Oman: Islamic finance set to take off

Text size +-

Islamic financial products, first authorised by the Omani government in 2011, are set to take off later this year, with the banking, real estate and insurance sectors all expected to see benefits. However, competition is also forecast to increase as both sharia-compliant and conventional banks vie for customers.

Bank Nizwa, the first bank granted authorisation to roll out Islamic financial products, intends to begin operating in the third quarter of 2012. The bank recently raised $156m through an initial public offering (IPO), which will be used to finance the development of new services.

Al Izz Islamic Bank is the second bank to have received authorisation to introduce sharia-compliant services and has announced plans for an IPO in September. The float is set to be valued at $104m, representing 40% of the bank’s proposed capitalisation of $260m.

The introduction of Islamic banking is also having a ripple effect throughout the wider financial sector. There has been strong movement on the Muscat Securities Market (MSM), with a number of banks looking to raise funding to support their entry. With the Central Bank of Oman (CBO) having set a minimum capital requirement of $26m for lenders to open an Islamic banking window, there have been several rights issues on the exchange.

In late July, Bank Muscat staged a $251m rights issue, which attracted bids totalling $321.26m, with the lender confirming in international media that much of the capital raised would be used to back its entry into Islamic banking.

The insurance sector is also set to see benefits, with the Capital Market Authority (CMA), which oversees the industry, looking to introduce a regulatory framework that will allow sharia-compliant insurance (takaful) firms to operate. In early August, Abdullah bin Salem Al Salmi, the executive president of the CMA, announced that legislation to pave the way for the launch of takaful products had been drafted by a team of consultants.

“We are now reviewing this draft and will discuss with the consultants. We have also consulted with other organisations, such as the Islamic Financial Services Board of Malaysia and have received comments on the draft,” he said in early August. “We hope we will be able to prepare the final draft within a month or so.”

The real estate sector also looks set to join the nascent segment. It is believed the new funding model will improve access to loans and rebuild faith in the property market. Philip Paul, the head of the Oman branch of international property consultant Cluttons, said that the property market is a good fit for Islamic banks, as it is in keeping with Islamic principles, which require an underlying physical asset in all transactions.

“In Oman, Islamic finance has the potential to, among other things, help the revival of the domestic real estate sector,” he said on August 7. “This impending resurgence will help investor confidence in the local market, but also accelerate national economic growth as well.”

While the advent of Islamic banking has been warmly welcomed, it is expected to come at some cost, at least as far as conventional financial operations are concerned. Abdul Aziz Al Balushi, the CEO of Ahli Bank, said that while he does not see Islamic banking taking a significant amount of consumer loan trade away from conventional banks, he does see areas where rivalry for business will be stiff. Indeed, with at least two dedicated sharia-compliant lenders, as well as an expected six local commercial banks set to open Islamic windows, institutions will work hard to bring in new customers.

“There will be tough competition in the mortgage loan business,” Al Balushi told media in early August. “There is going to be a lot of competition for deposits as well. Many people like to park their money without earning interest. So deposits will migrate to Islamic banking and the competition for low-cost deposits is going to be tough.”

That competition could bring benefits to customers, however, as banks will have to work hard to attract deposits and offer attractive products to entice clients.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart

Read Next:

In The Middle East

How the GCC Railway could revolutionise trade and transport in the Gulf

Following delays, the long-awaited GCC Railway looks likely to be revitalised, a move that could transform trade and connectivity across the Gulf.

In Financial Services

Modest growth expected for South Africa’s stock market in 2014

The Johannesburg Stock Exchange (JSE) enjoyed a good year in 2013, with its growth far outpacing that of the overall South African economy. However, with capital flows to emerging markets...


Modest growth expected for South Africa’s stock market in 2014

The Johannesburg Stock Exchange (JSE) enjoyed a good year in 2013, with its growth far outpacing that of the overall South African economy. However, with capital flows to emerging markets...