Following the amendments made to Oman’s Banking Law 2000, incorporated into the Royal Decree 69/2012 issued in December last year, Oman’s banking system has seen the establishment of two fully-fledged Islamic banks — Alizz Bank and Bank Nizwa, as well as the set up of a handful of Islamic banking windows by domestic conventional banks, including Sohar Islamic; the Shariah compliant window of Bank Sohar.
Over the last week, Bank Sohar has cropped up in Middle East news headlines following a filing on the Muscat Securities Market by the bank on the 18th July stating a merger proposal received from BankDhofar, another locally-incorporated conventional bank and Oman’s second largest bank based on market value. As yet however, there have been no other official statements from Bank Sohar with regards to whether or not it will acquiesce to the merger proposal, stating in a bourse filing that it will “consider BankDhofar’s proposal” and will make a decision based on the best interest of its shareholders and the national economy. However, should the merger materialize, it is anticipated that the new entity will have an estimated combined assets worth OMR4.13 billion (US$10.73 billion) and a market capitalization of around US$1.76 billion.
The Islamic Banking Regulatory Framework which was released by the Central Bank of Oman on the 18th December 2012 states that Islamic banking windows of locally-incorporated conventional banks are to maintain a minimum capital of OMR10 million (US$25.97 million) at any point in time, and is to carry out Shariah compliant transactions in full accordance with the Framework. Under the Framework, an Islamic window operation is defined as part of a conventional financial institution that provides both fund management investment accounts and financing and investment services that fully comply with the state’s Shariah requirements. In principle, it adds, these windows are potentially self-contained in terms of Shariah compliant financial intermediation, as the funds under management are to be invested in Shariah compliant assets.
The Islamic windows of Omani banks are also directly responsible to its fund providers, similar to a fully-fledged Islamic bank, thus the same disclosure requirements are applicable. All financial statements of Islamic banking windows will also be provided as part of the notes to the financial statements of the conventional financial institution it is under, and if the institution’s accounting system is not designed to produce the required information, there will need to be changes made to allow for this. Appropriate mechanisms also need to be put in place for the oversight of Islamic windows, as recommended in the section on General Obligations and Governance of the Framework, and the risk management of the window’s Shariah compliant assets and appropriate risk weightings of the assets for capital adequacy purposes must comply with the said disclosure requirements.
Speaking to Islamic Finance
news, Mahin Dissanayake, a director at Fitch Ratings, the ratings agency which recently affirmed Bank Sohar at ‘BBB+’, said that the rating encompasses the bank’s Islamic banking window, Sohar Islamic. The rating provision is based on “the high probability of support being available from the Omani authorities if needed, given the strong history of support for the banking system from the regulator, the Central Bank of Oman.” He also said that it is still early days for Islamic banking in Oman, with most Islamic banking windows and fully-fledged banks being in operation for less than six months. “Islamic banking in Oman is regulated separately from conventional banks, in accordance with the amendments to the Royal Decree.”
Mahin says that he expects to see steady growth in the Islamic banking market of Oman over the next 12 to 18 months, as opposed to “a boom” on the back of this being a new business growing off a low base, and demand for Islamic banking products in the country. “There are also lots of asset financing requirements in Oman which are in tandem with Islamic banking, particularly in the project infrastructure market which includes real estate and construction.” Bank Sohar, which had recently approved the appointment of its Shariah supervisory board during its 31st March extraordinary general meeting, recorded a net loss of OMR256,000 (US$664,890) for its Islamic banking services for the second quarter ended the 30th June 2013, while the bank’s overall post-tax profits stood at OMR11.95 million (US$31.03 million). — NH