In high demand: The new Islamic index is set for strong growth

Oman’s Islamic finance segment looks well placed for strong expansion in 2014, after the government launched a sharia-compliant stock index in July 2013. Already home to more than 30 listed companies, and expected to witness promising investment in the coming years, the Muscat Securities Market Sharia Index (MSMSI) will allow the sultanate to retain valuable domestic investment and continuously expand its offering of sharia-compliant services.

Although challenges remain for a specialised financial index, the MSMSI is experiencing a stable influx of initial public offerings (IPOs) and is poised for substantial growth in sukuk (Islamic bonds) offerings, as the private sector moves to bolster training and certification in expansion efforts, painting a positive picture for the sultanate’s Islamic finance index and sector.


With an estimated $11bn of Omani funds deposited in foreign Islamic financial institutions, the sultanate is hoping to attract back capital and retain valuable domestic investment and as the popularity of sharia-compliant financial products soars in the Gulf region. The government created a regulatory framework for an Islamic finance index in 2012, and two new financial institutions, Al Izz Islamic Bank and Bank Nizwa, acquired banking licences in the sultanate, with others including Bank Muscat, Sohar Bank and the National Bank of Oman, introducing Islamic service windows.

Later that year, in line with Central Bank of Oman (CBO) regulations stipulating banks must list 40% of their shares, Bank Nizwa and Al Izz floated IPOs which were heavily oversubscribed, a positive indication of demand for Islamic products including takaful(Islamic insurance) and sukuk. Bank Nizwa, for example, attracted $1.77bn in its IPO, 11 times the amount it was planning to raise.

The CBO issued its Islamic Banking Regulatory Framework, which will supervise Islamic banks, in December 2012, and in June 2013, Oman’s first corporate sukuk received approval. The five-year, OR50m ($129.5m) private placement was issued by Tilal Development Company, and arranged by Al Madina Investment, to expand the Muscat Grand Mall and pay off existing debts. It will pay a 5% profit under the ijara structure, a common leasing arrangement in Islamic finance.

The market opened for trading in July 2013, as a free-float index capped at 10%, with quarterly revisions of index constituents. As of November 2013, there were 32 stocks listed on the MSM Sharia Index, including 19 industrial companies, nine service sector companies and four from the financial sector – a stark contrast to the MSM, which is weighted heavily towards banks. These include Bank Nizwa, Al Batinah Development and Investment Holding Company, and the country’s two largest telecoms providers, Omantel and Nawras, as well as Oman Cement, Gulf International Chemicals, Shell Oman Marketing and Raysut Cement, demonstrating steady development towards a well-diversified index covering a broad economic spectrum.

Analysts predict that Islamic banks will capture a 5% market share in 2014, prompting further expansion into investment funds, brokerages and sukuk. The new availability is also expected to spur the market and economy as a whole by injecting liquidity into local capital markets and retaining local investment funds.

“Islamic financial services companies will also benefit from a clear strategy for fund flows, as well as the introduction of additional products,” Hassan Ahmed Mohsin, the CEO of Horizon Capital Markets, told OBG.


The index, and indeed the sector, have already performed well, with the MSMSI rising from a base value of 1000 points in July 2013 to trade at around 1065 points in late November. 2013 In 2012, Bank Nizwa ranked first in the sultanate in terms of share trading, capturing 11.7 % of the market’s total traded shares. Tilal’s sukuk sale closed successfully in November 2013, and shortly afterwards the government announced plans to issue a sovereign sukuk, the sale of which should take place in early 2014.

Recent takaful IPOs have also bolstered confidence in Oman’s nascent Islamic finance sector, most recently with the October 2013 launch of Takaful Oman, under the auspices of Oman National Investment Corporation Holding. The subscription is scheduled to conclude in December 2014. Takaful Oman joins Al Madina Takaful as two of the sultanate’s first takaful providers.

