Islamic banking sector in the Sultanate of Oman, which comprises of two Islamic banks and five Islamic banking windows, has continued its double-digit growth in 2021 despite the adverse economic impact of the Covid-19 pandemic, according to the Central Bank of Oman (CBO).
The apex bank noted in its Financial Stability Report 2021 that the total asset base of Islamic banking sector in Oman reached RO 5.9 billion (versus RO 5.2 billion in 2020) with a growth of 13.6 per cent.
This “corresponds to market share of 15.2 per cent of total banking sector assets, thereby gaining systemic significance as a sector,” the Central Bank stated.
Similarly, as of December 2021, total deposits and total financing of the Islamic banking sector reached RO 4.4 billion and 4.9 billion respectively, with a corresponding share of 17.2 per cent and 17.4 per cent, the report noted.
The asset quality of Islamic banking sector improved during 2021 with non-performing financing (NPF) ratio of 1.8 per cent as of December (2020: 1.9 per cent).
The sector’s capital to risk-weighted assets ratio (CRAR) also increased to 16.9 per cent as of December 2021 from 15.6 per cent a year earlier, against the regulatory requirement of 12.25 per cent.
Further, Islamic banking entities presented about three times higher profitability in 2021 from the plunge observed in 2020 due to Covid-19.
During 2021, the sector exhibited a pre-tax profit of RO 82 million against RO 27.4 million a year ago, which improved the return-on-assets (ROA) and return-on-equity (ROE) of the sector to 1.00 per cent (2020: 0.53 per cent) and 8.02 per cent (2020: 4.40 per cent) respectively, the report pointed out.
Looking at segment-wise financing of Islamic banking sector, as of December 2021, 55.5 per cent of gross financing went to the corporate sector, followed by 40.5 per cent (2020: 41.5 per cent) to household/retail and 4.1 per cent to small and medium enterprises.
Most of the personal financing comprises of low-risk housing finance (31.1 per cent of total credit).
These contributions were followed by the construction and manufacturing sectors with a 14.3 per cent (2020: 18.2 per cent) and 8.1 per cent (2020: 9.8 per cent) in total gross financing respectively.
“Due to high concentration of house financing in the asset portfolio of Islamic banking entities, diminishing Musharaka and Ijarah remained the most frequently used Shari’ah compliant contracts during 2021, contributing 49.4 per cent (2020: 48.8 per cent) and 21.2 per cent (2020: 23.8 per cent) of the total.
The use of Wakalah Bil Istithmar further increased to 16.5 per cent, from 14.1 per cent in 2020. These three contracts, together with about 10 per cent contribution of Murabahah contribute more than 97 per cent of the total Islamic bank financing in Oman,” the report noted.
Significantly, to ensure robust and sustained growth of the Islamic banking sector, CBO is finalising its medium-term Islamic Banking Strategy, which is built on five pillars, namely: (1) sustain the momentum 2) enhance the stability 3) expand the outreach 4) nurture the talent; and 5) boost the awareness.
Each pillar of the Strategy is supported by several ‘goals’, with a total of 40 ‘initiatives’ in the Strategy, about half of which are to be undertaken by the CBO and rest by the Islamic banking sector, the Central Bank stated.
“In addition, CBO is progressing on the introduction of a range of Islamic money market instruments to meet the liquidity needs of the sector."
"These included, among others, providing Shari’ah compliant emergency liquidity support and LOLR facility and offering Wakalah-based remunerative deposit facility to Islamic banking entities,” it added.