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Thursday, 18 December 2014

Islamic banking in Oman likely to grow at double-digit rate

Islamic banking in Oman is expected to grow at double-digit rates as Sharia-compliant banking products increasingly gain acceptance and the government's plans to ease restrictions come to fruition.

Launched in 2012, Oman's nascent Islamic banking segment saw assets surge more than five-fold to OMR1.1 billion ($2.86 billion) at the end of the second quarter of 2014, according to a study by Thomson Reuters. 

The sector, which comprises two dedicated Sharia-compliant lenders and six commercial banks with registered Islamic banking windows, currently represents more than 4 per cent of Oman's total banking assets, but this may increase to 10 per cent by 2018 if the best-case scenario for asset growth is achieved. Under a base scenario, the study estimates Islamic banking assets could reach OMR5 billion ($13 billion) by 2018, a 7 per cent share of estimated total assets. 

Sharia-compliant tools
However, such a formidable growth rate may require further regulatory assistance according to the study published in October and carried out in conjunction with a number of Islamic financial agencies. In particular, it identified the need for Sharia-compliant liquidity management instruments to open up the interbank market. Regulations currently ban the use of commodity murabaha, a money market contract widely used elsewhere in the Gulf.

Hamood Sangour Al Zadjali, executive president of the Central Bank of Oman (CBO), said the government was moving to respond to market calls to relax some of the existing restrictions and had set up a taskforce to develop Sharia-compliant liquidity management tools. He added that the banks needed to expand their product range. 

However, new products bring challenges for the sector, said Lloyd Maddock, chief executive officer of ahlibank, a conventional lender that offers Islamic banking services, such as lack of product awareness and employee expertise. 

"Islamic banking is still in the early stages in Oman," he told OBG earlier in the year. "While there is considerable demand for Sharia-compliant products, primarily from retail borrowers, the sector faces challenges, including the training of bank employees and explaining the propositions to the populace."

Rise in assets
Despite growth in the sector, Islamic banks still need tools to help them manage their funds and ensure profitability. The two Sharia lenders, Alizz Islamic Bank and Bank Nizwa, announced increases in assets and earnings this year, but recorded overall losses. 

Alizz Islamic Bank said total income more than doubled in the nine months to September-end, while it posted an OMR4.4 million ($11.4 million) loss, which it attributed to high expenses in the period due to the opening of branches.  Bank Nizwa said assets in the 12 months to September-end rose 49 Islamic Bank to reach OMR257 million ($667 million) year-on-year, while the group's net loss decreased by 49 Islamic Bank in the same period.

However, conventional banks are starting to gain traction in the Islamic sector. The Islamic unit of Oman's largest lender, Bank Muscat, was the only operation to post profits in 2013, while its sharia-compliant unit will float the country's first sukuk, or Islamic bond, announced in October.  BankDhofar said its Islamic unit had moved into profit in the nine months ending September 30, albeit the slightest of profits at OMR10,000 ($26,000) profit, but still a significant turnaround from the OMR1.31 million ($3.38m) loss a year ago.

SMEs highlighted 
Within Islamic finance, lending to small and medium-sized enterprises (SMEs) is identified as a key sector for growth. According to some estimates, more than 90 per cent of all registered firms in the sultanate fall into the SME category, although their combined contribution to the economy is only 15 per cent. 

The central bank governor said SME lending has become an important focus for policymakers: "To encourage lending to SMEs, the prudential requirement for banks to lend to SMEs have also been relaxed in terms of general provisioning requirements and risk weightage," he told OBG. "Islamic banking entities, by their business philosophy itself, should find SME finance more attractive," he added. 

Jamil El Jaroudi, chief executive officer of Bank Nizwa, echoed this sentiment, noting that smaller enterprises represented a strong market for Islamic banking, calling for greater support of the SME sector. 

