islamic finance

Oman's Islamic banking growth to continue despite pandemic

March 24, 2021

Muscat: Oman's Islamic banking sector growth is likely to continue apace in 2021-2022 following strong momentum in 2020 despite the pandemic and lower oil prices, Fitch Ratings said.

Islamic financing in Oman grew by 9.5 per cent in 2020, compared with the conventional banks' loan growth of 2.1 per cent. This was driven by demand for Islamic products, support from conventional banks offering Islamic products through their Islamic windows, and regulations supportive of Islamic finance.

The market share of Islamic banking and Islamic windows increased to 14.3 per cent at end-2020 (end-2019: 13.6 per cent), with total assets of OMR5.1 billion (US$13.5 billion). This is high considering that Oman was the last Gulf Cooperation Council (GCC) country to introduce Islamic banking in 2013. In contrast, Islamic banking has been present in Indonesia and Turkey for more than two decades but market shares there are below 8 per cent.

Omani Islamic banks are adequately capitalised with reasonable profitability and asset quality indicators, reflecting conservative regulation and relatively low-risk business models, the report said.

Payment holidays and flexibility allowing banks not to classify financing as impaired when payments are deferred mask underlying asset quality.

“We expect the weakening operating environment to pressure profitability and asset quality in 2021-2022, particularly in the real estate, construction and manufacturing sectors,” Fitch Ratings added.

Islamic banking penetration is likely to increase through training and awareness campaigns, new products and the greater use of fintech to target customers.
The Central Bank of Oman (CBO) is working on offering Islamic liquidity management through remunerative deposit accounts and a standing liquidity facility, and by acting as lender of last resort. It is also working to expand domestic-currency Sukuk issuance, which should increase sharia-complaint options for Islamic banks and help them to manage their liquidity. Sukuk issuance currently represents about 22 per cent of the total listed bond and Sukuk issuance in Oman.

Omani Islamic banks have smaller capital bases than their conventional peers, hindering their ability to participate in large government financing projects. Government and public enterprise projects represented only 4.6 per cent of the financing mix of Islamic banks and windows at end-2020, compared with 15 per cent for conventional banks. Sector consolidation would therefore be credit-positive. A notable development in 2020 was the takeover of Alizz Islamic Bank by Oman Arab Bank.


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