi explained. "But you have to start somewhere. Today we might start immediately with a waiver for a period of time with the consumer portfolio because it's ready, it's easy.

"If I opened my doors tomorrow I would have 10 people coming for a car loan, but it takes me three months to study a corporation, its balance sheet and extend a facility for them. So I'm not going to sit idly for the next three months. So maybe the Central Bank will allow us to develop our consumer portfolio first, but later on we will have to abide by the percentages that they keep. So we have to be both.

"The law allows us to also apply for investment banking, so you can also apply and become an investment bank. Out of the 17 banks in Oman, already 12 of the existing banks have an investment banking licence, so that will really complement your products."

REGULATiON REVELATIONS

Of course, there has been much going on behind the scenes to ensure that Islamic banks feel welcome in the Sultanate. After much anticipation, deliberation and a fair amount of tweaking Oman unveiled the finalised regulations for Islamic banks in the country.

"Islamic banking is considered as a new chapter in the banking sector in Oman, which would diversify banking services and augment financial inclusion," Hamoud bin Sangour al Zadjali, Executive President of the Central Bank of Oman, said as the regulations were unveiled in early October. "The advent of Islamic banking is expected to complement the current conventional banking in promoting growth in the economy during 2012 and beyond."

The first version of the rules drew a mixed reaction from banks and individuals, with many questioning whether Islamic banks had been given a level playing field. The final version, however, has received a warmer reception.

"Now it is extremely well received because people had been waiting for something like that," said Jaroudi. "It was well received at all levels - individuals, institutions, legal bodies, government bodies and so on."

The regulations had much input from more established markets, a happy situation that the Sultanate was keen to engineer. "I think Oman was hesitant to go into something that was completely untested or to explore the unknown," said Jaroudi. "They waited to see that this industry is here to stay and that it had developed into more than just an aspiration. If it was a still a dream they wouldn't have gone into it, because then it would have been difficult to regulate it, or put some kind of dimensions to it.

"Seeing as how this industry had developed in a number of countries, and that there are already regulations and legislations in other countries, they can learn from them instead of reinventing the wheel. They will start from where other people have finished, and I think that's a smart move. Oman now has the chance to learn from other countries."

CONVENTIONAL COMPETITION

However, there is concern that Islamic banks in Oman will struggle initially to compete with established conventional banks offering Shari'ah-compliant services. Fitch Ratings noted that although there is demand for Islamic banking, and its growth across the Gulf region is likely to outpace that of conventional banking, recent experience from Qatar suggests that customers in Oman will opt to get these services from established banks.

Newly created Islamic banks in Oman will face competition from incumbents such as Bank Muscat and HSBC Bank Oman, which are setting up Islamic banking windows. Fitch Ratings believes the combination of a well-known brand, an established network, service quality and cost-efficiency savings will give the incumbents a significant advantage. While the established banks will need to keep their existing and Islamic operations separate at the point of contact with the customer, there will be plenty of opportunities for cost savings at the operational level.

Evidence from Qatar shows the advantage that established banks have. When rule changes barred conventional banks from offering Islamic financial services, Islamic banks had expected an influx of customers as people with Shari'ah-compliant accounts switched banks. In practice the impact was small and many customers decided to switch back to conventional accounts with their existing banks instead.

"Where established banks in Oman are allowed to offer both Shari'ah-compliant and conventional products and services, we expect most customers to retain their primary banking relationship, assuming there are no significant differences in the terms on offer," said the ratings agency.

"We nevertheless recognise that substantial Government spending and stimulus will create opportunities for the Islamic banks to expand, primarily in retail banking, where conventional banks are close to regulatory caps, and in real estate and construction related business - their traditional asset-backed business lines," Fitch continued. "Furthermore, the new Islamic banks are likely to have funding cost advantages as they raise low-cost deposits."

TIRED OF WAITING

Jaroudi, however, believes there is room for everyone. "Oman, relative to the rest of the Gulf, is under banked," he said. "There could be two reasons for that. One is that the society doesn't want to do banking anyway, and the other is that they have been waiting for Islamic banks, because it is a relatively conservative society. We expect it's the second factor. Our IPO was 11.3 times oversubscribed - that tells you that a lot of money was waiting for such an event."

Indeed, a survey last year revealed that 85 per cent of consumers in Oman were interested in Islamic finance products. The report, published by Islamic Finance Advisory & Assurance Services, also found that 86 per cent of consumers in Oman have some kind of conventional banking product, of which 60 per cent declared to be  'bothered' about using because of Riba.

Further, 70 per cent of consumers in Oman anticipated opening an Islamic savings account in the next 12 months with half (35 per cent) expecting to do so within three months of one becoming available; and 77 per cent  of consumers in Oman expected to take out Islamic financing within the next two years. 

Not only does this mean there is a lot of demand, it also indicates that Bank Nizwa will be facing a lot of competition. However, Jaroudi believes that Bank Nizwa will differentiate itself both from its conventional and purely Islamic competition. "We call ourselves the first Islamic bank, but I don't just mean chronologically, I mean we want to be known as the first Islamic bank in the quality of our products, the return we can achieve for our stakeholders and the ability to serve our community," he said.

© Islamic Business and Finance 2012