| SYDNEY, June 27
SYDNEY, June 27 A regulatory framework for
Islamic finance is taking shape in Oman as government bodies
move towards meeting the country's stated aim of making
sharia-compliant products available to the public this year. But
logistical challenges and the limited size of the market may
prevent entrants to the business from making quick profits.
Legislation covering takaful (Islamic insurance) and sukuk
(Islamic fixed income securities) is expected to be finalised by
the end of the third quarter of the year, Capital Market
Authority officials told Reuters.
Approval of the country's first takaful licence will follow
soon afterwards, as three applications have already been
received by the regulator, Ahmed Al Harrafi, takaful team leader
at the CMA, said by telephone.
This complements efforts by the country's central bank to
introduce a law that will supervise Islamic banks; the law is in
its final stages of review, said Mohammed Al Abri, senior
director at the CMA.
Last year, after insisting for years that its banking
industry should be purely conventional, Oman reversed its stance
and said it would introduce Islamic finance, partly to prevent
outflows of funds to sharia-compliant institutions elsewhere in
But the introduction of the regulatory framework may not
produce a rapid surge of activity. Many institutions are still
grappling with the need to obtain product expertise, arrange
oversight by boards of Islamic scholars, train staff and build
"There is an expectations mismatch," Azmat Rafique, head of
Islamic banking at Oman Arab Bank, told Reuters. "On the ground
things haven't been finalised...and banks are still gathering
teams and systems."
Last week newly formed Bank Nizwa, the country's
first Islamic bank, failed at a shareholders meeting to appoint
its board of directors, despite an initial public offer of
shares that raised 60 million rials ($156 million) last month.
This could potentially delay its schedule for launching
Also, banking competition will be stiff. Bank Nizwa obtained
its banking licence last year along with Al Izz International
Bank, another new Islamic institution; they will bring the total
number of locally incorporated banks to nine.
Oman will thus have 19 commercial banks for a population of
only about 2.8 million, with the three largest lenders initially
accounting for about 60 percent of total banking assets,
according to central bank data.
Competition will be increased by the fact that conventional
banks will be allowed to use Islamic windows to offer
sharia-compliant products through their existing branch
networks. Bank Muscat, which has Oman's largest branch network
of 130 offices, this week joined Bank Sohar and National Bank of
Oman in saying it would deliver products this way.
Converting some existing conventional banks into Islamic
banks could streamline the broad banking industry, but the
central bank has not indicated whether this will be permitted,
commercial bankers said. The industry may in any case not be
advanced enough to handle such conversions, said Rafique.
Recent consolidation in the banking sector has been limited
to a merger of HSBC's Omani business with Oman
International Bank, the country's fifth largest lender,
which obtained approval earlier this month.
Rafique predicted 10 percent of existing bank customers in
Oman would eventually make the switch to Islamic banks, which
would also attract a similar number of people who are currently
outside the banking sector because of their religious belief in
The takaful legislation, on the other hand, will not allow
the use of Islamic windows but instead require stand-alone
operations with paid-up capital of 10 million rials, Al Harrafi
But such capital requirements are difficult to justify in a
sector eager to build scale, said Shyam Zankar, regional head at
Bahrain-based Medgulf Allianz Takaful.
In addition, takaful companies will also have to be publicly
floated on the country's stock exchange within five years of
launch, Al Harrafi said, adding that this requirement might
dampen the interest of at least one of the applicants.
Two firms have begun headhunting for senior positions in
anticipation of entry into Oman's takaful market, said a
Gulf-based chief executive of an insurance firm, who asked not
to be named.
In the area of monitoring Islamic product standards, Oman is
opting for the decentralised approach which prevails in the
Gulf, rather than the centralised Malaysian model. This could
facilitate early growth of the industry, by permitting a wider
range of competing products, but perhaps limit broad interest in
Islamic finance across the population because of the lack of a
single, commonly accepted sharia board overseeing the industry.
The CMA, which became a member of the Malaysia-based Islamic
Financial Services Board in March, considered creating a
centralised sharia supervisory body but this option was not
chosen, Al Harrafi said. An Islamic banking circular from Oman's
central bank urged each bank to establish its own sharia board.
The standards of the Accounting and Auditing Organisation
for Islamic Financial Institutions, a Bahrain-based industry
body, will be used as guidelines in Oman, Rafique said, but will
not be made compulsory.
(Editing by Andrew Torchia)