21
Oman
The Dawn of Islamic Banking
Azmat Rafique
Head, Islamic Banking, Al Yusr Arab Bank
The Central Bank of Oman (CBO) has allowed licenses for two full-fledged Islamic banks and six Islamic banking windows. As of October 2013, all had launched their operations.
International banks have also shown an interest in setting up Islamic banking operations in Oman, but no news of their applying for licenses has been confirmed by the CBO yet. The Oman Sultanate Information Source (OSIS) estimated in 2012 that there are more than 2 million potential customers of Islamic banking in the country. This estimate was based on the number of Muslims in Oman and taking into account the probable adoption of Islamic banking by non-Muslims.
The value of the Islamic banking sector in the Middle East is US$210 billion. Globally it is estimated to be worth more than US$1.3 trillion. Ernst & Young has forecast that a successful rollout of Islamic banking infrastructure could see the industry in Oman gaining up to US$6 billion in Islamic assets in the next few years.
Ernst & Young also projects that as new opportunities open up, Islamic banking assets in the Middle East and Africa could double to US$990 billion in 2015. The CBO has indicated that the Islamic banking sector in Oman will grow to represent 10–20 percent of the regional market in less than five years. This suggests a market size well in excess of US$100 billion by 2018.
Retail Banking
Since the commencement of Islamic banking, the industry has mainly focused on the retail sector, with Shari'ah-compliant products and services designed to address the regular banking needs of the people.
This section gives an overview of the Islamic retail banking sector in Oman, consisting of two full-fledged Islamic banks and six Islamic banking windows.
Bank Nizwa
Bank Nizwa, the first full-fledged Islamic bank in Oman, began its operations on January 10, 2013, with a paid-up capital of OMR150 million. It has the advantage of being perceived as a purer form of Islamic banking institutes than its window counterparts. Bank Nizwa currently has seven branches, located in Muscat, Nizwa, Salalah, Ibra, and Sohar. As part of its expansion plan, it is in the process of opening six new branches by the end of 2014.
Bank Nizwa started with limited product offerings, then gradually expanded them. Table 21.1 shows the retail products and services offered by Bank Nizwa.
Table 21.1 Bank Nizwa's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Al Yusr
Al Yusr is the Islamic banking window of the Oman Arab Bank, which is known for its rich history, legacy, and strong presence in Oman since the early 1970s. Al Yusr was launched in July 2013. It started its operations with a branch, in Muscat, and has recently opened its second branch in Salalah. It plans to set up three more branches by the end of 2014.
Since its launch, Al Yusr has been focusing on the retail sector, with its strong financing products composed of Shari'ah-compliant auto and home finance products. It was the pioneer in offering a complete suite of Shari'ah-compliant home finance products, including the financing of ready property, property to be built, and balance transfers from an existing conventional loan to an Islamic home finance.
Table 21.2 shows the products currently offered by Al Yusr.
Table 21.2 Al Yusr's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Meethaq
Meethaq is the Islamic banking window of Bank Muscat. It was launched in January 2013, with OMR150 million authorized capital through its first branch, in Muscat. Since the launch it has moved quickly to position its retail Islamic product suites, relying on the established reputation of its parent bank. Meethaq has been a strong frontrunner in the market with six branches in operation. It has appealed to the mass market with generic products and services available to a broad audience. The bank has also focused on the conversion of conventional mortgage services to Shari'ah-compliant financing options. It is the first bank in Oman to launch a Shari'ah-compliant credit card as well as to offer banca takaful (Shari'ah-compliant insurance) products from a takaful operator based in UAE.
Table 21.3 shows the products currently offered by Meethaq.
Table 21.3 Meethaq's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Muzn
Muzn is the Islamic banking window of the National Bank of Oman. It was the first Islamic banking window in Oman, opening on January 16, 2013, through its flagship branch in Al Azaiba, Muscat.
The National Bank of Oman provides a solid base for Muzn, with a strong reputation and its legacy as the first bank to be registered in Oman. In terms of market positioning, Muzn had the first-mover advantage; however, it was not able to capitalize on this and so far only has one branch in operation.
Muzn is focusing on its ijarah-based home finance products to promote the growth of the real estate sector in Oman. It is the first Islamic bank in Oman to register a Shari'ah-compliant home financing deal with the Ministry of Housing.
Table 21.4 shows the products currently offered by Muzn.
