Dubai: Islamic banking in Oman is growing at a faster rate than conventional banking segment, with Islamic banking assets up more than 62 per cent year on year, according to a recent report issued by the Central Bank of Oman (CBO).
Total assets held by Islamic banks and the Islamic banking windows of conventional lenders in February 2017 amounted to 3.27 billion Omani riyals (Dh31.2 billion), compared to 2.43 billion riyals a year earlier. This took the Islamic banking’s market share from 5.1 per cent of the banking system’s overall assets in 2015 to 10.8 per cent by February 2017.
Banking sector analysts say teething problems of newly established Islamic banks appear to be over and they are on a strong growth trajectory.
“We expect both Bank Nizwa (BKNZ) and 14 per cent Alizz Islamic Bank (BKIZ) to curtail any upward pressure on their costs in a tight operating environment, especially now that their initial investments in infrastructure an human resource development appear to be over,” said Hettish Karmani, Head of Research of U Capital.
Analysts expect these banks to be able to sequentially bring their operating cost-to-income ratio down to the likes of other Omani banks to about 40 per cent, resulting in operating profits to increase at a compounded annual growth rate (CAGR) of 10 per cent for BKNZ and 14 per cent ABKIZ during the forecast period (2017-2021).
Analysts do not expect cost of risk to rise as non performing loans (NPLs) remain very low (very much lower than entire banking sector at 2.1 per cent of total loans at 0.3 per cent for BKNZ and 0.21 per cent for BKIZ.
GCC market share
In addition two full-fledged Islamic banks there are six Islamic banking windows operating in Oman, including Al Yusr (operated by Oman Arab Bank), Meethaq Islamic Banking (Bank Muscat), Sohar Islamic (Bank Sohar), Muzn Islamic Banking (National Bank of Oman), Al Hilal Islamic Banking (Ahli Bank) and Maisarah Islamic Banking Services (Bank Dhofar).
Islamic banking has a sizeable market share of more than 25 per cent in the GCC indicating the importance of the sector to the overall economy. Saudi Arabia dominates the region with an Islamic banking market share of 51.2 per cent in terms of total banking assets, followed by Kuwait at 45.2 per cent. In UAE, Qatar and Bahrain, Islamic banks’ market share stood between 20-30 per cent of gross assets, according to each country’s central banks’ latest banking statistics.
In Oman, within a span of four years from introduction, the Islamic banking segment has reached OMR 3.07 billion in gross assets with a market share of 10.8 per cent as of February 2017. Bank Nizwa along with Alizz Islamic Bank and Islamic windows of six conventional bank are the players in Oman’s emerging Islamic banking sector with a footprint of 60 branches across the Sultanate as of the end of 2016.
Large deposit base
A key challenge facing Islamic Banks in Oman was the lack of understanding of Sharia-based financing options as well as higher costs for staffing and training specialised human resources. Stand-alone Islamic banks also needed to build a large deposit base and develop infrastructure from scratch in order to compete with the established conventional banks offering Islamic products through their Islamic windows. Another challenge was a relatively smaller capital base which hindered their ability to finance large infrastructure projects.
“Generally, early years are challenging for every business and same stood true for Islamic Banks in Oman as well. Generation of profits for depositors while investing in the development of a broad offering of Sharia-compliant products, and to offer competitive pricing to customers in a country where Sharia-compliant products were less understood, continues to remain a challenge,” said Ayisha Zia, Research Analyst at U Capital.