Muscat: Islamic Finance sector in the Sultanate of Oman has high potential to grow as some of Islamic banks and Islamic windows at conventional banks have started operations and the gulf state is likely to hit an asset base of OMR1.5 billion by the end of 2013 and in next 3-4 years it can reach up to OMR3-4 billion.
This was estimated by a well-known Islamic Finance practitioner who is the Director of Islamic Finance Advisory Services at KPMG in Oman, Khalid Yousaf.
According to his calculation, Shariah-compliant institutions are expected to mobilize OMR1 billion by way of deposits by the end 2013 while the equity capital of two Islamic banks and window operations put together is estimated in the region of OMR550 million. Of this, the combined paid up capital of two Islamic banks alone is at OMR250 million.
The Islamic financial institutions, including window operations, are expected to capture a market share in the region of 5-7.5 percent by the year-end, considering the fact that the total deposit base of Omani banks now is around OMR16 billion.
Yousaf stated, “The growth of liability side is easy because several people will look for Shariah-compliant deposit.”
“A lot of institutional money, which had left Oman, is likely to come back to the country. Oman’s high net worth individuals will also gradually bring back their funds as it is convenient to deal with a local bank than an institution based outside the country,” he added.
Banking sources said that there was a rush among customers for the opening of new accounts with the first Islamic bank in Oman after the inauguration of its main branch. Bank Nizwa has started operations, while Bank Muscat and National Bank of Oman have commenced their window operations. Two other banks, Oman Arab Bank and Bank Dhofar, have announced their plans to start window operations soon, even as others are trying to enter the market with Shariah-compliant products as early as possible.
It is generally believed that the marketing and promotions will play an important role in creating awareness among the people to transfer their funds from conventional banks to Shariah-compliant line of banking.
Yousaf commented, “The largest portfolio of conventional banks is personal loan and it is likely that most people will approach Islamic banks for personal loans, mortgage finance and auto loan.”
“There will be an increasing preference among Muslims to deal with Islamic banks (for remitting money),” he added.
He also said, “Islamic banks will be keen to deploy funds for getting good returns. Also, these banks will provide funds for working capital requirements of manufacturing and service industries.”
Another investment avenue will be treasury and capital market products. However, as far as foreign exchange exposure is concerned, an Omani Islamic bank cannot invest more than 40 per cent of its net worth in foreign currency dominated assets, except in sukuk. The single exposure limit in foreign currency exposure is limited at 5 percent.
Yousaf suggested, “There is a huge opportunity for sukuk to be introduced in the country, which will channelize Islamic funds into productive areas like infrastructure development, manufacturing industries and small and medium enterprises (SMEs). It is a bridge for channelizing funds from Islamic institutions to SMEs.”
He also said that Oman would witness a growth of sukuk issues and Islamic funds in the next two to three years due to excess liquidity among Shariah-compliant institutions in the initial period. “That will promote the growth of sukuk,” he added.
He suggested the government to encourage foreign banks to open window operations in Oman as they can bring in their expertise, which were tried and tested in their home market. “They can bring ready-made products as well,” Yousaf concluded.