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Sultanate takes ‘steady view’ over start of Islamic banking

The introduction of Islamic banking into Oman is being greeted with caution by the authorities, who wish to manage the ‘orderly development of the industry’. MUSHTAK PARKER looks at the wisdom behind this decision

Central Bank of Oman (CBO) officials are advising against any irrational exuberance about the introduction of Islamic banking in the Sultanate following the promulgation of a Royal Decree (No 69/2012) issued on 6 December 2012 by the Omani Ruler, Sultan Qaboos bin Said “amending some provisions of the Banking Law issued under Royal Decree No 114/2000” and adding “a new Title Six – Islamic Banking” to the said law.

The Royal Decree No 69 became effective as soon as it was published in the Official Gazette No 993 two days later. This means that banks in Oman, hitherto the only GCC country not to have introduced Islamic banking in its jurisdiction, can now offer Islamic banking products to customers and businesses, subject, of course, to approval from the CBO.

Both Omani government and CBO officials are careful not to raise unrealistic public expectations about Shariah-compliant finance in the nascent Omani market, where the industry is expected to be driven by young consumers, the financial and business sectors.

According to Hilal Ali Saud Al Barwani, deputy governor and vice president, banking control and legal department, Central Bank of Oman, “a year ago, we were expecting Islamic banking to have five per cent of the total banking market share in Oman to start with. Within one year we expect this to grow to perhaps 10 per cent market share. After that we expect it to grow even further.

“You see everybody’s waiting to see what Islamic banking is all about. It is currently only a market segment and it’s an appetite that we need to see how it is absorbed by the public and the business sector. There are high expectations and everyone keeps knocking at our doors asking when are we going to see Islamic banking in practice. Let’s wait and see how the market develops”.

Privately, however, deputy governor Al Barwani, who chairs the CBO’s Islamic Banking Advisory Committee, is quietly confident that the sector will take off and, eventually, will increasingly make its mark in the Sultanate – both in consumer finance, trade finance, SME finance, corporate finance and financing infrastructure and development projects – as it has done in the rest of the GCC region, where it has acquired an average total banking industry market share of between 30 per cent to 40 per cent.

But, for now, the immediate challenge is to manage the orderly development of the industry and the market in Oman. However, the CBO, perhaps uniquely, gave pre-approved licences to two Islamic banks – Bank Nizwa and Al Izz Islamic Bank – earlier this year. But, armed with successful initial public offerings (IPOs), board of directors, senior management and even core banking systems in place, they could not actually start business until the existing banking law amendments were enacted through a Royal Decree.

As such, they were reduced to staging mock runs of conducting consumer and corporate finance business and testing their computer and banking systems.

“It really depends on how these two banks grow, conduct and market themselves and Islamic banking to the public. I’m very happy to see that these banks are conducting market awareness and consumer education programmes to inform the market about the industry and the latest developments to manage expectations,” explained deputy governor Al Barwani.

The two IPOs are perhaps revealing – while Bank Nizwa’s OR60 million IPO last July was robustly oversubscribed 13.1 times receiving orders in excess OR681 million, Al Izz Islamic Bank’s OR40.8 million IPO in November turned out to be damp squib of an exercise with the offering only 1.14 times oversubscribed.

The shares of both banks started trading on the Muscat Securities Exchange in early December. In Oman, the minimum capital for all banks is OR100 million, of which 60 per cent is subscribed by shareholders, and 40 per cent must be offered to the public through an IPO. Bank Nizwa is capitalised at OR150 million and Al Izz Islamic Bank at OR100 million.

There have been reports that other applications to launch Islamic banks have also been submitted to the CBO, but according to Al Barwani, the CBO believes that “two banks to start with is reasonable. We will see how the Islamic finance industry in Oman evolves. We have also allowed ‘Islamic Banking Windows’, and almost all the local banks have applied for such a licence. But I think we will also start with one or two Windows initially.”

Already Bank Dhofar has confirmed that it has applied to the CBO to launch its Islamic Banking Window, called Maisarah.

The Articles relating to Islamic banking under the Royal Decree No 69/2012 – Article 124 to be precise – allows such banks to finance and invest “in the form of Mudaraba (trust financing); Musharaka (joint ventures or equity participation); Murabaha (cost-plus financing); Ijara (leasing); Salam (forward sale of commodities); Istisna (forward sale of construction equipment and materials); Qardh Hasan (benevolent interest-free facility) or other Shariah-compliant contracts.”

It also allows such banks to raise funds from the market through issuing and investing in Sukuk that are “backed by assets and projects”.

The CBO acknowledges that it faces several challenges in regulating and supervising its Islamic banking market in the short to medium term. “From the Central Bank perspective,” explains the deputy governor, it is really to do with liquidity management, and how we can help the Islamic banks. Even in Malaysia today the Islamic banks are facing problems because they are over liquid. The instruments and outlets as to how this liquidity could be absorbed are very limited and very expensive. You ask any Central Bank about short-term liquidity management. It’s a global problem.”

Whether the CBO will start to issue short-term Islamic commercial papers in domestic currency to accommodate the reserve positions, and to manage the domestic liquidity requirements of Islamic banks and IBWs, however remains a moot point. Bahrain and Malaysia have the most developed domestic Islamic liquidity management and money markets with regular domestic Sukuk issuances.

“The UAE,” reminded Al Barwani, “has had Islamic banking since 1975, but the Central Bank of UAE introduced Islamic Certificates of Deposits (CDs) for liquidity management purposes only two years ago. So that is something we can start with, but it also may take some time to see how it evolves. In Oman, we have the normal CDs for conventional banking. We need to develop the equivalent Islamic CDs for Islamic finance, which are based on commodity-based Murabaha. This is only under discussion at present, so I cannot confirm whether we’ll be ready with these Shariah-compliant CDs from day one.”

He agrees that Oman issuing a debut sovereign international Sukuk would send the right signal to the market, and revealed that initial discussions among the various relevant departments of government – Ministry of Finance, the Capital Market Authority (CMA) and the CBO, of course – have actively started in this respect.

“There are some initiatives developing, and we will see something within the next few of months in 2013. From a policy point of view, the Omani government, the CMA and the CBO, have an open mind as regards to issuing Sukuk. Islamic banking without Sukuk will complicate things. A debut sovereign Sukuk after all will set the benchmark. This is what we learned from the experience of others. Look at Turkey, they introduced Islamic banking in 1983 and only went to the market to issue its debut sovereign Sukuk last September,” he added.

The CBO would ideally also like the private sector and the government-linked agencies also to take the initiative in Sukuk origination. “We have started engaging and asking other entities also to look into this. The commercial banks themselves will have to drive the companies into raising finance through Sukuk origination,” he concluded.

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