Dubai: Oman’s non-Islamic banks are set to gain permission this year to offer Shariah-compliant products as retail lending increases the most in three years.

The sultanate, which approved licences for two Islamic banks last year, will pass legislation in 2012 to allow banks to offer the services through “Islamic windows,” central bank executive president Hamud Sangur Al Zadjali said recently. The move may draw customers who had turned to banks in other five Gulf Cooperation Council (GCC) countries for retail loans that comply with Shariah’s ban on paying and receiving interest, according to Dubai-based Al Mal Capital.

Personal loans at Oman’s banks, which rely on consumer credit for more than 40 per cent of lending, jumped 22 per cent in the second quarter, the most since the same period in 2009, central bank data show. The same category grew 2.1 per cent in the UAE and 28 per cent in Saudi Arabia. A study released last year by the UK-based Islamic Finance Advisory & Assurance Services found that of the 86 per cent of Omanis who bank with non-Islamic lenders, 60 per cent are “bothered” by using products based on interest.

“Oman’s tradition and culture are very similar to neighbouring Gulf countries, therefore, we expect to see strong demand,” Tarek Qaqish, Al Mal’s deputy head of asset management, said by email on October 4. “Islamic financial institutions are becoming very competitive and provide attractive products that compete with conventional banks, and clients look for the best offer in the market.”

BankMuscat SAOG, the country’s biggest bank by assets, is setting up an Islamic banking unit, known as Meethaq, and National Bank of Oman SAOG said in June its shareholders approved starting Islamic banking operations. Bank Nizwa, the nation’s first Islamic bank, made its trading debut on the Muscat bourse four months ago, while Alizz Islamic Bank is currently offering shares to investors. Oman has a population of about three million.

Catch up

“Oman has never had Islamic banking when Islamic banks have flourished in the GCC, so clearly and purely from a ‘making up for lost time’ perspective, they should do well,” Haissam Arabi, chief executive officer of Gulfmena Investments, said by email on October 4.

Still, new entrants into the Islamic finance market could face an uphill climb to vie with offerings from Shariah-compliant services at established banks, such as BankMuscat, Fitch Ratings said in a report on October 3.

“While there is demand for Islamic banking, and its growth across the Gulf region is likely to outpace that of conventional banking, recent experience from Qatar suggests that customers in Oman will opt to get these services from established banks,” the report said.

In Qatar, many customers switched bank to non-Islamic accounts when their banks were barred from continuing to offer Shariah-compliant services, Fitch said.

Oman, where banking industry assets grew 30 per cent in the two years to July, might sell its first Islamic bonds to boost the industry, Hilal Al Barwani, vice president of banking supervision at the central bank, said in January.

Sukuk issuances

“It’s a little bit too premature to expect a lot of sukuk issuances out of Oman in the short-term,” Abdul Qader Hussain, Dubai-based chief executive officer of Mashreq Capital DIFC Ltd., said by phone on October 1. “You need to get the Islamic products, the Islamic investors before you start issuing liabilities.”

Sales of sukuk in the GCC almost quadrupled to $18.5 billion (Dh67.95 billion) this year compared with the year-earlier period and global sales have already reached a record $37.6 billion, data compiled by Bloomberg show. The industry’s assets worldwide will double by 2015 to as much as $3 trillion, spurred by demand from the GCC and Malaysia, Standard & Poor’s said last month.

The yield on Dubai’s 6.396 per cent Islamic bonds due November 2014 declined 270 basis points this year to 2.88 per cent on October 5. The premium investors demand to hold the emirate’s notes over Malaysia’s 3.928 per cent sukuk maturing in June 2015 dropped 145 basis points this year to 142 points on October 5.

“Demand for Shariah-compliant products continues to increase across the Arab region and even internationally, and Oman is no different,” Al Mal’s Qaqish said.