Monday, November 12, 2012

On eve of Islamic banks' launch, Oman loan growth slows

With Islamic banking set for takeoff in Oman, it was perhaps disheartening for many to read "Credit growth in the retail segment inclusive of housing loans of the six listed Omani banks together dropped considerably to 1.9 per cent in third quarter ending September 2012 compared to its average quarterly growth rate of 8 per cent during the previous three quarters." but it probably will not be as much of a headwind for new Islamic banks in Oman, and may be an indication of why the conventional banks in the country are rushing to set up Islamic windows. 

The slowing in loan growth was due largely to restrictions from the Central Bank of Oman limiting the amount of a borrower's monthly salary that can be debited for installment payments to 50% for personal loans and 60% for mortgage loans.  However, it might not have much of an impact on Islamic banks, and with their entry into the market, it will pressure further conventional banks who will face both increased competition and slower loan growth if the current growth rate continues.  

For the new Islamic banks and windows, the first move will be to attract depositors, followed by finding consumers to whom they can provide financing.  The deposit growth will likely be more rapid initially than the growth in Islamic financing, since the former does not require the bank to undertake a screening of potential borrowers.  Indeed, the rapid deposit growth for Islamic banks could put pressure on the institutions to quickly provide financing since they will have depositors looking for a yield and few other investment opportunities if the government isn't interested in issuing a sukuk.  

But, to the question of why Islamic banks can be more sanguine about slowing loan growth than conventional banks.  Their natural customer base is Omanis who currently bank with conventional banks but would prefer Islamic banks (which have not been available in the past).  These consumers have experience working with banks already and will be easier to convince to switch to Islamic banks (and some may need no prodding at all).  Combined with slowing loan growth, the potential outflow of customers from conventional banks has them worried enough that at least 5 are considering opening Islamic windows in a bid to retain their existing customer base. 

Over time, the Islamic banks will have to shift their focus to attracting currently unbanked consumers (the current bank penetration rate is 70%, compared to a GCC average of 114%) , but right out of the gate, they will certainly focus their efforts on consumers who already have a relationship with an existing conventional bank.  And the enthusiasm for Islamic banking in Oman has been strong, which, in an environment of slower loan growth, should (and it seems, is) scaring conventional banks. 

No comments: