It is almost a year since the Royal Decree paved the way for the creation of Islamic banks in the sultanate and the Central Bank of Oman (CBO) is in the final stages of putting down the final set of regulations. Bank Nizwa, the first dedicated Islamic bank in Oman, has unveiled its logo and says it plans to start operations in July. BankMuscat and Ahli Bank have already announced the setting up of Islamic windows – Meethaq and Al Hilal respectively – which will be operational once approval from the Central Bank of Oman (CBO) comes through and the regulatory framework is in place.
Meanwhile BankDhofar has appointed Deloitte and Touche for a market assessment and feasibility study and Bank Sohar has entered into an agreement with Dar al Shariah Legal & Financial Consultancy of Dubai, a subsidiary of Dubai Islamic Bank, to help it with launching its Islamic banking window. Both Oman Arab Bank and National Bank of Oman too have expressed their intent to foray into Islamic banking.
Bankers expect Islamic banking products and services to debut by June this year in the market. The initial draft of the proposed guidelines by CBO was presented to the banks in the beginning of the year and bankers say the Omani model incorporates best practices from the GCC and Malaysia, customising them to suit the local market. But some rue that the 15 per cent limit (of the Islamic window capital base) stipulated for a single borrower may not be adequate to meet the requirements of some clients. “We have some concerns on the proposed regulatory ratios to operate Islamic banking windows.
Since the assigned capital for Islamic banking window is in addition to the minimum capital requirements for the existing conventional banking operation, we are of the view that the total capital base of the legal entity should be considered for the computation of various regulatory ratios, including single borrower limit and the capital adequacy,” says Abdullah al Jabri, deputy general manager, head of central operations, Ahli Bank.
As of now, apart from dedicated Islamic banks Bank Nizwa and Al Izz International that are yet to start operations, and Sarasin-Alpen Oman that won a licence to offer Islamic products, the conventional players are yet to get their licences for their Islamic banking windows. “At this point banks just want clear regulations from CBO before one can start offering Islamic banking services and expedite the licencing processes,” says Mohammed Redha Ahmed Jawad, general manager, wholesale banking, Bank Dhofar.
With CBO advising banks to put in place the right systems before licences can be awarded, Ahli Bank and BankMuscat have already set up their internal Shariah boards comprising at least three members. Both have at least one Omani Shariah scholar on their team. The other members are selected from various countries in the Middle East.
“This helps us benefit from their years of expertise in the other regions along with the local insights that will help address Oman specific matters. With the support of our strategic partner Ahli United Bank, Bahrain, we are well prepared and geared up to rollout Shariah compliant products and services,” says al Jabri.
Some in the industry predict that a successful marketing strategy will not just aid the Islamic banking sector in gaining up to US$6-8bn in assets over the first five years, but may also affect conventional banking in some ways. “By 2015, 60 per cent of assets will be Islamic, so over a period there will be a shift from conventional banking to Islamic banking. Islamic banking is on a growth mode in almost all the Islamic countries,” says Sulaiman al Harthy, group general manager, Islamic Banking, BankMuscat.
But Ahmed al Rawahi, chairman of the founding committee of Bank Nizwa says it is too early to speculate if conventional banking will face any sort of decline due to Islamic banking activities. “Conventional banks can benefit from establishing Islamic windows. It is good that many of them are establishing Islamic windows as it is good for the market and the country. It will raise public awareness about Islamic banking and help share knowledge on the subject,” says al Rawahi.
Companies in other industries may start altering their business models to become more Shariah compliant. “It has been noticed that companies in the other parts of GCC that converted their business models to Islam have experienced an increase in their valuation by anywhere between 18-25 per cent,” says Fares Mourad, head of Islamic Finance, Bank Sarasin.
Systems in place
To ensure watertight Islamic banking regulations, CBO has examined the evolution and practices of Islamic banking in some major jurisdictions and studied how the challenges arising from a new system in banking were tackled.
“Our team has worked with external consultants to evolve a draft framework and the same is being subjected to consultative process with the banking sector as well as relevant professionals,” says a CBO spokesperson. Simultaneously, CBO is working on further facilitations that may be made on the legal and operational side, considering that Islamic banking is in some ways different from conventional banking.
Bank executives point out that certain regulations like the establishment of an independent and separate Islamic window and setting up of standalone Islamic branches to ensure segregation of funds are unique to Oman.
“The Malaysian and Pakistani central banks tried to introduce relaxed window models but couldn’t ensure Shariah authenticity, while CBO has managed to devise a trustful and viable window model. It will help to enhance the public’s confidence in Islamic products. A customer service representative entertaining customers in a regular branch will not be able to justify the requirements of Islamic and conventional banking as both demand a different set of mindset and skills.
