Islamic banks in Oman are building a counterparty network for wakala, a sharia-compliant agency agreement, to use as a major tool for their interbank funding needs.
A viable wakala market could help Omani banks' profitability and, if it is imitated elsewhere in the Gulf, challenge the dominance of commodity murabaha, a cost-plus-profit arrangement that is popular in other countries.
Last week, a bilateral wakala agreement was signed between Bank Nizwa, Oman's first full-fledged Islamic bank, and the Islamic unit of Bank Sohar which allows the lenders to place surplus funds with each other.
Bank Nizwa is in the process of signing similar agreements with other banks in Oman, which would help to create a formal network enabling Islamic money markets to function, chief executive Jamil Al Jaroudi told Reuters.
"If and when this happens, the volume of transactions would be representative of the size of the Islamic money market in Oman.
"Using the concept of wakala as an interbank instrument is new to Oman and perhaps quite new in some other markets too, especially those which have traditionally relied upon commodity murabaha," Jaroudi added.
In wakala, one party acts as agent (wakil) for another; in wakala sukuk, for example, certificates are issued by an originator to buy specific assets, which in turn are given to a wakil for management, who charges an agency fee which can include a performance fee. The originator undertakes to buy the assets at maturity at an agreed price.
In the Gulf, use of wakala is dwarfed by the more-established commodity murabaha, in which a financial institution agrees to purchase merchandise for a client and the client promises to buy it from the institution at an agreed mark-up.
Commodity murabaha faces criticism from within the industry for not being sufficiently based on real economic activity, a key principle in Islamic finance. In December, as Oman became the last country in the six-member Gulf Cooperation Council to adopt Islamic finance, it issued regulations which banned commodity murabaha.
By removing an interbank tool available to Oman's Islamic banks, the ban threatened to make their liquidity management more difficult.
In April, Oman's central bank granted Islamic banks a one-year relaxation of rules on the amount of foreign assets which they can hold, to give more time for Islamic financial instruments to be developed domestically.
While future wakala volumes are difficult to estimate, the network would include non-Omani lenders, saidMohammad Haris, head of Islamic banking at the Islamic unit of Bank Sohar.
"Sohar Islamic does intend to sign similar wakala agreements with Islamic banking institutions both locally and outside Oman. We have already signed master wakala agreements with many Islamic windows and banks."
In June, a standard wakala contract template was launched by the Bahrain-based International Islamic Financial Market, a non-profit industry body which develops specifications for Islamic finance contracts.