After many years of not allowing Islamic banks, Oman recently changed course and licensed two Islamic banks, Nizwa Bank and Al Izz. Nizwa Bank already went through its IPO with strong demand, and Al Izz expects to complete its IPO by September and is seeking to raise 40 million rials ($104 million), including an investment from Aabar Investments, which is owned by the Abu Dhabi government.
With the two new launches, existing banks are planning entrance into the Islamic finance market, with a successful rights offering from Bank Muscat, which will fund the development of an Islamic window at the bank. The rationale for the country's about-face on Islamic finance is that it wants to stop the flow of deposits out of the country to Islamic banks elsewhere in the GCC.
An article in The National describes the challenges for the Muscat exchange as being primarily falling volumes, and it is unclear whether the development of Islamic banks will address this challenge. The new Islamic financial institutions will have to attract funds from elsewhere in the GCC and one way it can do this would be to attract issuers of sukuk from within the Sultanate.
However, it is unclear about how even new listings from within the Sultanate can attract significant investments from the rest of the GCC. Even now, there are just 9 conventional bonds listed on the Muscat Securities Market and adding a few sukuk to that will not create a liquid market for these sukuk.
The initial push for Oman will probably come from attracting deposits now stashed in Islamic banks elsewhere in the GCC held by people who are unwilling to place their deposits with conventional banks. There is no telling how significant these deposits are or whether there will be sufficient demand locally from individuals and companies for financing from the new Islamic banks. It will be likely that initial demand will come from people and companies who have avoided conventional banks so far, which should provide good quality assets for the banks (since the first clients will have built their businesses with no debt).
Whether the Islamic banks will be able to grow both deposits and loans (as well as issue sukuk to increase their capacity to provide financing) to become large enough to support their fixed expenses remains unclear. But, the new Omani Islamic banks will at least have a long track-record of Islamic banking in the GCC to learn from.