The Sultanate of Oman, being the last of the GCC states to implement regulations for its banks to market Shari’a compliant financial products and services, issued its Islamic Banking Regulatory Framework (IBRF) — a formidable document of some 500 pages at the end of 2012. At that time the Omani banking market numbered 17 institutions. By the first anniversary of the launch of IBRF, two specialist Islamic banks – Bank Nizwa and AlIzz Islamic Bank had emerged and less than half of the existing banks had set up dedicated branches (or windows). With this relatively slow start, results in 2013 for most bank participants proved disappointing overall; however, 2014 by contrasts, has proved to be an excellent year for Islamic finance in Oman, culminating in the establishment, under the aegis of the Central Bank of Oman
ACCORDING TO THOMSON REUTERS (Zawya Report December 17, 2014), should Islamic banking assets continue to grow at the rate seen in 2014, they will represent some 7 percent of total banking assets (or US$ 13 billion) in the sultanate by close of 2018. Complementing this tide of success, the Government of Oman has recently mandated lead managers and investment advisers for the launch of its debut sovereign sukuk for an estimated RO200 million (US$520 million), projected for Q1 of 2015, setting a long awaited benchmark for prospective corporate sukuk to follow down the line. This was also timely as it accompanies the introduction of executive regulations (compliant with the applicable locally adopted principles of Shari’a) for the structuring, issue and operation of sukuk issues under the umbrella of the IBRF. Oman has never looked to establish itself as a regional or international hub for the Islamic finance industry but the sultanate’s decision makers have been sufficiently shrewd to acknowledge proactively the potential demand for this industry and at the same time the benefits it can bring to the country’s economy. Within this spectrum of developments, we discuss briefly a SWOT analysis of the Omani Islamic finance sector in the short to medium term.
With the establishment of the Central Shari’a Board (CSB), Oman now has in place all the regulatory and commercial infrastructure necessary to stimulate a vibrant Islamic finance sector as part of its banking and finance industry, and is the only GCC state to have done this. Bahrain’s central bank has a consultative panel but this is used solely to assess the compliance of sovereign financial products. The sense of pragmatism displayed by Oman in this initiative is further reflected in its offering the local banking community a choice, in entry to the Islamic finance market, between forming a new business operation on the one hand and arranging self-funded, independently capitalised “windows” on the other hand. The CBO has adopted the prudential standards and guiding principles of the Kuala Lumpur based IFSB (Islamic Financial Standards Board) and the reporting and accounting measures of the Bahrain based AAOIFI (Accounting & Auditing Organization for Islamic Financial Institutions) for the purposes of its regulation and supervision of participating Omani banks in line with local and international expectations.
AS A FINAL COMPONENT OF the IF systemic infrastructure for Oman an Islamic Index has been set up at the Muscat Securities Market to facilitate the trading of Islamic stocks and bonds, which will likely be the stimulus which that asset class requires. The IBRF sanctions many, but not all, of the IF products and principles widely found in the GCC and other Muslim countries at the present time. Notable omissions from those sanctioned are the commodity Murabahah and Tawarruq (tripartite Murabahah), both of which have significantly fuelled the development of the Islamic finance sector in Malaysia and elsewhere. The Islamic finance landscape in Oman is complete through the sanctioning of Takaful insurance in the Sultanate: new legislation, enhanced capital requirements, mandatory listing on the MSM and a new regulator (CMA) were all put in place earlier in 2014 and two new Takaful providers (Al Madina Takaful and Takaful Oman) have commenced business.
Although Oman is seen as a strong market for Islamic finance, it lags behind in certain areas. Some of these might be as follows:
1. Slowness of regulatory implementation: Oman was slow in sanctioning the use of IF products in its jurisdiction.
The modern era of IF runs from the late 80’s, a time when Oman was well advanced in its Renaissance. This has left it trailing both the rest of the GCC and other Asian countries where IF has been successful. But it depends what Oman wants to derive from the genre: it looks to stimulate investment, local liquidity and commerce and little beyond that. And it now has the tools to achieve this.
2. Conservative selection of potential products:
The conservative approach of the government to the sanctioning of Islamic finance products in Oman has been noted already. But again it depends what its objectives are. It has never sought to be a hub but it does look to ensure that the economy derives benefit, which is already proven.
