Branching out: Strong regulatory framework underpins the expansion of sharia-compliant institutions

The creation of Oman’s Islamic banking segment dates back to 2012, when the Central Bank of Oman (CBO) launched the Islamic Banking Regulatory Framework. The following year the regulator issued licences for the country’s first two sharia-compliant banks, alizz islamic bank and Bank Nizwa. Islamic windows have also been launched at six conventional banks: the Meethaq Islamic window at Bank Muscat; Muzn at the National Bank of Oman; Maisarah at Bank Dhofar; Al Yusr at Oman Arab Bank; Sohar Islamic at Bank Sohar; and Al Hilal at Ahlibank. (ultram)

By the end of 2013 the combined assets of Islamic banks and banking windows had reached OR815m ($2.1bn). Assets grew by 68.2% in 2014 to OR1.37bn ($3.6bn). By June 2015 they had expanded to OR1.83bn ($4.7bn), or 6.7% of banking assets. “It would not be excessively optimistic to assume that Islamic banking assets will reach around 15% of total sector assets over the next five years,” Helmi Haruna Rashid, the general manager of wholesale banking at Bank Nizwa, told OBG.

Profit & Costs

The segment posted combined losses of OR725,000 ($1.9m) in 2014. Nevertheless, the CBO said that while the fully fledged sharia-compliant banks remained loss-making, four of the six Islamic windows were profitable.

Higher costs than those faced by conventional banks represent a potential challenge but these can be overcome. “Islamic banks’ costs may be higher than conventional banks, but not greatly so, and the market as a whole is not characterised by very intense competition,” said Haruna Rashid, adding that Islamic banks have thus had room to enter the market without undercutting their own cost base. Sulaiman Al Harthy, the group general manager of Meethaq Islamic Banking, said Islamic banks had initially been very competitive on price as they had large amounts of capital to allocate, though this dynamic had changed as the market developed.

Another challenge is the availability of investment opportunities. However, industry figures say that efforts to develop local sharia-compliant capital market instruments will help. “The government’s planned sukuk (Islamic bond) issue will be a boost for the segment as it will allow Islamic banks to deploy some of their excess liquidity,” Al Harthy said. Industry figures also indicate that the launch of the sovereign sukuk should boost the development of a local corporate Islamic debt market.


A Sharia Supervisory Authority, formed by the CBO to help regulate the segment, met for the first time in March 2015. “The terms of reference for the board have not yet been made public so it is difficult to judge its impact, but there is a need for a more standardised market, in particular as regards inter-bank and generic products, which it should help to create,” said Haruna Rashid. In July the CBO announced that it had established an independent department to deal with Islamic banking issues other than supervision.

“Not all the elements are there yet as regards regulation,” Haruna Rashid said, citing areas such as tax law and regulations covering special-purpose vehicles. “However, the authorities are working on developing the framework, and Oman in a very short space of time is already around halfway to the point well-established Islamic banking markets such as Malaysia have reached.”

Rashad Ali Abdullah Al Musafir, the acting CEO of Bank Sohar, told OBG that asset financing is less volatile in difficult times than other forms of lending, but will require both a great deal of customer outreach and education to ensure that the segment can fully take off. “The lending process is more complicated and the ownership of assets different than under conventional banking, so developing the sector will be a big challenge without also improving the public’s understanding,” Al Musafir told OBG.