Table 21.4 Muzn's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Sohar Islamic
Sohar Islamic is the Islamic banking window of Bank Sohar. It was launched in July 2013, coinciding with the month of Ramadan. Sohar Islamic relies primarily on Bank Sohar for its name and expert banking reputation.
Unlike other players, Sohar Islamic is mainly focusing on the commercial and corporate sectors while using its retail banking sector to complement its strong commercial banking drive. The window has expanded its branch network to four branches.
Table 21.5 shows the products currently offered by Sohar Islamic.
Table 21.5 Sohar Islamic's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Al Hilal
Al Hilal is the Islamic banking window of Ahli Bank. It was launched in February 2013 with a capital of OMR10 million. It started with six branches, which give it a strong presence. Al Hilal is penetrating the market with its Islamic mortgage products. Its goal is to gradually convert its conventional parent bank's retail portfolio to Shari'ah-complaint Islamic banking, which shows its strong commitment to the retail secor.
Table 21.6 shows the products currently offered by Al Hilal.
Table 21.6 Al Hilal's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Maisarah
Maisarah is the Islamic banking window of Bank Dhofar. It was launched in April 2013 through its flagship branch in Salalah.
In September 2013, Maisarah announced the launch of the Shari'ah-compliant priority banking services, becoming the first Islamic bank in Oman to introduce these services to serve its high-net-worth customers. However, the bank is primarily focused on corporate and commercial banking sectors.
Table 21.7 shows the Islamic deposit and financing products offered by Maisarah.
Table 21.7 Maisarah's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Al Izz
Al Izz, the second full-fledged Islamic bank, started its operations in October 2013. Like Bank Nizwa, it will have an advantage over the windows in being perceived as a pure Islamic bank. Al Izz is utilizing the relationships with its investors from the Gulf Cooperation Council (GCC) region to establish a strong reputation.
Al Izz started with a paid-up capital of OMR100 million, of which 40 percent was raised by an initial public offering and 60 percent was contributed by its promoters.
Al Izz has launched a wide range of simple and easy-to-understand Islamic products that cater to the broad needs of retail and commercial customers. The products are based on a variety of Islamic finance contracts, such as mudaraba, ijarah, istisna, and wakala. SME financing will be targeted at a later stage.
Table 21.8 shows the Islamic deposit and financing products offered by Al Izz.
Table 21.8 Al Izz's Retail Product Suite
| Deposit | Financing | Others |
|
|
|
Corporate Banking
This section describes the corporate, commercial, and SME banking offerings of the two full-fledged Islamic banks and the six Islamic windows. Growth in this sector is directly dependent on the state of economic activity in the country. Islamic banks and windows, flushed with liquidity in the initial months found it difficult to convert this liquidity in Islamic banking assets.
At present several windows, after facing tough competition in the corporate and commercial banking sectors, are focusing more on converting conventional facilities into Islamic ones. The main reason is the indifference of large and medium-size corporations toward the religious connotation of Islamic banking. These institutions primarily give more weight to pricing and service quality. The second reason is the limited supply of new diversified demand of finance in the market. Currently, most of the financing requests are for real estate projects in the country.
Bank Nizwa
Bank Nizwa started its operation in retail banking and then later introduced corporate and commercial banking. However, it did not build its corporate portfolio as expected, considering it was the first Islamic bank in Oman.
Its corporate and commercial banking products have been designed to serve SMEs, large corporations, government-owned entities, and project and structured finance transactions.
Table 21.9 shows the products and services offered by Bank Nizwa's corporate and commercial banking sector.
Table 21.9 Bank Nizwa's Corporate and Commercial Banking Product Suite
| Deposit | Financing |
|
|
Al Yusr
Al Yusr also began its Islamic banking operations with retail banking products and services. It has introduced value added products and services to meet the regular business needs of the commercial and SME banking sectors.
Table 21.10 shows the products and services offered by Al Yusr to its corporate and SME banking customers.
Table 21.10 Al Yusr's Corporate and SME Banking Product Suite
| Deposit | Financing |
|
|
Meethaq
Following its launch in retail banking, Meethaq is now expanding its product range to the commercial and corporate banking sectors.
Meethaq is strongly focusing on the corporate sector and aims to play a leading role in this area. This is evident from its large corporate banking team.
Table 21.11 shows a list of the products and services offered by Meethaq that have been launched to support its business strategy.
