In December 2022 Oman marked 10 years since its establishment as a burgeoning destination for sharia-compliant banking and investment. The sultanate has successfully pushed for the development of a robust and supportive governance framework since the regulation of its Islamic finance segment began with Royal Decree No. 69 of 2012, which added a chapter dedicated to Islamic banking.
This process culminated in the issuance of the Islamic Banking Regulatory Framework (IBRF) in December 2012, which outlined the regulatory requirements for the undertaking of sharia-compliant commercial and investment banking activities. Since the introduction of the IBRF and the issuance of its first sovereign sukuk (Islamic bonds) in 2017, the sultanate has made key strides in the development of its Islamic banking segment.
In September 2022 the Central Bank of Oman (CBO) announced that total assets of the domestic Islamic banking segment had grown by 9.1% year-onyear (y-o-y), reaching a 16.2% market share of total banking sector assets and consolidating the sultanate’s position as the world’s 15th-largest Islamic banking market. Similarly, by the end of the third quarter of the same year Islamic banking accounted for 18.9% of all loans and 18.1% of total deposits within the banking industry.
Regulatory Evolution
The growth in Oman’s Islamic finance industry correlates with its regulatory evolution, which has allowed institutions to deliver sharia-compliant financial services by way of setting up fully fledged Islamic banks or Islamic banking windows within conventional banks. Although Oman is a relative newcomer in the regulation of the segment, the sultanate learned from the experiences of its neighbours and implemented a robust sharia-compliant governance framework. The scope of the IBRF is extensive, ranging from licensing requirements, general obligations and governance, accounting standards and auditor reports to supervision and control, capital adequacy and credit, market, operational and liquidity risks. Likewise, the IBRF sets out the process and requirements for obtaining an Islamic banking licence, which requires domestic banks, foreign banks and Islamic windows to have paid-in capital of no less than OR100m ($260m), OR20m ($52m) and OR10m ($26m), respectively.
Regulatory improvements have not been restricted to the IBRF. The Capital Market Authority (CMA) issued a new sukuk regulation in early 2016, which enabled the issuance of Oman’s first sovereign sukuk in 2017 – an offering that witnessed oversubscription more than three times – signalling strong investor demand for Islamic financial instruments and confidence in the sultanate’s sharia-compliant finance sector. Ultimately, measures introduced by the CBO and the CMA seek to ensure that Islamic lending institutions operate in a transparent and compliant manner, while also promoting the broader principles of Islamic finance.
The proliferation of fully fledged Islamic banks and Islamic banking windows was a key outcome of the IBRF. In turn, the market has been able to attract a diverse customer base, ranging from individual investors and small businesses to large corporations and government entities. Prior to 2012 relatively few Islamic financial institutions operated in the sultanate. By 2022 Oman’s Islamic banking segment had expanded to comprise two Islamic banks and five Islamic banking windows.
Services
By offering a wide range of financial products and services that cater to the needs of different market segments and capitalise on innovation as a competitive advantage, Islamic banks not only have improved customer service but also become increasingly more dominant players in the local economy. For instance, according to the CBO’s 2022 “Financial Stability Report”, 55.5% of gross financing of Oman’s Islamic banking segment went to the corporate sector, 40.5% to retail clients, and 4.1% to small and medium-sized enterprises. Likewise, low-risk housing loans comprise the majority of personal financing loans, accounting for 31.1% of gross financing, followed by loans to construction and manufacturing, constituting 14.3% and 8.1% of total gross financing, respectively.
“Oman is focusing on strategic sectors that promote the broader aims of Oman Vision 2040, and local private financial entities will have opportunities to grow in this context,” Khalid Jamal Al Kayed, CEO of Bank Nizwa, a sharia-compliant lender, told OBG. “Islamic banks need to be available to finance public-private partnerships in sectors such as education, health care, tourism and hospitality, along with agriculture and food. Islamic banks can also play a role in providing green finance options, contributing to the shift towards sustainability. Given current trends, it is anticipated that Islamic banks will have additional instruments to improve liquidity and increase their participation in key development projects.”
Overcoming Challenges
The Islamic banking segment is expected to maintain its positive trajectory in the short to medium term, though a number of challenges remain to be addressed. These predominantly consist of gaps in distribution channels, limited product offerings, a relatively small capital base, limited sukuk investment options and insufficient Islamic liquidity management products. Although local Islamic banks in the past have been adequately capitalised and exhibited reasonable profitability and asset quality, they have yet to attain levels displayed by their conventional counterparts.
The capital bases of Islamic banks are smaller than conventional ones, which can limit the scale of participation in large government financing projects. For example, government and public enterprise projects represented 10.4% of the financing mix of Islamic banks and windows at the end of 2021, more than double the 4.6% participation they had in 2020 but still lower than the 16.1% participation of conventional banks. The need for further scalability has encouraged consolidation within Oman’s Islamic banking industry, which witnessed the takeover of Alizz Islamic Bank by Oman Arab Bank in 2020. In January 2022 Bank Nizwa and Sohar International Bank (SIB) received approval to begin due diligence for a potential merger, which was followed by the signing of a non-binding merger agreement between SIB and HSBC Bank Oman in July of the same year.
Consolidation is viewed favourably by the industry as it would enable greater cost efficiency, widen distribution channels and raise capitalisation levels. Mergers could also support faster growth for Islamic banking subsidiaries or windows by allowing them to take advantage of the stronger capitalisation and liquidity profiles of larger conventional banks. In tandem with the natural evolution of the sector, the CBO is developing a medium-term strategy for the Islamic banking segment that includes the establishment of a lender-of-last-resort and a sharia-compliant deposit insurance scheme. Similarly, in 2021 the CMA released draft rules for sukuk and bond regulations to standardise market rules, improve the efficiency of debt instruments and include environment, social and governance-linked instruments. As of March 2022 sukuk issuances represented about 19% of total listed government bonds.
Prospects
The appetite for Islamic banking products in Oman is expected to expand, boosted by rising awareness, elevated oil prices, positive real GDP growth and supportive regulation. In addition, in August 2022 global ratings agency Standard & Poor’s upgraded the country’s sovereign credit score from “BB-” to “BB”. The Islamic banking segment’s financing growth outpaced its conventional peers in 2021, expanding by 11.6% compared to 3.1%, and at a compound annual growth rate of 9% between 2017 and 2021. The segment’s double-digit performance in 2021 followed a strong 2020 showing despite the headwinds resulting from the Covid-19 pandemic and lower oil price environment, with lending growing 9.5% that year, in contrast to the 2.1% loan growth experienced by conventional lenders.
The growth potential for Oman’s Islamic banking segment remains high given the sultanate’s Muslim-majority demographics, banking penetration rate – 75% of the population was banked as of 2022 – and ongoing diversification agenda. Whereas Islamic banking has been present in Indonesia and Turkey since 1992 and 1984, respectively, it represented around 10% of their total banking assets as of 2021 compared to more than 15% in Oman.
This indicates that there is already strong appetite in Oman for sharia-compliant finance. Having registered consistent expansion in terms of assets, market share, loans and deposits since its emergence in 2012, Oman’s Islamic banking industry shows significant growth potential in the years ahead.
