A few weeks ago, press reports hailed the creation of a new Islamic bank in Oman as well as the ability of conventional banks to open branches or windows dedicated to Islamic financing. This marked a radical change of policy because until now Oman has been the only Gulf State without Islamic finance.

Oman has a long tradition of being an open and fair environment in which to do business. There has been increasing desire within the Omani and international community to do business in Oman in a formally Shari’ah-compliant manner. The announcement is seen as a significant milestone.

Why is This Development Significant?

We expect a series of guidelines to be released by the Central Bank of Oman (CBO) in the coming months, enlarging on the change in policy towards Islamic financing. The guidelines will provide further details of how financial institutions will be able to offer Shari’ah-compliant products and services.  We anticipate that the announcement will lead to the following key developments:

  • Conventional lenders will be able to offer Shari’ah-compliant products with ad hoc clearance from the CBO. 
  • Existing banks will be able to set up Islamic banking branches or windows (although they may not switch to full Islamic banking).
  • Business opportunities and incentives will exist for many international financial institutions and businesses wanting to operate in Oman.
  • We expect the first formal branches to be formed within eight to 16 months bearing in mind the need for guidance from the CBO.

What is the Business Impact?

Islamic finance and Shari’ah-compliant products and services represent a fast-growing global industry estimated to grow at between 10 and 15 per cent annually over the next few years.

The Islamic finance industry has witnessed the development of certain significant trends.  We outline some of these here and how they will be relevant to Oman.

What is Islamic Finance and Why is it Growing?

Islamic finance is a way of entering into financial transactions that do not offend the principles of Islam. This means that the financing must be consistent with the principles of the Shari’ah (or Divine Law). Such principles form part of the Shari’ah, which is often understood to be Islamic law, but it is actually broader than this in that it also encompasses the general body of spiritual and moral obligations and duties in Islam.

Growth has been driven by:

  • Political factors: governments in Islamic countries providing a favourable regulatory and financial environment and the desire of western governments to encourage Islamic finance.
  • Socio-cultural factors: increasing commitment from retail customers to Islamic products and the resurgence in Muslim cultural values.
  • Economic factors: growing wealth accumulation in GCC countries and non-Islamic investors seeking a diversified investor base.
  • Product development: increasing sophistication of Islamic finance products and increasingly competitive terms compared to conventional banking.
  • Demographics: growth in the young Muslim population worldwide.

An Opportunity for Oman: Growth of Sukuk (a Core Market)

The commodity Murabaha is the most widely used Islamic money market instrument for such needs as liquidity management, providing working capital and raising funds for mega projects, with an estimated trading volume of US$ 7–8 billion daily. However, the Sukuk is currently the Islamic product with the strongest growth trajectory in spite of recent market fluctuations. It has been predicted that we will see the issue of a significant number of corporate and sovereign Sukuk in the coming years, and with it the development of a liquid and efficient Islamic capital market.

Suk (with the plural being “Sukuk” although in practice the term “Sukuk” is used irrespective of whether it is a reference to the singular or plural) is the Arabic name for a financial certificate. It is often described as the Islamic equivalent of a conventional bond but there are significant differences. Conventional fixed-income, interest-bearing bonds are not permissible in Islam. Sukuk are securities that comply with Islamic law and investment principles and which prohibit the charging or paying of interest. Sukuk are structured so that, not only do the investors in Sukuk have the benefit of a covenant to pay by the issuer, but the issuer also has an ownership interest in the underlying assets. Issuers of Sukuk have included governments, quasi-government institutions and corporate entities including multinational companies.

As a result of the open and fair business environment and the maturity of its legal system, Oman is well positioned to take advantage of the growth in Sukuk and become an attractive market for Islamic finance products and services more generally for the following reasons:

  • Oman has a well developed banking law that is easily accessible as it is officially in English and Arabic.
  • Furthermore the ministries and government bodies are supportive of moves towards international business practices. Sukuk transactions will be able to include comprehensive security packages registered in Oman and benefit from established enforcement procedures.
  • The CBO will continue its long tradition of being a responsible and pragmatic regulator encouraging certainty and security in the market.

Challenges to Growth in Oman: Debate in Relation to Standardisation

The growth in Islamic finance products has to an extent been hampered by the differences in views of Shari’ah Supervisory Boards amongst different banks. This has partly been driven by geographical differences. One significant effect of this has been a delay to the standardisation of the form of documents used in Islamic finance products. This has limited the amount of cross-border trading in the industry and is seen by some commentators as the biggest hurdle for its growth in Oman. The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), based in Bahrain, and the International Islamic Financial Market (IIFM) have been addressing these issues. Their efforts in issuing standards on a range of topics have been compared to those of conventional bodies such as the International Swaps and Derivatives Association (ISDA).

What Next?

The timing of the directive of His Majesty was unexpected. Therefore the regulators in Oman as well as the banking and business industry both in Oman and internationally are all trying to identify what potential areas of change need to be addressed first in order to facilitate Islamic financing business and products. It is anticipated that the first window of a conventional bank and the Islamic bank itself will take eight to 18 months to establish. Oman is in the spotlight and the regulators are aware of their sense of responsibility in ensuring that conditions for Islamic financing business in Oman are fostered and driven forward. To that end, the CBO is entering into a period of consultation with banks and businesses with a view to implementing the appropriate guidelines and regulation for the Oman market.  Watch this space.

(Being published in Financer Worldwide)