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Oman’s Islamic banking share to rise steadily this year: Fitch

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Muscat: International ratings agency Fitch said the market share of Oman’s Islamic banking sector is expected to rise steadily this year, driven by sizeable public demand for Islamic products, supportive government regulations, a growing branch network, and a push from conventional banks’ Islamic windows. Oman’s Islamic banking reached 16.4% of total sector assets at end 2022 compared to 15.2% in 2021. Islamic financial services were first introduced in Oman in 2012.

Oman has the fastest growing Islamic banking market in the GCC, with two full-pledged Islamic banks and five Islamic windows. The market share of Islamic banks in Oman stands at 17% as per Central Bank of Oman (CBO) report.

Fitch said when CBO introduced in 2022 an Islamic liquidity management instrument (ILMI) in the form of a wakala money market instrument, there was a structural improvement. The wakala money market instrument allows Islamic banks and windows to place remunerative deposits with the CBO for a minimum duration of one day to a maximum of three months. The lack of ILMI has been a long-standing challenge for the Islamic banking sector. “At present, there are no Islamic repos and short-term government sukuk in Oman for Islamic banks to invest their excess liquidity or Islamic alternatives to treasury bills.

Regulations prevent Islamic banking entities from placing funds with conventional banks, which limits counterparty choice. The CBO plans to introduce more ILMI in phases, both for providing liquidity support to Islamic banking entities and for absorbing excess liquidity,” the ratings agency added.

Omani Islamic banks’ (including windows) total assets reached RO 6.4 billion ($16.6 billion) in 2022. The financing growth of Islamic banks was 12.2% y-o-y, exceeding conventional banks’ 3.4% growth. Islamic bank’s deposit growth of 10.9% also outpaced conventional banks’, which fell by 0.9%. The Islamic banking market share, based on both financing and deposits, crossed 18.5% in 2022.

Islamic windows of conventional banks are significant growth drivers, with about 40% share of sector assets as of end-3Q22, while the balance is held by full-fledged Islamic banks.

Islamic bank windows significantly benefit from their parent conventional bank in terms of use of their existing franchise and infrastructure, making them more cost-efficient.

"Profit-and-loss sharing financing contracts are a key feature of the Omani Islamic banking system, in the form of diminishing musharaka and wakala, which have 51.3% and 15.9% shares of total financing, respectively, at end-3Q22. Diminishing musharaka is mainly used for property financing, while wakala enables customers to access cash-products, including for working-capital requirements. Wakala financing is adopted due to the regulatory ban on tawarruq products. Islamic banks also offer deposits based on profit-and-loss sharing contracts, in the form of mudaraba," Fitch said.

Oman's Islamic banking market is 17%, the smallest in the GCC. Islamic banking in Oman still faces multiple challenges, including awareness gaps in the population, growing – albeit still limited – distribution channels, and scope to expand employee expertise.

Kuwait has the largest market share of Islamic banking in the GCC with 35%, followed by Qatar with 27%, Saudi Arabia with 24%, Bahrain with 22%, and UAE with 17%. GCC Islamic banking share reaches 25% of the total banking assets.

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