In Oman, as in all the GCC countries, it is impossible to sever the link between the sustained depressed level of global crude oil prices and the prospects for Islamic finance growth in its banking sector. Islamic finance was launched in Oman at the end of 2012 when oil still stood at over US$100 per barrel. But everything changed just as Islamic finance was getting established in the country; by the middle of 2014, crude dipped to much less than its peak value, and stayed there. This is of the greatest importance since the sustained success of Islamic finance in the country is dependent upon the participation of the government, if only as a provider of liquidity for the sector, now pre-occupied with plugging its annual budget deficit and supporting the value of the national currency.
Review of 2016
The government’s principal participation in Islamic finance in Oman – through the issuance of sovereign Sukuk – has been disappointing, especially after the great success of its debut in October 2015; there has been just one further issuance since then, in June 2016, once more well received. With a combined issuance value of OMR500 million (US$1.29 billion) to date, it has at least set an initial pricing benchmark that the private sector can follow for commercial Sukuk.
At the same time, Oman has, during the course of 2016, achieved a sound infrastructure for its Islamic finance sector to develop and progress. The Capital Market Authority’s regulations for Sukuk went live early in the year with innovative flexible provisions aimed at simplifying solicitation procedures and reducing the launch time for issuance. Oman Sovereign Sukuk is the state’s vehicle for any further issuances. And the Shariah Index of the Muscat Securities Market, the country’s bourse, now boasts 15 listings, bolstering the claims of Sukuk to recognition as a separate distinctive asset class as well as delivering a much-needed liquidity tool.
Also, the Islamic banking sector in the Sultanate continues the progress made in the course of the past two years. To the end of the third quarter (Q3), the sector leader, Bank Muscat (Meethaq), posted a respectable 30% increase in income, with rival Bank Dhofar (Maisarah) seeing a OMR2.13 million (US$5.51 million) profit over the same time period. Overall, the eight participating banks in the sector generated a 53% increase in financing commitments up to the end of July, continuing an established trend from 2016.
Set against that, Alizz Islamic Bank, one of the two dedicated Islamic banks, continued its battle to achieve profit and realized a OMR3.42 million (US$8.85 million) loss, again to the end of Q3. In the same vein, bank credit (conventional and Islamic combined) jumped 11% year-on-year for the first three quarters; this is attributable, according to some sources, not to customer confidence but rather to borrowers locking in to current interest rates in anticipation of the central bank taking these higher where it needs to do so to defend the Omani rial’s US dollar peg.
Preview of 2017
The coming year is slated to be a tough one for Oman economically, with a growing government deficit, a continued strength in the US dollar and no appreciable rise in the price of crude. Looking to cover the funding gap, the central bank has already indicated that the greater part of its borrowing requirement (60%-plus of the total) will be met from the international bond markets. That does assume no further significant reduction in Oman’s credit rating.
Where it draws on domestic sources, Sukuk will be simply one of the options along with government development bonds, treasury bills and others. Assuming that Islamic debt liquidity is not going to be as high on the government’s list of priorities as it once was, this may impact on the sector in time.
Islamic finance has proven itself as an accepted and successful option for project financing in the private sector and as an alternative to conventional retail lending, and in both respects it carries potential for sustained growth into 2017.
Islamic finance in Oman has coped well with a difficult year in 2016, meeting the challenge set by its introduction in late 2012, which was to make a significant contribution to the development of the country’s economy. 2017 looks set to be at least as difficult as this year economically, if not more so. The sector continues, along with its conventional counterpart, to suffer from a significant problem of oversupply and it is reasonable to expect that some mergers or acquisitions will be seen among the eight bank participants, where the two front-runners are doing well but the rest are striving to achieve profitability.