Table 21.11 Meethaq's Corporate Banking Product Suite
| Deposit | Financing |
|
|
Muzn
Muzn was the first Islamic banking window, but so far it has not come up with an effective strategy to acquire market share. It has a small corporate banking team and only one branch in Muscat to serve its corporate customers.
Table 21.12 shows the products currently offered by Muzn for its corporate and SME sectors.
Table 21.12 Muzn's Corporate Banking Product Suite
| Deposit | Financing |
|
|
Sohar Islamic
Though Sohar Islamic started its operations a bit late, it is aggressively focusing on corporate and commercial banking in the areas of asset finance, working capital finance, trade finance, and treasury and investment products.
It aims to establish itself as the leading Islamic solution provider for its commercial and SME customers.
Table 21.13 shows the key products offered by Sohar Islamic.
Table 21.13 Sohar Islamic's Corporate Banking Product Suite
| Deposit | Financing |
|
|
Al Hilal
Since the beginning of its operations Al Hilal has focused on the corporate and SME sectors with a wide range of products from project financing to bilateral financing and trade services.
Recently it signed a cooperation agreement with the Muttawar Omani Company to extend its Shari'ah-compliant housing finance solution to the Lamar Bausher residential project.
Table 21.14 shows the products currently offered by Al Hilal for its corporate and SME customers.
Table 21.14 Al Hilal's Corporate Banking Product Suite
| Deposit | Financing |
|
|
Maisarah
Maisarah is primarily targeting corporate and SME sectors, and it has structured a robust corporate banking team that is focusing on government, large corporations, mid-tier corporations, and SME sectors. Currently, Maisarah has two branches in Muscat and Salalah.
Table 21.15 shows the offerings of Maisarah in corporate banking.
Table 21.15 Maisarah's Corporate Banking Product Suite
| Deposit | Financing |
|
|
Al Izz
Al Izz commenced its operations during the month of October 2013 with both retail and corporate banking products.
Table 21.16 shows the offerings of Al Izz in corporate banking.
Table 21.16 Al Izz's Corporate Banking Product Suite
| Deposit | Financing |
|
|
Tax and Accounting
Unlike its neighboring GCC countries and many other Islamic banking markets, Oman has adopted the financial accounting standards issued by the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). According to the Islamic banking regulatory framework, Islamic banking entities are required to comply with all the requirements of the AAOIFI standards; however, when no explicit guidance is available in the AAOIFI standards, Islamic banks (which include banks with Islamic windows) should comply with the relevant International Financial Reporting Standards (IFRS) or International Accounting Standards. It might be considered a challenge for Islamic banks to fulfill all the requirements of the AAOIFI standards in this new banking segment. Many mature Islamic banking markets—including Malaysia, Indonesia, Pakistan, and the GCC—have not yet opted to follow the AAOIFI standards.
Besides the accounting requirements, the CBO has stipulated separate reporting and auditing requirements for Islamic banks. It is mandatory for the banks to obtain an annual audit report on their financial position from an external auditor in accordance with the auditing standards issued by AAOIFI and the International Standards on Auditing and Assurance.
The CBO has developed a separate set of reports for Islamic banks. The purpose of the CBO's stringent reporting regime is to closely monitor the performance of Islamic banks during the initial phase of the industry.
The immediate need is to educate the Omani people in order to prepare a future workforce. Local and international accountancy bodies, colleges, and universities should develop short courses and include Islamic finance and accounting courses in mainstream programs. It is equally important that Islamic banks should develop in-house capacity building and advanced programs for talented Omani youth.
For the time being, no separate tax laws have been introduced for Islamic banks and windows. However, an internationally recognized assurance and consultancy firm, KPMG, was appointed by the government to review the existing tax structure and suggest appropriate amendments in the tax laws to accommodate Islamic banking transactions.
In May 2013, the firm submitted its recommendations to the government. According to the recommendations, all Islamic finance transactions should be treated on par with conventional financial products. A matching principle has been recommended for tax purposes—that is, an Islamic finance transaction, for tax purposes, should be considered equivalent to a conventional transaction depending upon the outcome of the transaction. For example, Islamic finance instruments like murabahah (deferred payment sale) will be considered equivalent to loans in conventional banking.
The recommendations are currently under consideration by the government, and if everything goes well, amendments in the tax laws are expected to be announced soon.
Takaful and Re-Takaful
Considering takaful as prerequisite of the Islamic financial system, the Capital Market Authority (CMA) engaged an internationally recognized law firm to draft a legal framework for Shari'ah-compliant insurance and financial instruments. Since it was altogether a new experience for Oman, the CMA also consulted other international Islamic finance organizations like the Islamic Financial Services Board to deliberate on the draft regulations.
