Muscat: Bank Nizwa, the Sultanate's first Islamic bank, has got a sizable relaxation in deploying funds in overseas markets for the initial one year. The banking regulator Central Bank of Oman (CBO) has allowed Bank Nizwa to invest up to 75 per cent of the bank's net worth in foreign currency-denominated assets in the first six months, up to 50 per cent in the subsequent six months, which is against the normal 40 per cent ceiling for banks in Oman, Hamoud bin Sangour Al Zadjali, Executive President of the CBO, told Times of Oman.
"Thereafter, the bank has to bring down the maximum ceiling to 40 per cent. At the moment, it is available to only Bank Nizwa and not (extended to) other banks, which have window operations," added the CBO chief, on the sidelines of an Islamic banking conference here yesterday.
The CBO took such a favourable decision after taking into account a request from Bank Nizwa for extending the ceiling on overseas investment, until the bank finds these assets in Oman.
However, the CBO chief noted that since the capital employed by conventional banks for offering Islamic banking window services is comparatively limited, this extension is not available to them. Bank Nizwa has a huge paid up capital of OMR150 million. In fact, it takes time for Islamic banks to book assets within the country and therefore, treasury also becomes important. The CBO needs to frame regulation for short-term instruments as well for enabling Islamic banks to deploy their excess liquidity.
Leasing and hire purchase companies will be allowed to offer Sharia-complaint products, after the apex bank sees the demand for Islamic banking products. Sangour said although foreign banks were also interested in setting up Islamic banks in Oman, the CBO has decided to first give the opportunity to local banks. "We will see the market size, how it develops, and accordingly take a decision whether we need to increase the number of players. We need about two to three years to see how the market settles down," he explained.
Sangour said that Oman will have two full-fledged Islamic banks and six conventional banks with window operations. "I think that is enough for the time being." He also added that alizz islamic bank would commence operations in the second half of the year.
Sangour said the Ministry of Finance is planning to issue OMR200 million worth development bonds this year, as per the budget proposal. "Probably, some of these bonds will be sukuk, if the government will be able to finalise this issue, because sukuk issue is different from normal bonds. Sukuk issue is asset based and assets are the projects. So they have to choose the projects for issuing sukuk. We are discussing with the government and the Ministry of Finance for issuing sukluk for the Islamic banks and for other investors," he said, adding; "We do not have any timeframe for it, nor any specific amount for the sukuk issue. We hope that (the sukuk issue) may be floated towards the end of this year or next year."
Although the Islamic banking industry in the Sultanate is under formation, the onset of Islamic banking operations has brought remarkable activity in the banking sector that led most licensed commercial banks to increase their capital to open independent Islamic windows – in addition to the two licensed banks Islamic banks – bringing the total capital of Islamic banking in the Sultanate of Oman to almost OMR500 million.
He said licensed banks and Islamic windows are required to exert extra effort to attract savings and diversify and develop new financial instruments as well as focus on the quality of banking services.
Studies indicate that the value of global Islamic banking and finance assets is witnessing significant growth rate of around 20 per cent per annum.
"No doubt this remarkable success naturally imposes a set of challenges, perhaps the most prominent is the complete knowledge of the rules of Islamic finance and its Sharia-related and applicable regulations.
This requires the availability of qualified personnel capable of advancing the Islamic banking industry and leading it forward towards the desired target."
Therefore, it is the duty of Islamic banking institutions to develop plans and programmes to qualify staff and devote their attention to supporting training programs and plans based on solid scientific methodology.
He said it is imperative for Islamic banking institutions to diligently comply with Sharia law and avoid imitating conventional banking products. Hence, these institutions need to create Sharia compliant tools and financial products that are varied, innovative and flexible enough to respond to public demand. These tools and products must also be credible, reliable and satisfactory.