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Friday 25 May 2012

Key drivers for growth of Islamic banking in Oman


MUSCAT — Apart from the stable economy, the presence of a favourable demography in Oman provides ample potential for the growth of Islamic banking in Oman.

According to reports, about 20 per cent of adult Omanis prefer a Sharia compliant bank for their banking needs. This trend is similar to overall 22 per cent Sharia compliant assets in the GCC region. In Oman 60 per cent of the population is less than 30 years of age.

“Also with the government plans towards diversification of economy we anticipate the financing needs to increase in Oman thereby providing opportunities for the newer banks”, say analysts of Gulf Baader Capital Market in a report on Bank Nizwa initial public offering.

Since the launch of Islamic products in the GCC region, all individual countries have reported higher levels of growth in Islamic assets and liabilities. Islamic banking assets in the GCC region have reported compound annual growth rate (CAGR) of 20.4 per cent over the last three years.

“We expect Oman to follow a similar trend and grow at a faster pace in the initial years of operations led by substantial unfulfilled demand for the Sharia products”, says the report.

In the Sultanate there are a number of conservative customers, who want to deal only with Sharia compliant banks. Further there remains the possibility that Sharia compliant funds parked by Omani investors overseas will come back to the local banking system with the opening up of Islamic banks.

As per market reports, during 2010 the global Sharia compliant assets were estimated at $1 trillion with retail banking continuing to be the main driver of the industry’s growth.

The Islamic finance represented only 1 per cent of the total global financial assets, which provides a case for higher growth rates going forward.

“With the emergence of Islamic banking in Oman, not only a new market is being formed with wider variety of products and services, there is also expectation of shift from the conventional banking to the Islamic banking”, says the report. Referring to Bank Nizwa, the first dedicated Islamic bank in Oman, the report says:
“The bank will be better placed to attract high-margin retail and institutional clients who are inclined to opt for Sharia compliant products. However, overall the industry is likely to become more competitive, which would in turn put pressure on the margins of all banks”.
In the Mena region, the Islamic banking assets are worth $400 billion, forming about 14 per cent of the total asset base of $3 trillion. As per the prospectus, the global Sharia banking industry has been growing at higher rates between 2003 and 2010.

In the GCC Region, the Islamic Banking assets stood at about $285 billion (as at end 2008).
The total Sharia compliant banking assets forms about 22 per cent (end 2008) of the total banking assets in the region. This shows the potential demand of Islamic Finance in Omani market too.

Oman’s financial system is dominated by banks which account for more than 90 per cent of total assets and liabilities of the financial sector as a whole.

The combined balance sheet of commercial banks exhibited healthy growth in all major banking aggregates.

Total assets increased by 18 per cent to RO 18503.1 million in February 2012 compared to RO 15693.7 million in February 2011.

Credit constituted bulk of the banks’ assets which remained by and large stable.

While credit to government declined by 51 per cent in February 2012 reflecting revenue surplus arising out of higher realisation of international crude oil prices, credit to public enterprises and the private sector increased by 47.6 per cent and 15 per cent, respectively.

On a year-on-year basis, total credit expanded by 17.9 per cent to RO 12,782.2 million at the end of February 2012 and accounted for 69 per cent of total assets.

The banking industry around the world has been passing through a critical phase since 2008.
Most of the banks and financial institutions, particularly in the western countries, were busy in repairing their balance sheets, infusing capital, and recovering from the state of credit crunch.


( Oman Daily Observer / 25 May 2012)


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