Muscat: Oman's Islamic banks and window operations of conventional banks, some of which have already started operations, are expected to achieve an asset base of OMR1.5 billion by the end of this year and OMR3-4 billion in the next three to four years, said a prominent expert on Islamic finance.
The Sharia-compliant institutions are expected to mobilise OMR1 billion by way of deposits by the end 2013 while the equity capital of two Islamic banks and window operations put together is estimated in the region of OMR550 million. Of this, the combined paid up capital of two Islamic banks alone is at OMR250 million.
The Islamic financial institutions, including window operations, are expected to capture a market share in the region of 5-7.5 per cent by the year-end, considering the fact that the total deposit base of Omani banks now is around OMR16 billion.
"The growth of liability side is easy because several people will look for Sharia-compliant deposit," Khalid Yousaf, Director-Islamic Finance Advisory Services, KPMG in Oman, told Times of Oman.
"A lot of institutional money, which had left Oman, is likely to come back to the country. Oman's high net worth individuals will also gradually bring back their funds as it is convenient to deal with a local bank than an institution based outside the country."
Banking sources said that there was a rush among customers for the opening of new accounts with the first Islamic bank in Oman after the inauguration of its main branch. Bank Nizwa has started operations, while Bank Muscat and National Bank of Oman have commenced their window operations. Two other banks — Oman Arab Bank and Bank Dhofar — have announced their plans to start window operations soon, even as others are trying to enter the market with Sharia-compliant products as early as possible.
Marketing and promotions
It is generally believed that the marketing and promotions will play an important role in creating awareness among the people to transfer their funds from conventional banks to Sharia-compliant line of banking.
"The largest portfolio of conventional banks is personal loan and it is likely that most people will approach Islamic banks for personal loans, mortgage finance and auto loan," Yousaf noted, while explaining how Islamic banks are going to deploy their funds. Another lucrative area for Sharia-compliant institutions is remittance business. "There will be an increasing preference among Muslims to deal with Islamic banks (for remitting money)," he added.
As far as the corporate lending is concerned, Islamic institutions will offer project financing for real estate development, for building infrastructure projects like airports, sea ports and power plants. "Islamic banks will be keen to deploy funds for getting good returns. Also, these banks will provide funds for working capital requirements of manufacturing and service industries," Yousaf noted.
Another investment avenue will be treasury and capital market products. However, as far as foreign exchange exposure is concerned, an Omani Islamic bank cannot invest more than 40 per cent of its net worth in foreign currency dominated assets, except in sukuk. The single exposure limit in foreign currency exposure is limited at 5 per cent.
However, the maximum investment ceiling for sukuk is 30 per cent. It appears that the Islamic institutions will definitely invest in retail and corporate portfolios (than in treasury instruments) due to high interest margins. Also, these institutions will try to invest maximum funds in Oman. "There is a huge opportunity for sukuk to be introduced in the country, which will channelise Islamic funds into productive areas like infrastructure development, manufacturing industries and small and medium enterprises (SMEs). It is a bridge for channelising funds from Islamic institutions to SMEs," Yousaf explained.
Yousaf also said that Oman would witness a growth of sukuk issues and Islamic funds in the next two to three years due to excess liquidity among Sharia-compliant institutions in the initial period. "That will promote the growth of sukuk."
Islamic insurance or takaful will also benefit from the development of Islamic banks as these
institutions require Sharia-compliant insurance coverage for their products.
Yousaf suggested that the government should encourage foreign banks to open window operations in Oman as they can bring in their expertise, which were tried and tested in their home market. "They can bring ready-made products as well."