According to the draft regulations, the proposed capital base for a takaful operator is OMR10 million, and the operator must be a public company listed on the Muscat Stock Market. The company is also required to appoint a three-member Shari'ah board to implement a Shari'ah governance structure and ensure Shari'ah compliance.
Window operations are not allowed for the insurance companies; they have to establish a separate company to offer Shari'ah-compliant insurance services. It is a deviation from the norms in the banking sector, where conventional banks have the liberty to open an Islamic banking window to offer Islamic banking products and services.
The CMA, being the regulatory authority for takaful operations, has so far issued approval to three companies. One of these principally approved companies announced its initial public offering (IPO) during the last quarter of financial year 2013. The IPO was a success and the industry is eagerly waiting for the commencement of its Islamic operations.
The future of the takaful business is highly dependent on the performance of the Islamic banking sector in Oman. The growth and success of both segments are interlinked. Currently, in the absence of takaful operations in Oman, Islamic banks have either obtained temporary exemptions from their Shari'ah boards to deals with existing insurance or are dealing with takaful operators in the GCC region.
Hopes are high that takaful operators will target the untapped market in Oman. The masses in Oman who opted for Islamic banking out of religious inclination will opt for Shari'ah-compliant insurance arrangements as well, when available. The share of Islamic finance in the GCC and Malaysia is 25 percent and 22 percent, respectively, whereas the takaful market share is 15 percent and 10 percent, respectively, according to Ernst & Young. This clearly provides a wide window of opportunity for takaful operators in GCC region.
Islamic Investment Securities
Liquidity management is one of the key challenges for Islamic banks in the absence of Shari'ah-compliant investment instruments. Although the CBO has relaxed cross-border placement limits for Islamic banks and windows for a limited time, no concrete and permanent solution is available at present. The CBO has not yet introduced any Shari'ah-compliant instruments through which Islamic banks and windows can manage and meet their liquidity needs.
Islamic banks and windows are not allowed to place funds with their conventional counterparts. Moreover, the regulator has also barred money market placements by means of commodity murabahah (tawarraq). Currently, the only options available are interbank placements through wakala and mudaraba arrangements.
The CMA has hired the services of an internationally reputed consultant to document the regulatory framework for Islamic debt instruments. In January 2013, a first draft was circulated among the stakeholders for their feedback. The regulations define sukuk as “negotiable capital market instruments (such as notes or certificates) that represent or evidence a proportionate interest in underlying assets and revenues, and have been structured according to Shari'ah precepts.” The highlights of the draft regulations are as follows:
- A joint stock company or a special purpose vehicle (SPV) can issue sukuk.
- The SPV will not be subject to tax.
- A Shari'ah supervisory board will consist of a minimum of three members.
- Sukuk can be issued either as a public offer or a private placement.
- A company can issue sukuk only to the extent of its net worth, which is not a condition in other countries.
- The issuer has been given an option to follow either IFRS or AAOIFI standards.
An innovation in the regulations is the creation of a trust in the context of sukuk. The creation of trusts is not otherwise recognized under Omani laws. The regulations permit an SPV to create a trust for which the SPV acts as a trustee and the sukuk holders or their nominees are beneficiaries.
The market has perceived the draft regulations as stringent and conservative. The market has introduced certain restrictions that do not prevail in other markets and may limit the market size.
Few initiatives have been taken by corporations to take advantage of this situation. The latest example is the issuance of a trust certificate worth OMR50 million (US$130 million) by Al Madina Investment Company, a construction conglomerate in Oman. These sukuk are based on an ijarah structure. The underlying asset for the sukuk is one of the landmark projects of the company in Oman.
Because of its low debt-to-GDP ratio and its flourishing economy, Oman has a massive potential to develop the sukuk market. The government is spending huge amounts on developing and improving the infrastructure, building new airports in Muscat and Salalah, and there is a long list of projects in pipelines. Oman has about US$30 billion committed to ongoing infrastructure projects (a new Muscat airport, rail project, and gas-fired power generation plant being the largest ones). When compared to its GDP of approximately US$70 billion, this compares quite favorably to other GCC countries. It also points to the fact that infrastructure projects will be looking for new methods of financing like sukuk and syndicated loans from Islamic banks and windows in the near future.
