Long road to success

Higher borrowing by the government through Sukuk provided an initial push to Islamic banking, but the sector still has to overcome many hurdles

The year 2016 could prove to be a milestone in the history of Islamic banking in Oman as for the first time since the launch of the sector, a Shari'a complaint bank reported profit and the total assets under it crossed RO3bn mark, accounting for around ten per cent of the total banking assets in the country.

Three years after the government allowed the entry of Islamic finances, Bank Nizwa, which started in 2013, become the only Shari'a compliant bank to close a financial year with a profit.


“This was indeed a milestone as we moved from loss-making to break even and booking profit for the first time. We saw the negative macro economic scenario as the opportunity and the challenge. Being in the management, you need to do something different when there is a tough time. You cannot do business as usual” says Khalid al Kayed, CEO at Bank Nizwa.

“If you compare the overall growth in the finance segment in Oman to that of Islamic banking, you will find that it is too high indicating that the market share for Shari'a based banks are increasing in Oman,” he added.

However despite being profitable, Bank Nizwa still has to face competition from other banks, including Islamic windows of conventional banks and a host of other financial institutions.

According to the Central Bank of Oman (CBO), the total assets under Islamic finances increased by 36.6 per cent in 2016 to touch RO3.01bn, thus accounting for around ten per cent of the total assets in thecountry. The rapid growth in Islamic finances is mainly attributed to increase in the total amount of Sukuk issued by the government to finance the budget deficit.

According to CBO, Islamic banks and conventional banks’ Islamic windows together operated with 70 branches at the end of 2016 compared to 60, a year ago. They also had 72 ATMs and 17 cash deposit it machines in service. Moreover the total deposits held with Islamic banks and windows also registered a significant increase of 41 per cent to RO2.17bn at the end of 2016 from RO1.54bn a year ago.

Initial enthusiasm

CBO announced the opening for Islamic finances in the country in December 2012, heeding to the widespread demand. Within few months of CBO finalising the regulations governing Islamic banks, all local banks except one made entry into the segment through separate windows. This was soon followed by the launch of two full fledged Islamic banks – Bank Nizwa and Alizz Islamic.

There was much enthusiasm for this industry in the country and many were predicting a faster growth in the initial stages, but the reality was a little different. Banks were eager to expand services fast but the exhaustive regulations by CBO, which were one of the strictest in the world, called for extensive documentations, staffing and controls which led to muted response from consumers.

Industry insiders believe that a significant number of people are still out of the banking system due to their beliefs and if Islamic banks are able to bring them on board, it could push the growth of the sector in the country.

However, with softening of crude oil prices from second half of 2014 proved to be dampening for the Islamic finance in the country. “The macro economic situation, where we are living is impacting everybody. The banking sector by nature cannot remain aloof to it,” says Kayed.

However, the situation changed rapidly when government decided to finance a part of deficit through Sukuk (Shari'a version of debt instruments). Higher borrowing provided much needed support to Islamic finance as they can park surplus capital and could earn steady income also.


According to Dr Mughees Shaukat, head of Islamic Finance at College of Banking and Financial Studies, “In the age of dwindling oil resources and price dips, Oman continues to exert serious efforts in diversifying its economy and aims to reduce the oil sector's contribution to GDP from 46 per cent  at present to nine per cent  by 2020. To this end, a suitable, sustainable and diversified financial architecture ranks second to none.

He said “Oman’s welcome adoption of Islamic finance and banking has created a golden opportunity for the sultanate to reap the desired benefits. Thus far the progress have been exciting and appears to have gained momentum in times of crisis.”

Countries like Indonesia which permitted Islamic finances around  25 years back, have around five per cent share under it whereas in Oman, in just four years of operations they have over ten per cent share, indicating the potential in the country, says Shaukat.

Bumpy road ahead

Despite encouraging result shown by Islamic Bank and Islamic windows of conventional banks, most experts are still skeptical about its growth prospects in the country as economic issues due to low oil prices amidst competition from other banks continues to put pressure on margins.

Shaukat says, “The common problem Islamic finance has faced globally is viz-a-viz its operational perception as being similar to conventional finance. This is based on the premise that renders the current mechanics as driven more by retail banking model via debt based products.”

Kayed says, “The challenge we faced in Oman was not of a new bank entering a system, rather it was a new industry entering a system. Our biggest challenge was that most people in the country didn't have the awareness of Islamic banking products. And most clients were already dealing with conventional banks for last 30-40 years, and all their banking needs were already been taken care of. Now, the challenge before us was not only to make them aware about products rather convincing them to shift.

He said “Going forward I see a better future for Islamic banks and Bank Nizwa will find ways to innovate and seamlessly address challenges and integrate banking into the lives of customers and the community we serve.”

According to experts, higher growth witnessed by Islamic banks compared to overall banking industry in Oman shows that the increase in market share of it is happening at the cost of conventional banks in the sultanate.

“As the competition from conventional banks is going to be intense, it will put a pressure on margins and maintaining profitability for some of Islamic bank or window would be difficult and going forward  it might result in consolidation in the financial sector also,” Kayed said.

Last year, Bank Nizwa made a proposal to acquire non banking finance company United Finance. Later Alizz Islamic bank also made the offer but talks failed ultimately. However, this year again, Alizz Islamic has made the similar offer.

Almost, all the experts emphasised that still the awareness about Islamic finance products is low in the country, and if Islamic banks wants to make their presence felt in the country in the long run they need to take serious steps to create awareness, and also they need innovative solutions to over come competition from conventional banks. 

Long road to success
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