Oman: Green light for IFS

The Omani government has opened its doors to Islamic banking, with Sultan Qaboos bin Said Al Said issuing a royal directive in early May allowing for the roll-out of sharia-compliant financial services and institutions.

By the end of May, the Central Bank of Oman (CBO)’s board of governors had approved legislation for the establishment of sharia-compliant institutions and Islamic branches in conventional banks. The CBO additionally approved the creation of Bank Nizwa, which will be the first Islamic institution operating in the Sultanate. The central bank has stipulated, however, that existing banks in Oman cannot switch to become Islamic banks, although they will be able to offer sharia-compliant products and services.

Until the Sultan’s directive was issued, Oman was the only Arab country in the Gulf without a sharia-compliant financial institution. The arrival of Islamic finance is expected to provide a boost to the Sultanate’s banking sector. According to Ernst & Young’s Islamic Financial Services (IFS) Group, Islamic institutions are expected to gain a significant share of Oman’s $42bn in banking assets, and could gain some $6bn in Islamic assets in the coming years.

According to Ashar Nazim, the executive director and head of IFS for the MENA region at Ernst & Young, Oman’s adoption of sharia-compliant banking could be as successful as in the UAE, where Islamic banking windows at conventional banks now account for 11% of banking assets. “Given the size of the local market, early movers are set to create a strong advantage in both Islamic banking and takaful,” Nazim said at an introductory seminar on Islamic banking in Muscat in early June. “The next 18 months could materially change the competitive landscape in favour of Islamic windows and banks.”

A significant amount of capital and investments is expected to flow into the country as a result of the royal directive allowing IFS. Until now Omanis have had to invest in sharia-compliant products abroad, mainly in other GCC countries, and it is likely that these funds will return to Oman.

Companies in the region have been eager to examine the opportunities the arrival of IFS in Oman will create. International Turnkey Systems (ITS), a global consulting company operating in several fields, including banking and Islamic finance, held a conference on Islamic banking in Muscat on June 20, which included presentations on methods for instituting sharia-compliant practices, as well as on various industry challenges and relevant technologies. The conference was attended by representatives from a wide variety of financial institutions and organisations, including Emirates Islamic Bank, Dubai Islamic Bank and the International Association for Islamic Economics.

Although they have additional specifications, IFS products are not immune from the competition for high-tech services offered across the banking sector. The level of technology employed by banks – both Islamic and conventional – is becoming ever more important for their success in the region. “Banking in Oman is rapidly becoming a technological competition,” Ewan Stirling, CEO of HSBC Bank Middle East, told OBG. “Good internet services and the offering of mobile banking are factors that matter the most.”

The Sultanate’s entry to the market comes as the value of the global Islamic banking industry surpassed $1trn, of which an estimated $210bn is invested in the Middle East. With the increasing popularity of IFS, international players have been quick to hop on board. In February financial information provider Bloomberg Professional announced the launch of an Islamic finance platform, which includes data, analyses and news on sharia-compliant services.

Additionally, sukuk, or Islamic bonds, are becoming more widely traded. The London Stock Exchange announced in early June that the addition of two sukuk funds would bring the total number of sukuks listed on the exchange to 33, and the Luxembourg Stock Exchange currently has 16 listed.

In spite of a slowdown in sukuk issuance following the global financial crisis, the market seems to be on the road to recovery. Standard & Poor’s reported in February that more than $13.7bn in sukuks were issued in the first half of 2010, indicating year-on-year growth of 92%. While Asian countries – particularly Malaysia – have dominated global sukuk issuance in recent years, countries in the Gulf have begun to play a greater role, accounting for about 30% of the global total in the first half of 2010, according to Standard & Poor’s.

Though there are currently no official plans for the development of a sukuk market in Oman, many industry experts believe that sukuk issues would lead to higher profits for financial institutions. Mabid Ali Al Jahri, the president of the International Association for Islamic Economics, told Muscat Daily in late June that if the CBO is quick to establish new guidelines, the first Omani sukuk could be issued before year-end.

“The government, CBO, Omani corporations and even conventional banks can issue sukuk,” he said. “If they start working on it right away, we might see the first Omani sukuk in six months. The issuers of sukuk, whether a government or a business institution, will find it an effective way to mobilise large funds.”