Earlier in May, Oman's absolute ruler, Sultan Qaboos, issued a royal decree paving the way for the authorization of the country's first standalone Islamic bank and for other interested banks to set up dedicated Islamic banking windows.
The first application to launch an Islamic bank, Nizwa Bank, has already been submitted. However, the authorization process may take more than a year because the Central Bank of Oman has yet to develop and adopt a regulatory and supervisory regime for Islamic banking and the government has yet to introduce an enabling Islamic banking law. This will depend on the priority with which these government agencies implement the royal decree.
However the challenge is also for market education and awareness of Islamic banking and financial products and services of the regulators, the market players and the consumers in general. This paves the way for new opportunities for the Islamic financial advisory, product structuring, training and Shariah advisory services.
Hitherto, Omani banks have in general been very hostile and indifferent to Islamic banking, dismissing it as unworkable and even undesirable by some detractors. Still today, some Omani conventional bankers harbor the misconception that Islamic banking is uncompetitive and therefore more expensive. As such, it would not take off in the country. Such notions are based more on ignorance or an ideological denial that Islamic finance is here to stay, proven and is eminently efficacious.
Oman remains a very opaque society, in which disclosure and transparency even at the level of financial institutions let alone regulators and government ministries is very limited with a tendency to be sycophantic.
Banking sources, who wish to remain anonymous, stress that the decision to allow Islamic banking was partly due to growing new demand especially from young Omanis for Shariah-compliant financial products, something which is taken for granted by consumers in the remaining five Gulf Cooperation Council (GCC) countries — Saudi Arabia, Kuwait, UAE, Bahrain and Qatar. Oman is the only GCC country which does not have an Islamic bank.
The opening up of the Omani banking sector to Islamic banking may also have a correlation with the Arab Spring — protestors demonstrating for political and economic reforms in the streets of Arab capitals from Tunisia to Syria over the last few months (even Oman had some demonstrations in which a few protestors lost their lives) — blaming endemic economic and political mismanagement nurtured on a obsessive reliance on the interest-based market capitalist banking model which nearly brought the collapse of the global financial system in the financial crisis of 2007-2010.
It must be the ultimate irony that a Muslim country is now introducing Islamic banking in its staunchly interest-based financial system through what clearly seems to be a belated financial inclusion policy.
The official reason for the government U-turn on Islamic banking is to attract much needed inward foreign direct investment flows from the Islamic finance industry, which like its conventional counterpart too is looking for geographic and asset diversification in mitigating risks and seeking better returns. Another reason, however, is that there has been a steady outflow of funds — both individual and institutional — from Omanis who prefer to invest on a Shariah-compliant basis abroad rather than in conventional banking products at home.
This is stark reminder of the growing pulling power of Islamic banking to those jurisdictions with relative sizeable Muslim populations - irrespective of whether they are majorities or minorities - which do not facilitate the introduction of Islamic financial institutions or products. An indisputable driver of Islamic banking today is demand - especially from the young, which make up some 65 percent of the populations of the GCC countries.
The hope is that once Oman has a home-grown Islamic banking offering, most of these funds would be repatriated.
Omani banks, deprived from setting up Islamic banks over the last three decades when the likes of Dubai Islamic Bank, Kuwait Finance House, Abu Dhabi Islamic Bank, Al-Rajhi Bank have been pioneering the industry from neighboring GCC countries, have been showing some interest in the industry in the last few years albeit abroad and often indirectly.
In the syndicated Murabaha sector, for instance, it is not unusual to see the odd Omani bank participate. BankMuscat, the largest bank in the sultanate, two years ago even took out a 21.33 percent equity stake in Gulf African Bank (GAB), the first Islamic bank in Kenya. This was done through its associate Bahrain-incorporated BankMuscat International (BMI) Bank BSC in which it has a 49 percent equity stake and which already officers Islamic financial products and services. In fact, Ahmed Mohamed Abdullah Al-Abri, chief operating officer of BankMuscat is a member of the Board of Directors of GAB and BMI Bahrain.
The “liberalization” of the Omani market to Islamic finance has already drawn the attention of the big hitters in the industry in the GCC. Jordan-based Arab Bank; Kuwait Finance House, Al-Rajhi Bank of Saudi Arabia and Bahrain-incorporated Albaraka Banking Group (ABG), which includes Albaraka Bank Bahrain, are all reportedly keen to enter the Omani market. Arab Bank, for instance, has a dedicated long-established Arab International Islamic Bank.
They are eyeing their own Islamic banking licenses or branches; or in the short-term advisory and white labeling opportunities for the introduction of Islamic banking products and services into Oman. However, the possible scenario could be joint venture Islamic banks in Oman in which the foreign partner holds a minority stake because the current legislation does not allow foreigners majority ownership in banks in Oman.
At the same time, Omani banks that eventually become involved in Islamic banking could be an important bridge in this respect between the GCC and countries such as India and East Africa, two regions with which Oman has traditionally had close political, trading and kith and kin links. Both India, with a Muslim population in excess of 200 million, and East African countries such as Kenya are ahead of Oman in facilitating Islamic financial products. Reliance, Tata and Ambit, for instance, have all launched Islamic equity funds in India and for NRIs (non-resident Indians) abroad. Kenya has two Islamic banks - GAB and First Community Bank.
The Islamic Corporation for the Development of the Private Sector (ICD), the private sector financing arm of the Islamic Development Bank (IDB) Group, is in the process of launching an Islamic bank in Uganda, which may have branches in neighboring countries such as Tanzania including Zanzibar. ICD is also thinking of approaching Omani investors in the Islamic bank.