For religious reasons, Omani clerk Ali al-Sulaimi does not believe in
paying interest on borrowed money, but he badly wants to build a house for his
family.
Islamic banks “should open today already”, said Sulaimi,
dressed in a white dishdasha robe and traditional Omani woven hat called the
kuma, as he went to prayers at the Sultan Qaboos Grand Mosque in the capital
Muscat.
Now an edict issued by the central bank in May this year is set to meet
demand from Sulaimi and other Omani Muslims who have long called for the
sultanate to embrace the Islamic finance industry, which operates according to
the religion’s sharia law.
Oman, home to roughly three million Muslims, is seen as an untapped
opportunity for Islamic finance, which prohibits the lending of money for
interest and other activities that violate religious principles.
The Islamic finance market has grown to nearly $1 trillion globally,
analysts estimate. But unlike neighbouring states such as the United Arab
Emirates and Iran, which have embraced the industry, Oman until this year
remained stubbornly secular in its approach to finance. Its central bank head
said in 2007 that “banks should be universal.”
Oman reversed its stance after seeing a steady trickle of investment
money flow to nearby countries with well-established Islamic banking sectors.
The decision was also seen as one way of appeasing its population, after the
sultanate faced several public protests demanding more jobs and an end to corruption
– demonstrations which prompted the government to promise to boost spending by
$2.6bn.
Setting up Islamic banking is not an overnight proposition. Legal and
banking experts said it could take between three to five years for the industry
to gain momentum in Oman as financial institutions acquired expertise and
brought in experienced professionals. Many banks appear to consider the effort
worthwhile, however.
“There is a lot of opportunity for Islamic finance in Oman, with
almost every bank considering launching an Islamic window and one or two
full-fledged Islamic banks being launched,” said Ashar Nazim, leader for
Islamic financial services in the Middle East and North Africa at consultancy
Ernst & Young.
“Islamic banking could be 8 to 10 percent of [banking] market share
over the next three to five years. I’m comfortable with saying it could be at
least a $6bn industry in Oman.”
The commercial banking sector has seen steady gains in both deposits and
assets over the past two years, according to central bank data. Total deposits
at commercial banks reached OR11.2bn ($29bn) at the end of June, up 14.3
percent from a year earlier, while total assets climbed 4.5 percent to OR16.3bn.
In an Islamic mortgage transaction, of the kind which may allow Sulaimi
to build a house in the next year or two, a bank does not lend money. Instead,
it might typically buy the asset from the customer and then resell it at an
implicit profit, allowing the customer to pay the bank in instalments – a
practice called Murabahah.
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Ernst & Young estimates that Oman’s banking industry will need 500
bankers to cater to demand for Islamic finance. Designing and launching a
full-fledged Islamic bank could typically take six to twelve months, Nazim
said; obtaining capital and expertise could mean further delays.
Bank Nizwa and Al Izz International Bank, two lenders currently been set
up, have received licences from the central bank to operate as wholly Islamic
financial institutions but it is unclear when they will open their doors. Both
banks will be sponsored by local investors in Oman; Al Izz has in the past
raised the possibility of obtaining additional capital through an initial
public offer of shares.
National Bank of Oman, the sultanate’s second-largest lender by assets,
may seek board approval be the end of the year to open an Islamic branch, its
chief executive said.
Bank Dhofar is also looking to apply for an Islamic banking license
before the end of the year, its acting chief executive Mohammed Redha Jawad said,
although there are challenges in training staff and obtaining experienced
bankers, he added.
“There has been growing pressure from investors for Oman to come in
line with the rest of the region and allow Islamic finance,” said George
Sanders, partner at international law firm SNR Denton in Muscat.
“We’ve come across transactions that were held up or modified
because investors had been hoping to use Islamic finance and had to rethink the
deal because Oman didn’t have it.
Sanders said he expected large commercial financings to be the first
Islamic deals in Oman, pending the opening of other Islamic banking services.
Islamic bonds, or sukuk, have gained momentum in the region and could be a new
source of funding for Omani companies.
Oman’s Capital Markets Authority “is in the process of coming up
with new rules and regulations for [the sukuk] market”, said Yahya
al-Jabri, executive president of the authority. “Beyond doubt, the sukuk
plays a significant positive role in the development of the market.”
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