In conjunction with the inaugural IFN Oman Seminar held in Muscat in March 2016 to promote, highlight and support the growth of Islamic finance in Oman, IFN in partnership with the Omani government are pleased to present the findings of the first IFN Oman Dialogue.
The two and a half-hour invite-only event formed part of IFN’s groundbreaking annual series of high-level, closed-door international industry Dialogues, and was attended by a select group of Oman’s leading Islamic finance practitioners and industry regulators.
Designed to establish a working plan for the progression and evolution of Islamic finance in Oman, the panel achieved an exceptionally open, honest and in-depth discussion of the opportunities and concerns facing the Shariah compliant financing and investment market in Oman; as well as a thorough overview of the wider economic climate and the urgent steps needed to support the growth of Islamic finance in order to benefit from its valuable potential contribution to the country’s financial market.
Covering the entire breadth of the market from regulatory framework and legislation to retail banking, investment and financing, capital markets, Takaful and beyond, the findings and recommendations from this report form essential reading for all regulators, stakeholders and supporters of Oman’s financial markets: and provide an instrumental and actionable roadmap for future progression.
The discussion follows Chatham House rules to encourage free and open debate. As such, no comments are attributed.
Executive Summary and Recommendations
General Overview and Regulatory Framework
- The current IBRF regulatory framework needs to be revisited – it has served its purpose but must be updated and adapted to reflect the evolving market needs.
- Oman needs to decide on its vision and its position in the market, and then enact a strategic and comprehensive plan covering everything from regulation to education to human talent in order to achieve that. Just throwing things together piecemeal will not succeed.
- There is an urgent need for a comprehensive strategy document that outlines the regulatory vision for Islamic finance in Oman over the next 5-10 years, in order to help banks accurately structure their investments and strategy.
- There is a disconnect between layers of regulation, and often what is allowed by one department is prohibited by another (ie a disconnect between the Islamic Banking Regulatory Framework (IBRF) and the commercial banking law, or between the Central Bank of Oman (CBO) and other government ministries) which can make the operational process for Islamic banks lengthy and difficult.
- Islamic finance can make a real and valuable addition to the Omani economy, especially as it seeks to diversify – and it needs to be supported in its ability to do this by the regulators.
- Oman should create a regular forum or platform where regulators, stakeholders and industry players work together to create a harmonized system that leverages all that Islamic finance has to offer. The central bank should be asking industry players for feedback.
- Oman should consider a centralized industry body for Islamic finance that can represent and act for industry interests.
- Oman should participate more actively in global industry and standard-setting bodies such as the IFSB, which have already issued opinions on many of the relevant issues.
Retail Banking
- Islamic banks are facing a number of operational limitations, including problems in matching assets and liabilities, and it is impossible for them to comply with the current financing ratios. They urgently need a relaxation of the rules to help them get on their feet and grow/compete effectively.
- More instruments are needed to assist with a serious liquidity management issue – and Islamic banks must be allowed to treat sovereign Sukuk as a short-term liquidity management instrument.
- Commodity Murabahah is needed, and it should be up to the individual Shariah boards of banks to determine when and where its use is appropriate.
- Beyond the IBRF, there are also certain prudential requirements on the conventional side which also apply to Islamic banking, and these can be very restrictive.
- The authorities need to understand the specific details of Islamic transactions and waive the additional charges and taxation in order to achieve efficient and cost-effective products including perfected title transfer.
- Central bank limitations (such as insisting that Islamic banks get specific permission for all fundraising) are restricting growth and go beyond monitoring the safety and soundness of the system. Islamic banks are prevented from doing certain things to prevent them from growing too fast, and that is unfair.
- Islamic banks need to be more innovative in the products they offer, and provide solutions that are not available in the conventional banking arena.
- Stand-alone banks have many issues compared to Islamic windows, and they have a disadvantage regarding access and branch networks. Islamic windows should eventually be spun off, but this is not likely to happen any time soon as it will require changing the laws of equity ownership.
- Open dialogues are needed between the private sector and regulatory bodies.
- Awareness is a key issue, and banks cannot do this on their own – all stakeholders, from regulators to government ministries to schools and education, should be involved.
- Islamic banking is still treated as commercial banking, and that has to change – it is a unique alternative and should be treated as such. It is not enough to take normal banking law and dress it up to look Islamic.
- The central bank is improving, and in the last six months it appears to be approving more requests.
Investment and Financing
- More investment products are needed as these are very limited in Oman. Islamic banks have an opportunity here – especially in the field of products such as real estate investment trusts (REITs) – but the central bank must approve these rather than declining on the basis of risk.
- The Capital Market Authority (CMA) is currently working on investment funds regulation, especially for real estate vehicles.
- Oman has not done enough to position itself in the international market, and it needs to do more in order to attract inward investment – including international roadshows with the support and participation of the regulators.
- Development authorities should work with the banks and investment institutions to provide the right kind of facilities for investors to make it easy for them to set up shop in Oman. Financial institutions need regulatory support to attract foreign direct investment (FDI).
- Oman has a low debt-to-GDP ratio and low foreign currency borrowing, so has a rarity value that should be attractive to investors seeking opportunities.
- Oman needs to diversify its investment opportunities – it cannot compete with Dubai on a pure finance level, especially since its downgrade.
- Oman needs to develop and build up its private sector – at the moment, around 55% of bank deposits are from the government or government-related entities.
Capital Markets
- Oman should have gone to market earlier – it needs a yield curve to price its assets, and it does not have a history of issuance.
- The Omani market needs more listings, more activity and more IPOs – foreign investors will not come to a market where there is no liquidity or depth so market capitalization needs to increase.
- The CMA should issue guidelines to corporate in the form of Q&As in order to explain the Sukuk concept and encourage issuance.
- The liability and responsibility of the issue manager in Oman is draconian – the CMA or any investor can bring a claim against the banks and the issuer, and the list of obligations and responsibilities is extensive. This creates a number of issues because there is no statutory defense.
- The new Sukuk regulation is expected to provide an advantage and increased flexibility for Sukuk as compared to conventional bond issuance.
- The CMA does not issue regulations in isolation, and all stakeholders need to play a role to tell the regulator what is needed.
- The CMA does not directly regulate Shariah committees or offer a centralized board because it wants the market to be flexible and innovative in the early stages.
- Oman needs to identify its value proposition and complement other financial hubs (such as Dubai or Malaysia) rather than compete.
- The whole structure and model of Takaful in its current form needs to be restructured and realigned.
- There are certain issues with the model, and the business model needs to change in order to generate a profitable policyholders’ fund that does not require Qard Hassan from the shareholders’ fund.
- The Omani Takaful industry has around 9% market share, but much of this was converted from the conventional rather than growing organically.
- The market needs to grow and more firms need to be established – it is hard to raise awareness with just two companies and more capital investment is needed.
Conclusions and Recommendations
- Regulation needs to adapt to current and evolving requirements, rather than remaining static. The IBRF needs to be updated.
- The industry and the regulators need an ongoing dialogue or platform to discuss market needs, issues and requirements.
- The CBO needs to engage better with the banks and listen more carefully to their needs.
- The CMA needs to provide more support for issuers in order to encourage Sukuk.
- Government departments need to communicate and cooperate better with each other, and awareness within the authorities themselves is as important as awareness for the public.
- Collaboration between market participants and stakeholders is essential.
- Banks should unite to promote innovation, in areas such as crowdfunding, Awqaf and Zakat.
- Raising awareness is key, and it should be done through a united effort between banks, regulators, government bodies and schools.
- Human talent is a key issue and Oman has the opportunity to play a role in developing this at a global level.