It is recommended that the CBO, in collaboration with government authorities and the CMA, arrange mudaraba-based certificates of deposits and ijarah-based sukuk instruments enabling Islamic banks to effectively manage their liquidity and earn revenue on their surplus funds.
Regulatory and Other Issues
The Islamic banking regulatory framework issued by the CBO did not put in place a centralized Shari'ah supervisory board. Instead, it allows each Islamic bank or window to have its own Shari'ah supervisory board to establish and oversee its Shari'ah governance structure. Each Shari'ah supervisory board is required to have a minimum of three Shari'ah scholars, each with a proven knowledge of fiqh and financial matters and a minimum of 10 years of experience. These requirements are more stringent than those of many other Gulf countries, since there is the restriction that Shari'ah supervisory board members work for two competing Islamic financial institutions.
The CBO has taken another strict stance by restricting the commodity murabahah transactions. Commodity murabahah, or tawarruq, is a liquidity management technique used in most of the countries that have opted for a parallel Islamic banking model. Under commodity murabahah or tawarruq, one institution buys an asset from another Islamic bank or window on a deferred payment arrangement and sells the same asset to a third party on a cash basis to generate liquidity. The CBO regulatory framework rules out this instrument. Tawarruq has come under criticism by some scholars for not being fully compliant with Islamic financial requirements. However, this has posed a challenge for newly established Islamic banks to manage their liquidity in the absence of any Shari'ah-compliant certificates of investments, treasury bills, or sukuk-like instruments.
It is expected that the Islamic banking industry will face severe competition. The Islamic banking windows will face intense competition from full-fledged Islamic banks and other windows as well as from their conventional counterparts. It is important for the windows to create the right perception among the masses and invalidate the public impression that windows are opened by conventional banks merely to sabotage the customer flow to Islamic banks.
Conclusion
Through the launch of Islamic banking, the financial sector in Oman has obtained more depth in terms of the financial products and services it offers to its customer base.
The growth of Islamic banking in Oman is promising. Islamic banking entities have entered the market with interest and enthusiasm. The range of products, considering Oman's status as a nascent market, is quite comprehensive and gives customers a broad range of choices. Various strategic focuses are being tested in the market by the banks, and in the coming years the picture will become clearer with regard to their success or failure.
Various recent initiatives in Oman to develop a competent and knowledgeable human resources pool are commendable and will surely prepare the necessary workforce to manage this industry. Awareness about Islamic banking products and concepts is still a challenge, and banks and regulators should jointly start initiatives to create awareness among customers for easy adaptation of this sector.
As regulators in Oman actively play their role by issuing regulatory frameworks for Islamic banks by CBO, drafting regulations on sukuk and takaful by CMA, and creating amendments in the tax regime, the ground is almost ready for the healthy growth of the Islamic banking industry in Oman.
References
- Al Hilal. http://www.ahlibank.om/islamic-al-hilal.
- Al Izz. http://www.alizzislamic.com.
- Al Yusr. http://www.alyusr.om.
- Bank Nizwa. http://www.banknizwa.om.
- Central Bank of Oman. World Islamic Banking Competitiveness Report 2012–2013, by Ernst & Young. 2014.
- Central Bank of Oman, “Islamic Banking Regulatory Framework.” December 18, 2012.
- Maisarah. http://www.maisarah-man.com.
- Meethaq. http://www.meethaq.om.
- Muzn. http://www.muzn.co.om.
About the Author
Azmat Rafique is the head of Al Yusr's Islamic banking window of the Oman Arab Bank (OAB). He was tasked to establish the Islamic banking business for the OAB that was successfully launched in 2012.
Prior to joining the OAB, he was a manager in the Islamic Financial Services Group (IFSG) of Ernst & Young in Qatar and led several multicultural teams on engagements relating to Islamic banking strategy, corporate governance, product development, and Shari'ah audits. Azmat was also part of the IFSG core team in Bahrain and led the corporate governance subteam, also in Bahrain. Before joining Ernst & Young he worked at MCB Bank, Pakistan, as team leader in the Islamic Banking Group. During his 10 years with MCB Bank, he also served in various important positions in the Corporate and Commercial Banking groups. In these roles he was responsible for handling diverse business concerns that ranged from local SMEs to renowned multinational companies.
Azmat completed his MBA in finance from the Institute of Business Administration, Karachi–Pakistan, and received an MSc in Islamic economics, banking, and finance from Loughborough University in the United Kingdom.