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Oman Islamic finance set for growth despite banking downgrade

12 September, 2017

 

 

When banking executives gathered at the First Salalah International Forum on Islamic Finance in Oman’s southern beach resort town at the end of last month, everybody was upbeat about the growth potential of Shariah banking in the sultanate. Having a comparably low penetration of Islamic banking within the Gulf Cooperation Council (GCC), Oman enjoyed robust growth in the sector over the past years owing to government promotions and private banking initiatives for Shariah-compliant banking. 
However, a revision on the stability outlook of Oman’s entire banking system released by rating agency Moody’s on September 5 is now somewhat dampening the euphoria.
So far, the prospects were rosy. According to the latest report released by the Central Bank of Oman in August, Shariah-compliant banks – including window operations of conventional banks – have a combined market share of just 11.6% worth $1.4bn of Oman’s total banking assets, compared to regional leader Saudi Arabia which has a share of 51%, Kuwait with 39%, Qatar with 27%, Bahrain with 22% and the UAE with 20%.
“The Islamic finance industry in Oman has enjoyed robust growth since its launch several years ago, with total asset growth rate of the sector standing at an average 40% year-on-year since 2013,” said Khalid al-Kayed, CEO of Bank Nizwa, a lender positioned together with Alizz Islamic Bank and Meethaq Islamic Bank, the Islamic banking window of Bank Muscat, at the core of Shariah banking in Oman.
According to the Central Bank of Oman, growth of Islamic banking assets was even around 62% in 2016 over the previous year.
“This highlights the potential for Oman to become a hub for Shariah-compliant banking solution,” al-Kayed noted.
But Moody’s is more cautious. The rating agency changed its outlook on Oman’s banking sector to negative from stable last week, citing  areduction in the government’s capacity to support the country’s banks when cash runs short, as well as softer economic growth and tight liquidity conditions, as the reasons. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Oman over the next 12 to 18 months.
“We expect fiscal consolidation amid prolonged oil price weakness weighing on economic growth in Oman. This will also weigh on credit growth, which we forecast to fall to 5% in 2017, down from 10.1% in 2016 and 12% in 2015,” said Mik Kabeya, Dubai-based analyst at Moody’s Investors Service Middle East.
This, of course, will also hamper Islamic lending including sukuk and other debt facilities amid an Islamic banking industry that just has begun to raise its head.
The rating agency also pointed out that a high volume of debt is held by single borrowers and Oman’s real estate sector – where Islamic finance is a preferred funding tool –, which is posing downside risks to asset quality. Moody’s also expects that profitability of banks in Oman will decline over the outlook timespan, and that the share of problem debt will likely rise while funding and liquidity conditions will remain tight.
But on more positive terms, Moody’s noted that the capital ratio of Omani banks is generally sound, which means that the capability to absorb losses remains solid. And the government is aware of the situation and would act accordingly.
“Although the government’s capacity to support banks if needed will reduce, we note that willingness to provide support will remain very high,” Kabeya said.
With regard to public finances, Oman posted a budget deficit of $5.2bn in the first five months of 2017, already two-thirds of the forecast deficit for 2017. The sultanate raised $7bn from international bonds this year, including a $5bn-conventional bond in March and a $2bn-sukuk in May, the country’s inaugural foray international public sukuk market. The Omani government also signed an agreement for $3.5bn in loans from Chinese financial institutions in August, further compounding public debt exposure. 
But those convinced that the Islamic banking industry in Oman has reached a sufficient momentum to keep pace – even though public debt remains a challenge – say that Shariah banks in the country could master the aftermath of the oil price slump and its negative effects on credit and money markets by sheer economies of scale. With a low overall banking penetration of around 15% – less than the average penetration level of 20% in the GCC – there is plenty of customer potential for Islamic banks and room to grow with new products segments and branches, as well as by providing financing for small and medium businesses and communities in widely unbanked interior regions where business use to be widely cash-based. 
All of that should represent an ample field for Islamic financial institutions to grow further in Oman despite the weak fiscal position of the country as a whole.


Original Source: http://www.gulf-times.com/story/563588/Oman-Islamic-finance-set-for-growth-despite-bankin

 

 

 


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