Government plans to bolster the SME sector, through incentivising small businesses to take part in major infrastructure programmes, means there may be a ready market for sharia lenders.  The Islamic finance sector will also benefit from overall growth in the banking sector, with credit growth set to rise as real estate and non-oil sectors gain momentum. With bank deposits and liquidity levels rising, lenders in Islamic and conventional banking will be well positioned to accommodate the increased demand for finance.

(Times Of Oman /17 December 2014)
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With Oil’s Slump, Gulf Nations Seen Turning to More Sukuk

The almost 50 percent plunge in oil this year is set to unleash a wave of Islamic bond sales as Gulf Cooperation Council nations seek to compensate for slumping revenues.
Sukuk issuance across the region in 2015 will surpass this year’s $14.8 billion, according to Emad Mostaque at Ecstrat Ltd. The 2014 figure is the lowest in three years, data compiled by Bloomberg show. The Gulf states may sell sukuk to help meet planned expenditure, including to fund infrastructure projects at home, said John Sfakianakis, Middle East Director at Ashmore Group Plc.
With Saudi Arabia and Qatar planning more than $700 billion of spendng during the next seven years, boosting sales of sukuk will help compensate for oil prices that are about 25 percent below the $80 a barrel the International Monetary Fund says governments in the region need to balance their budgets. The six-nation GCC includes four members of OPEC, which supplies 40 percent of the world’s oil.
“There will have to be a balance between spending and debt issuance in order to cover for a lot of the capital and current expenditures,” Sfakianakis said by phone from Riyadh on Dec. 16. “It’s reasonable to expect sovereign debt issuance to increase in 2015 across the board.”

Growing Pressure

Brent crude, used as a benchmark for more than half the world’s oil, fell 0.5 percent to $59.56 per barrel at 9:30 a.m. in London, the lowest on a closing basis in more than five years. It may decline to $50 a barrel in 2015, according to a Bloomberg survey of 17 analysts.
Islamic bonds from the GCC, which comply with the religion’s ban on interest, account for more than a quarter of all sales in a market worth about $310 billion, according to data compiled by Bloomberg. Dubai, Qatar and Bahrain are regular issuers.
“Sovereigns in the GCC may increasingly rely on sukuk as a means to support government funding at a time of decreasing oil revenue,” Jonathan Fried, capital markets partner at law firm Linklaters LLP in Dubai, said in an e-mail yesterday. Linklaters advised the Luxembourg government on its debut sukuk sale earlier this year. “There is an ever-growing demand for sukuk products in the GCC.”
That hasn’t stopped yields climbing as oil prices collapsed. The yield on Shariah-compliant bonds from the Middle East jumped 14 basis points last week, the steepest increase since August last year, according to JPMorgan Chase & Co. indexes. That compares with a 22 basis-point decline in the benchmark 10-year Treasury.

Susceptible to Oil

“In the short term, I don’t think there will be any noticeable impact on any of the governments’ strategies,” Thomas Christie, the head of fixed income at Prometheus Capital Finance Ltd., a Dubai-based investment advisory company, said by phone on Dec. 15. “If the oil price continues in the downward trend, in the long term, in the next five years,” there may be an impact to sales, he said.
Bahrain and Oman will be most susceptible to lower oil prices and are likely to issue sovereign debt to finance their fiscal deficits, according to a Moody’s Investors Service report last week. The ratings agency said earlier this year the sovereign sukuk market will reach about $30 billion globally in 2014, and it expects growth to continue in 2015.
Bahrain Mumtalakat Holding Co., the country’s sovereign wealth fund, sold a $600 million sukuk last month. Oman’s Central Bank head Hamud Sangur Al-Zadjali said in October the country may sell 200 million rials ($519 million) of Islamic bonds next year, its debut sale.
While “less resilient” GCC states with fewer fiscal buffers like Bahrain and Oman are likely to issue, “all of them should see an increase in sovereign debt issuance over the next year or two,” Ashmore’s Sfakianakis said.
(Bloomberg / 17 December 2014)
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