We have experienced such kind of problems in the region, so in this regard we really appreciate what CBO has done,” says al Harthy. He adds that CBO’s move to ban all controversial Islamic products (a first ever regulation in the realm of Islamic banking) like the commodity murabaha (buying and selling commodity for financing purpose) in the Oman market is also a step in the right direction as it will help foster public confidence in a relatively conservative market.
It has also been the first time in the GCC that the initiative for Islamic banking has arisen from the central bank itself instead of local banks first requesting for such services. But Alun Williams, an independent consultant in Islamic Banking in the sultanate points out that the rules for the existing commercial banks opening up an Islamic window are likely to be slightly different from those being developed for dedicated Islamic banks coming up in the country.
“However, both Islamic windows and dedicated Islamic banks will still be required to conform to common Islamic banking standards, such as those issued by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the international Islamic finance governing body,” says Williams. Bankers say that the Islamic products that will be sold in Oman will not differ markedly from that in the other countries. BankMuscat is looking to introduce full range of Islamic products for consumer, corporate and investment customers, while Ahli Bank is periodically consulting with its experts at its headquarters in Bahrain to introduce similar products.
Meanwhile, Sarasin Alpen is looking to assist its clients in areas such as state and succession planning and Islamic financial planning, apart from offering regular Islamic products. “The advisory services of Sarasin Alpen in Oman are tailored to meet the clients’ requirements and we will use our existing expertise in Islamic wealth management to add value as long as it is within the scope of our licence,” says Mourad.
Evolving landscapes
The introduction of Islamic banking is by no means a simple addition of another investment tool in the market, but such services will alter the landscape of Oman’s banking industry, say bankers. However, the biggest challenge in the successful implementation of Islamic banking in Oman lies in adopting the right marketing strategy to increase awareness. Organisations such as Sarasin Alpen are adopting the word of mouth marketing approach while others like BankMuscat are stepping up their road shows as well as media presence to increase awareness within society.
“Training of competent staff is a challenge. People who don’t know about Islamic banking will not be able to hire the right people as worldwide in this industry, resources are short and people need time to build expertise,” points out Mourad. While the banks adopting Islamic windows have managed to find at least one Omani Shariah scholar to join their board, executives admit that there is a dearth of Shariah scholars worldwide and Oman is no exception. “Oman has credible Shariah scholars who will be able to advise and assist institutions to formulate their Shariah advisory units. Shariah scholars around the world work very closely to standardise fatwas and Shariah rulings.
In that context, we believe that Omani Shariah scholars will partner with other Shariah scholars from both the region and international scene. Government support is key to the success of the industry,” says Hatim el-Tahir, director of the Islamic Finance Knowledge Center at Deloitte & Touche (ME). He feels Islamic finance will have a fair share of government’s fund-raising needs and contribute to the overall GDP of the economy.
Al Harthy says an IFAAS study has estimated that the demand for Islamic banking is good with around 86 per cent of Omanis now seeking such services. The cascading effect of the success of Islamic banking in Oman is immense on the banking assets on the whole, as Oman vies for a piece of the pie of this US$20bn industry.
Ernst & Young estimates that Islamic banks in Oman may gain up to US$6-8bn in Islamic assets over first five years.
“We expect Islamic finance to capture up to ten per cent of the market in the next few years,” says Ashar M Nazim, MENA leader, Islamic Financial Services, Ernst & Young. “The first year would be really challenging but the moment the Islamic banking community is able to communicate the message in the right way to people, you will see a big shift in business. Islamic finance will help to encourage productive purpose-based financing in the society rather than consumptive loans. The banking sector is integrated with other industries, hence it will aid the growth of other industries too,” says al Harthy.
While the effect of Islamic banking will be slowly felt on the conventional banking side, Mourad points that the ultimate benefit is for the clients. “Islamic finance is going to increase the pressure on Oman’s conventional banks to revaluate their business models, products and service offerings. We are not just talking about banking but also on the insurance sector which will eventually evaluate their business models too which will result in optimisation in both cases,” says Mourad.
Companies in other industries too might slowly start adopting a Shariah model that will help attract more foreign investments, executives point out. The prolonged wait to introduce Islamic banking in the sultanate seems to imply that enough groundwork has been done and carefully thought out processes have been adopted to make the concept a remarkable success in the region, taking the industry to new heights in the coming years. of assets will be Islamic, so over a period there will be a shift from conventional banking to Islamic banking. Islamic banking is on a growth mode in almost all the Islamic countries, says al Harthy, group general manager, Islamic Banking, BankMuscat
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