Islamic banking is one of the bright spots in the Omani banking sector, with growth outpacing the market as a whole
Oman was the last of the GCC states to develop a licensing system for sharia-compliant banks. The regulations were only finalised in late 2012 and the first licences issued shortly thereafter. Since then, it’s been the most dynamic part of the banking sector and it is expected to take an ever more significant share of the overall market in the next few years. “Oman Islamic banking assets are likely to grow faster than conventional banking assets,” says Mik Kabeya, analyst in the financial institutions group of Moody’s Investors Service. Kabeya estimates that the asset base of Oman’s Islamic banking sector grew by 68 per cent in 2014, compared to growth of 11 per cent in the conventional banking arena, and that Islamic banks could account for around 10 per cent of the banking sector’s asset base within 2-3 years, compared to around 6 per cent at the moment.In early July, just before the start of Ramadan, the Central Bank of Oman opened a specialist department to oversee the Islamic banking sector. Earlier this year the Muscat government also said that it would issue its first sovereign sukuk (Islamic bond), although it is not yet clear when that will happen. Nonetheless, such moves are helping the country’s Islamic banking sector, which is still in its infancy, to develop and mature.
There are only two purely Islamic banks in the country, Alizz Islamic Bank and the slightly larger Bank Nizwa. Unsurprisingly, given their short history, they are still relatively small. Alizz has assets of 120 million Omani rials ($312 million) at the end of December 2014, while Nizwa had 253 million Omani rials. Their greatest competition comes not from each other, but from the Islamic banking ‘windows’ of the conventional banks. Some of these are already larger than Alizz or Nizwa in terms of assets. For example Maisarah Islamic Banking Services, which is part of the BankDhofar group, had assets of 192 million Omani rials at the end of last year, while Meethaq, the Islamic banking arm of Bank Muscat, had assets of 427 million Omani rials.
Many of the conventional banks see the sharia-compliant sector as one of the most promising areas of the market. “In 2013 we launched aggressively into Islamic banking, opening seven branches at once,” says Lloyd Maddock, chief executive officer of Ahli Bank of Oman, which owns Al Hilal Islamic Bank. “This proved to be a good strategy, and we have built a fast growing, profitable business from scratch.”
Despite all the competition, the two newcomers are still growing quickly. Alizz and Nizwa reported rises in assets over the course of 2014 of 20 per cent and 29 per cent respectively. Growth in deposits was even more rapid. Alizz says its deposits were up 129 per cent in 2014 to 11.2 million Omani rials, while Nizwa’s were up 188 per cent to 49 million Omani rials. Their results from the first half of this year point to continued strong growth. Alizz reported assets of 188.7 million Omani rials at the end of June, a rise of 58 per cent since December. It has opened two new branches this year, in Salalah and Muscat, taking its total to six. Nizwa has 11 branches and says its assets expanded by around 47 million Omani rials to 300 million Omani rials in the first half of the year.
Both of these banks are still loss making, however. Nizwa reported a net loss of 7.7 million Omani rials for last year, while Alizz booked a 5.5 million Omani rials loss. First half losses this year amounted to 3.2 million Omani rials for Nizwa and 3.6 million Omani rials for Alizz. In contrast, some of the Islamic banking windows of the conventional banks are already making a profit. Maisarah moved into the black in its first full year of operations, with a small net profit of 230,000 Omani rials in 2014. Bank Muscat says that Meethaq is also profitable.
Just how quickly the sector will grow and mature remains to be seen, but most observers suggest that it is likely to continue to outpace the conventional banks. That growth could come in part from new product launches and more sukuk, from both the sovereign and other issuers, which will provide a welcome source of liquidity. Fitch Ratings points out that Oman’s Islamic banks tended to hold excess liquidity in cash due to a shortage of other options. “By diversifying liquidity portfolio investments, Oman’s Islamic banks will be able to reduce concentration risks and boost profitability as they benefit from participation in sukuk profit distributions,” says Bashar Al Natoor, global head of Islamic finance at Fitch.
However, the Omani authorities have taken a relatively conservative approach to the Islamic banking sector to date, which could keep things in check to some extent. “Islamic banking is expected to grow strongly in the coming years, though perhaps not as strongly as has been seen in other GCC countries, because the regulations mandate a very strict adherence to sharia principles,” says Rashad Ali al-Musafir, acting CEO of Bank Sohar. “This naturally curtails growth, as only the most genuine of financings that satisfy sharia principles are booked. However, demand continues to remain strong.”
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