Industry leaders provide insight on what Oman’s Islamic finance landscape will look like in five years and what market players and regulators will need to do to get there. With developments already taking place in each major sector, how can sustainable growth be achieved in Oman’s banking and capital market sectors? What is Oman capable of achieving domestically and what is the outlook for cross-border Islamic finance activities?
The future for Islamic finance in Oman is promising – that is the consensus reached by the panelists who all agreed that the progress made by the Sultanate so far has been “tremendous”; however, challenges including in the area of regulation and human capital remain.
Promising progress
Commanding 7.75% of the total banking assets (as at the end of 2015), and approximately 8.7% of the Takaful market after a short three years since Islamic finance was officially introduced into the Sultanate, it is widely believed that Oman is well on its way to reaching its 10% market share target by 2018.
The Sultanate’s success is attributed to it being able to learn from the best practices of its peers: “Being new entrants to the Islamic finance industry, we have had the opportunity to learn from the experience of other jurisdictions. We have tried our best to avoid mistakes done elsewhere and this gives a positive signal to the Omani market,” explained Abdullah Salim Al-Salmi, the executive president of the Capital Market Authority (CMA).
Sohail Niazi, the chief Islamic banking officer of Bank Dhofar’s Maisarah Islamic Banking Services, agrees with Abdullah adding that: “All building blocks are in place – we are in the very early stage of development and have just begun our journey.” Sohail, however, notes realistically that: “We may not be able to follow the same [initial] trajectory but the building blocks are in place and the tangible factors such as demand will continue to drive it forward.” Sohail believes that there would be significant conversion by the banking community toward Shariah finance translating into a larger market share for the industry.
Islamic banking in particular holds significant potential driven by the fact that overall banking penetration in Oman is still relatively low at 14-16%, according to Dr Jamil El Jaroudi, CEO of Bank Nizwa. “We also have a framework for liquidity/deposit and in terms of incremental growth, we have seen a 40% growth from deposits suggesting that Islamic banks are well positioned to capture new business.”
The Islamic debt capital market is also highlighted as a bright spot for the GCC nation. The successful debut of the government in the Sukuk space last year was well received by market players who view the issuance as a benchmark for corporates encouraging them to also tap the asset class. Abdullah confirms this: “We have been approached by corporates especially from real estate developers who have expressed their interest in Sukuk.”
However, Abdullah notes that one sovereign issuance is not enough and that the market needs continuous issuances, bigger in value, to capture regional and international interest. “We should look into dollar or euro-denominated Sukuk to attract foreign investment. From a technical aspect, we don’t see any issue in issuing such papers as the CMA is flexible.”
Challenges
While the general sentiment is that Oman will continue its positive trajectory over the next five years, however all stakeholders – regulators and market players alike – will need to work collaboratively to address perennial issues that are prevalent in Oman as they are in many emerging Islamic finance markets.
Key challenges include: the lack of awareness, a dearth in qualified human capital, insufficient liquidity instruments and a lackluster secondary Sukuk market.
Awareness
“I think awareness, or the lack of, is a key challenge in the Omani market and we need to collectively address that, otherwise we cannot make the progress that we want,” said Ehab Hashish, the deputy general manager of wholesale banking at Alizz Islamic Bank.
Abdullah resonated with Ehab’s comments noting that public awareness is imperative: “Unless end-users understand what they want, and what they expect in terms of results, it will be difficult for operators.”
Human capital
The lack of qualified Islamic finance talents well-versed in the industry is an ongoing concern and according to Dr Jamil, should be viewed as such. “We cannot wait for the industry to grow then address the problem. Otherwise, it will take a lot of time,” he said.
Abdullah agreed that Oman’s Islamic finance community is still lacking the right people but noted that there have been new developments and “huge progress” by both the government and private sector to encourage people to learn about Islamic finance.
Secondary Sukuk market
With only two issuances in the market, it would perhaps be unreasonable to expect a vibrant secondary Sukuk market despite the availability of trading infrastructure.
“Two Sukuk experiences are not enough and we need more issuance,” agreed Dr Jamil. “But what we also need is regulatory flexibility – banks currently are only allowed to hold 2.5% of the issuance. Whereas in the case of the Omantel issuance: out of OMR50 million, only 18% was held by Islamic banks when in other jurisdictions, the entire issuance will be underwritten by a single bank.”
Abdullah added that making market makers available would also likely assist in spurring the trading of Sukuk.
Liquidity management tools
As in other markets, Oman is also facing a shortage of Islamic liquidity management tools.
“Many liquidity instruments available in other markets are not available here. Banks have, however, found solutions using rudimentary basics to take [a] step forward. But would we be able to go to the next stage?” asked Sohail.
“I wish commodity Murabahah were available in the beginning to grow the industry – just to kick-start for the short term,” shared Dr Jamil, who concluded that Oman needs to have the courage to revisit certain laws to further propel the industry.
Conclusion
Oman has penned a remarkable Shariah finance story over the last three years, especially in comparison to other emerging Islamic finance markets such as Indonesia, Turkey and Egypt. But as the expert panelists noted, there is still a long way to go in terms of building its human capacity, broadening its liquidity instrument stable as well as raising awareness; but the country is on the right footing.
In the words of Dr Jamil: “We have just completed Phase One and now we are entering Phase Two. We were initially like a huge airplane taking off, full of fuel and struggling a little bit – but now, we hope to cruise easily.”