Interview: Khalid Al Kayed

How do banks in the sector differ from conventional institutions, and how are they being supported by the Central Bank of Oman (CBO)?

AL KAYED: There are many elements that differentiate Islamic banks and conventional banks. First and foremost is the idea that their activities are exclusively based on sharia principles, whereby profit is generated through a profit-and-loss sharing model. Furthermore, Islamic banking tends to create links with the real sectors of the economic system by using trade-related activities. As a result, funds are linked with real assets and therefore contribute directly to economic development. The entire process is subject to a high degree of supervision, with both internal and external auditors, sharia supervisors, a board of directors, an independent internal sharia supervisory board, and the central bank’s higher sharia authority.

The CBO plays an important role not only in regulating Islamic banks but also in supporting their development. Its most prominent contribution in this regard was the issuance of the Islamic Banking Regulatory Framework (IBRF) that was published before such entities began operating commercially. The IBRF is a comprehensive guideline for Islamic banks and windows that has set a benchmark for others to follow. Apart from this, the CBO regularly supports Islamic banks whenever they require guidance and advice in light of changing economic and operating factors, which is why the Islamic banking sector in Oman, including conventional banks, is financially sound and stable.

What has been the impact of Islamic banking and financial services on the Omani economy?

AL KAYED: Islamic banking assets constitute 11.5% of total banking assets as of September 2017, and grew by 16.8%, or OR520m ($1.35bn), whereas conventional banking assets grew by 2% – OR552m ($1.43bn) – in the first nine months of 2017. This shows that Islamic banking has outperformed its counterpart, which is a significant achievement and testament to the potential of growth in the sector. Islamic banking is growing faster than conventional banking, and the expectation is that it will represent 20% of assets held in the banking system by 2020.

Islamic finance caters to all financing needs, including those related to individuals, corporates and capital market instruments such as sukuk (Islamic bonds), among a wide range of other areas. Despite the relatively recent start of Islamic finance in the sultanate, sukuk have already been issued, the first of which was in 2013.

All of this is a testament to our view that Islamic finance has great potential to grow and contribute to all sectors of the economy. The sharia-compliant segment is important for Oman, as it contributes to the diversification of the economy.

How can the CBO address the lack of sharia-compliant instruments that can serve as high-quality, short-term liquid assets for Islamic banks?

AL KAYED: There has been significant development regarding the issuance of sharia-compliant, high quality assets contributed by both corporates and the government. However, in order to generate liquidity and to use those instruments for liquidity management purposes, the CBO should issue short-term, sharia-compliant instruments that are either sukuk- or wakala- (agency) based, and become a player itself in the interbank market by creating an Islamic window that would manage the surpluses or deficits among banks through wakala arrangements. This will make Islamic banks more competitive by allowing for better returns to investors and will also reduce undue pressure on balance sheets related. With that being said, I am confident that the CBO has plans to take action regarding this matter soon.