Robust regulation and a measured approach to competition should not hinder the establishment of a healthy Sharia-compliant banking sector.

Worldwide, forecasters are suggesting strong growth for the Islamic finance sector, with Standard and Poor’s predicting the industry’s total global value will be some $3trn by 2015, up from $1.3trn in 2010. Furthermore, throughout the GCC, Islamic assets currently represent anywhere between 15-50 per cent of total banking system assets. Some predict that Islamic banks here will capture a 6-8 per cent share of system assets within the next three to five years. Given the popularity of Sharia-compliant finance in other GCC countries, it is clear that there is potential for the Islamic banking sector here to achieve figures considerably higher than this.
Since the Royal Decree 69/2012, permitting the licensing of Islamic banks and opening of Sharia-compliant windows in conventional banks, there has been a flurry of activity in this sector in Oman. Two full-fledged Islamic banks have been established and begun operations. Bank Nizwa began trading in 2013 after a successful IPO which attracted $1.77bn in bids, or the equivalent to an 11 times oversubscription. alizz islamic bank also had a successful IPO in early 2013, with bids also exceeding expectations. Further to this, most of the conventional banks operating here opened Islamic windows in order to take advantage of this new and diverse source of revenue. Bank Sohar, Bank Dhofar, Bank Muscat, Ahli Bank and National Bank of Oman (NBO) were among the names to do so.
Major challenges
While the opening of the Islamic banking sector has undoubtedly brought many opportunities, both the regulations governing it, and the enthusiastic uptake of licenses by so many institutions can be seen to present challenges.
Both the new Islamic banks and their conventional counterparts with Islamic windows are regulated by the Islamic Banking Regulatory Framework (IBRF), produced by the Central Bank of Oman (CBO) and published in December 2012. This framework has been criticised by some stakeholders for what have been seen as its overly strict regulations that make it both difficult and expensive to take full advantage of the opening nascent sector. In order to qualify for an Islamic banking license, banks need a Sharia board with three experienced Islamic scholars and two with Islamic law or accounting backgrounds. Detailed regulations stipulates the amount of experience these scholars must have, the number of boards on which they can sit, the length of their tenure and several other factors. Further to this, in order to stop co-mingling of Islamic and non-Islamic assets/deposits placed in conventional banks, the regulations state that Islamic banking windows must have dedicated branches. Conventional banks have therefore had to nominate branches to be converted and re-branded, creating additional expense to the overall costs of establishing and opening their Sharia compliant operations.
However, not all the regulations are as burdensome as these. For example, controls regarding liquidity and the holding of foreign assets have been relaxed in order to give these new banks a helping hand during their establishment. The IBRF dictates a limit of foreign currency-denominated assets to no more than 40 per cent of a bank’s net worth, but this limit has now been raised to 75 per cent for the first six months, and will be reduced to 50 per cent in the next six months. It is hoped that this will help these banks to establish their operations and develop the necessary financial instruments.
Perhaps, one of the biggest concerns though is that of competition, with so many new entrants looking to get a foothold within the sector. No doubt those already established were therefore comforted by Hamood bin Sangour al Zadjali, executive president of the CBO, who has made clear that the authorities recognise the Islamic banking sector’s growth prospects could be threatened by the entrance of foreign banks and that they will only issue licences to Omani banks. Further to this, as domestic competition has grown, Al Zadjali announced that the central bank had no intention of granting more permits for new Islamic banks, or indeed Islamic windows, thus giving space for new entities to put down strong roots, as well as give the market time to stabilise. It is, however, assumed that once this period has passed, subsequent licenses will be issued, and that these will also be available to non-banking finance companies (NBFCs), thereby allowing the sector to expand and diversify.
Those who have been watching the financial services sector in the Sultanate for a long time will also point out that prudent regulation has stood conventional banks in very good stead, particularly during the post-Lehman Brothers Collapse era. Therefore, robust regulation and a measured approach to competition should not hinder the establishment of a healthy Sharia-compliant banking sector.