3. Oversupply in Oman’s banking sector:
There were 17 existing banks in Oman in 2011; since then one of those has disappeared by merger and two Islamic banks have set up. There is still over supply from the conventional players and this may have checked further growth in the industry as customers remain to be shown the benefits of changing product.
4. Long wait to bring sukuk regulations and announce Oman’s debut issue in 2015 Q1:
Aware of the need for liquidity management opportunities in the Islamic banking sector, the CBO sought to counter – balance this delay by relaxing restrictions on banks’ participation in Islamic investments abroad (and it remains to be seen how that concession will be reversed). There is a perception that the CBO saw the debut
sukuk opportunistically as a means in part to address the looming 2015 budget deficit and some suggest that this might affect the pricing (although the issue will likely be aimed primarily at local investors).
At the same time the systemic infrastructure for Islamic finance that Oman has established provides opportunities in a number of areas, including the following:
1. Project finance & infrastructure:
The use of Islamic finance tools in projects is well recognised in KSA, for example. In Oman, this has yet to emerge, although in the construction of the Kempinski hotel at The Wave resort, an Istisna’a agreement is being used to cover the agreement to construct the hotel in conjunction with a forward Ijarah contract to become effective on completion of building. The financing is to be secured on the hotel. Further use of such structures in Oman depends on the conversion of sponsors, employers and contractors to the merits of doing so in preference to conventional secured lending.
2. Further development of use of IF in retail banking and SME sector:
About 91% of all registered businesses in Oman count as SME’s and the government is actively promoting Islamic finance as a funding source for these especially startups. This has been taken up first by Bank Muscat (Meethaq) and later by HSBC Oman. Finance for capital assets (through Musharakah) is seen as particularly attractive for this sector. Working capital facilities, through Islamised factoring arrangements (with an appropriate allocation of risk), is proving harder to get away.
3. Valuable prospective contribution of CSB in “blessing” new products:
The CSB is not merely a specialist arm of the CBO for the policing of the IF sector. Its remit is also to serve as a “sign-off ’ institution for the development of new products and this could prove invaluable in providing momentum in the retail sector.
4. Benchmark set for further sovereign and corporate sukuk:
The debut sovereign sukuk should serve as the lead required to stimulate the use of this instrument in the Sultanate for the absorption of local and (in time) international liquidity generated in the IF sector. Bank Muscat’s earlier initiative with its provisional note issuance will draw strength from this basis for a benchmark in the Sultanate.
So, what possible obstacles might lie in the way of the fulfillment of the Omani Islamic finance development initiative that needs to be navigated cautiously?
• Consumer resistance to innovative methods of financing:
Several bank participants, notably Bank Dhofar (Maisarah), have seen some success in the provision of house purchase facilities. There is some consumer cynicism towards the partnership with the bank concept—will the funder really be prepared to “share the risk” as it is being promoted?
• Conservative regulator – CBO: The CBO has proved to date to be conservative in its approach to the introduction of IF.
Maybe this will slow further development? The writer’s view is that the remit of the CSB (above) may allay some fear here.
• Small market & latecomer to IF, regionally & internationally:
Oman will look to stimulate its economy through IF to the extent it sees it needs to. As noted, there is no apparent ambition to become a principal hub in the region. The existing pressure for investment of local IF liquidity will persist however and how this is to be met is a major challenge for the authorities.
• Sustained oil price downside & depressed GDP/reduction
of sovereign credit rating:
The December 2014 reduction by Standard & Poor’s of Oman’s outlook from stable to negative (leaving its rating undisturbed) following the sharp fall in oil prices is not due to affect the debut sukuk. But should oil’s fall in value become sustained (the better view being that it will not) may affect Oman’s options for funding its budget deficit as it returns to the international debt market after an absence of 8 years.
THE WAY FORWARD
Oman has successfully introduced Islamic finance as a force to stimulate its non–oil economy. It has done so rather belatedly albeit on a measured basis. The sector’s further development will be driven by consumer acceptance and demand, the government’s pragmatism and external factors over which the authorities have limited control.