More promisingly, a Thomson Reuters Zawya Sukuk Perception and Forecast Study 2014 found that Muscat is increasingly considered the most attractive future sukuk market in the GCC, with surveyed participants expecting the sultanate will become a lead issuer of sukuk in 2014. Although Saudi Arabia and the UAE lead the pack in sukuk issuances for 2013, Oman is seen as increasingly attractive due to the large number of infrastructure projects in the pipeline, which will likely be funded through the planned sovereign sukuk, as well as the availability of relatively untapped liquidity in a fledgling market. The MSMSI’s potential is substantial. According to accounting firm Ernst & Young, Oman’s Islamic finance sector could gain up to $6bn in assets over the next several years, with the total value of Islamic banking assets in the MENA region projected to reach $990bn in 2015, from $416bn in 2010.

Regulatory Developments

The Capital Markets Authority (CMA) became a member of the Malaysia-based Islamic Financial Services Board in March 2012. However, Oman, like many others in the GCC, has opted for a decentralised approach to regulatory enforcement, in contrast to the centralised model used in Malaysia. Under the new law, Islamic banks in the sultanate must establish their own sharia supervisory boards, whose prerogatives and functions are governed by the Islamic Banking Regulatory Framework. Oman’s Islamic finance laws are somewhat stricter than others in the GCC region, particularly on the issue of using tawarruq, or murabaha, as a market instrument.

In tawarruq, one party purchases an asset, defers payment to the vendor, then sells the asset to a third party for cash. Organised tawarruq has been criticised by Islamic scholars due to its tenuous link to real economic activity – a significant criterion for sharia compliance. Although Omani banks had lobbied for the temporary inclusion of tawarruq, the government has prohibited the practice except in one-off emergency cases.

All Islamic financial products listed on the MSMSI must comply with sharia rules that have been set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), a Bahrain-based organisation which sets standards for Islamic finance. Using the Ideal Ratings system, officials will examine and analyse all the listed companies every three months, adding and removing firms based on compliance with sharia principles. A decentralised approach will likely assist in the early growth of the industry by allowing a variety of competing products to enter the market, although the lack of a single, widely accepted sharia board overseeing the industry has been identified as a potential impediment. However, Article 126 (B) of Oman’s Islamic Banking Law requires that the CBO’s board of governors establish a supreme authority for sharia oversight, tentatively titled the Oman SOA.

As of late 2013 Oman SOA had not been established, and the government had yet to provide guidance as to the nature of its role, function, power, authority or institutional status. Laws for takaful and sukuk were also still awaiting final government approval. Further regulatory development and clarification will be critical as the industry grows. Challenges related to logistics and infrastructure could also present issues for existing players and investors. Institutions are still struggling to obtain the proper expertise and oversight, as well as train staff and build computer systems to successfully trade on the MSMSI. The public and private sectors have been working towards helping the financial sector manage a steep learning curve. In 2012 the CBO initiated a nationwide programme aimed at providing training to the sultanate’s financial professionals in Islamic finance best practice. Consulting firm Islamic Finance Advisory and Assurance Services delivers the “Islamic Banking Foundation Programme,” an intensive two-week course ending in certification. The CMA has also organised a number of workshops explaining AAOIFI regulations to interested stakeholders, and in October 2013, Dubai’s Ethica Institute of Islamic Finance announced it would launch its Islamic finance certification programme in Oman. In a statement, the company said it expects high demand for Islamic finance certification programmes in the sultanate.

And although the sultanate’s fledgling Islamic financial services market was established late in the game, the timing could be beneficial to stakeholders and shareholders. In a 2013 interview with business publication The Banker, Hamood Sangour Al Zadjali, CBO governor, said Oman is well-positioned to learn from the experience of longer established markets as it rolls out more sharia-compliant products. He said, “We should appreciate that Islamic banking is evolutionary in many jurisdictions. While a few countries have exclusive Islamic banking, many have introduced it over a period of time … When drawing up the sharia governance framework, we have looked into practices elsewhere and norms recommended in accredited standards set by the Islamic Financial Services Board and AAOIFI.”


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The Report: Oman 2014

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