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Islamic banking to aid local bank growth
Times News Service
August 27, 2013 , 10 : 00 pm GST
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Moody’s based its projections on Oman’s solid operating environment, which will increase general credit demand. Photo - Times file picture
The opening up of Islamic banking sector is credit positive for the local banks, as expansion into Islamic banking has the potential to strengthen their franchises and diversify revenue generation, said Moody's Investors Service in a new report published yesterday. The industry, however, will still need to manage various challenges to deliver the anticipated growth, added Moody's.
The rating agency released the report, entitled 'Islamic Banking in Oman: Solid Growth Prospects Moderated by Industry Challenges, yesterday
"We believe that Islamic banking operations in Oman could capture a 6 per cent to 8 per cent share of system assets within the next three to five years. This share will stem primarily from the 'conversion' of customers from conventional to Islamic banking services," said Khalid Howladar, Senior Credit Officer and co-author of the report.
"The balance will come from Islamic operations capturing a disproportionate share of the anticipated total system annual growth of around 8 per cent to 10 per cent over the next three to five years," added Howladar.
Moody's bases its projections on Oman's solid operating environment, which will increase general credit demand; and the appeal of Islamic banking to a largely Muslim population.
The demand for Islamic banking services has been demonstrated clearly in the other Gulf Cooperation Council (GCC) countries, where Islamic assets currently account for between 15 per cent and 50 per cent of total banking system assets.
Despite these solid growth prospects, the industry will need to manage various challenges over the next three to five year period to deliver this growth. In particular, Moody's anticipates that Islamic financial institutions (IFIs) will face sizable costs to establish brand new Islamic banking franchises and build operational risk management infrastructures that ensure Sharia-compliance; risks related to the management of potential real-estate concentrations; and constraints in liquidity management given the lack of domestic Islamic instruments.
Moody's expects that the IFIs will manage to address these challenges over the medium-term and build solid franchises and diversify revenues through the provision of additional services to customers in Oman and regionally. "While we expect that competition will intensify as new Islamic banks come into the market, we do not anticipate any substantial changes in the Omani banking landscape," noted Elena Panayiotou, Assistant Vice President and co-author of the report. "The new Islamic windows of the existing conventional banks will be well-positioned to capture a significant share of the Islamic banking market given their ability to leverage their existing customer bases and infrastructure," explained Panayiotou.
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