Islamic banking in Oman to start in 2013

The new rules for Islamic banks in Oman will be released in the first quarter of 2013 and the first standalone Islamic bank, Bank Nizwa will launch early in 2013 with Bank Al Izz to follow in 3-6 months. The draft regulations were distributed to banks, and there were reports were that tawarruq, a common structure used for inter-bank financing, will not be permitted.  The draft regulations are said to be the same as the draft guidelines issued earlier. 

As a result most of the Islamic banks in Oman will have surplus cash uninvested, and they will be likely to not have the option of placing these funds outside of Oman with Islamic banks using tawarruq through limits on foreign investments, but if they do place the funds with Islamic banks elsewhere, they will have the option to use wakala.  This will actually benefit the Islamic banks in Oman right out of the gate so long as they are lending into inter-bank markets since rates on wakala, according to data from ThomsonReuters, are higher than for tawarruq.

From the start, the shortage of options in the inter-bank money market will not be problematic as deposits are likely to flow much more quickly to Islamic banks with Islamic financing from the banks to follow more slowly (due to the time it takes to assess the quality of the creditor and approve the financing).  There will also be a question about how many Islamic banks the market can support, in part because loan growth dropped in the third quarter of 2012, although with just two Islamic banks this might not be as much of a problem as if the market were larger.

The area where Islamic banks might face a challenge is with competition from Islamic windows of domestic conventional banks, which will also be able to start up in 2013.  Foreign banks would be allowed to enter the market depending on how the Islamic banks in Oman perform once they are allowed to begin operations.  At last count, there were five that were planning to open Islamic windows, which would put the total market for Islamic finance at 7 institutions. 

The area of real concern for the standalone Islamic banks is, therefore, whether the conventional banks' Islamic windows are able to leverage their existing branch network to attract more of the market share for Islamic banking from the standalone banks.  On the other hand, they will likely face challenges adapting their conventionally-focused systems to ensure segregation of the funds between the Islamic banking business and the rest of their conventional business.  Once they do this, they will also have to convince customers that this segregation is airtight, a problem that the Islamic banks will not have to face. 

So for now, it is time to look forward to the opening of a new market for Islamic banking, one that was largely driven by domestic demand for Islamic banking products.  Once the operations begin, the discussion about these issues can commence again.