Oman: A scenic reality

Introduction of Islamic Banking In Oman: The Bank Nizwa Journey

• Understanding the reasons behind Government’s inertia to allow Islamic Banking in the country

• Demonstration of the viability of Islamic Banking.• Downside of the absence of Islamic Banking solutions in

Oman.• Feasibility Study & Market Survey• Strong popular support & hunger for Islamic Banking• Strong Investor Appetite• Aggressive Lobbying• Easy Applicability of Islamic Banking Under Oman’s

Regulatory Framework• Final Approval

Opportunity to establish a Sharia-compliant bank in Oman

Area of assessment RationaleMarket assessment•Macroeconomic overview•Oman Banking sector•Competition•Products and segmentation•Sharia Compliant banking•Primary research

•The robust macroeconomic growth in Oman is complemented by a strong demand for both consumer and corporate banking products.•The banking sector has been growing and has shown strong profitability and growth.•Significant opportunities exist for new players in both lending and non-interest generating activities. •Projections indicate that, if introduced, Sharia compliant banking would grow rapidly in Oman.•Being overwhemingly Muslim,Omanis(and the majority of residents) are hungry for Islamic banking services.

Regulatory and Legal•Business model implications•Operational implications•Other maters

•Until now ,the CBO’s banking law and regulations are silent on Sharia banking products. As a result there is a lack of clarity on legal enforceability and acceptability of Sharia contracts.•However , in June of this year the Omani government has,for the first time,open doors for Islamic banks and windows ,with the very first license granted to Bank Nizwa.

Taxation•Corporate tax•Effect on client for certain structures

Overall, Tax treatment should be no different than in conventional banking except for:•Corporate customers of a Sharia compliant bank may experience timing differences due to the structure of a few Sharia contracts.•The bank may be subject to tax if appreciated assets are transferred to an SPV, which might be required for some structure (e.g. Sukuks). Theses assets could also be subject to stamp duty on property transfers.

Human Capital•Availability of personnel•Training opportunities•Omansiation implications

•Recruitment of Sharia Board members, senior and middle management should not be difficult, given the wide pool of resources available in Oman and the region.•Training within and outside of Oman through Sharia banking programs can be achieved.•Omanisation should not hinder recruitment and expatriates should be recruited for key senior level positions.

Financial Modeling•Return on assets•Return on capital•Return on equity

•Under certain assumptions the bank may be profitable by the third year of operations. ROA, ROE, and return on capital should become positive by the third operational year.

The Oman financial system is dominated by the banking sector and at the end of 2009, 17 commercial banks accounted for 93% of financial system assets…

CBO

Specialized Banks

CMA

Local Commercial

Banks

NBFIs

Foreign Banks

Banks

Brokerage houses

Finance houses

Insurance companies

• Bank Muscat• National Bank of

Oman• Oman Arab Bank• Oman International

Bank• Bank Dhofar• Bank Sohar• Al Ahli Bank

• Muscat Finance• Oman Orix Leasing

Company• Taageer Finance

Company• Al-Omaniya

Financial Services• United Finance

Company• National Finance

Company

• Financial Services Company• Vision Investment

Services• United Securities

Company• Fincorp• Global Financial

Investment Company• Al Madeena• National Securities

Company• Others

• Al-Ahli Insurance Company• Oman United

Insurance Company• Dhofar Insurance

Life Insurance Company• Muscat Insurance• Muscat Life

Insurance Company• Oman United

Insurance company• Others

• HSBC Bank• Standard Chartered

Bank• Habib Bank Limited• Bank Melli, Iran• State Bank of India• Bank of Barooda• Bank Saderat• National Bank of

Abu Dhabi• Bank of Beirut• Qatar National

Bank

• Oman Housing Bank• Oman

Development Bank

Survey conducted indicates there is a strong appetite for Sharia compliant banking, especially with retail clients

Factors ImplicationsFactors ImplicationsCriteria for selecting banks to deal with

• Sharia compliance is the second most important criteria for Omani nationals (82% of respondents) after knowledgeable staff who deal well with customers.

• Sharia compliance is also the second most important criteria for the Arab expat population after “convenient branch and ATM network”. It is not a driver of bank choice for the non Arab expat population.

Why retail customers are not taking loans

• 37% of Omanis of banking age have a loan product with a bank at the time survey. Conversely, 63% did not have any loan with a bank.

• 49% of Omanis surveyed have participated in Jamaiya, mainly due to Sharia compliance (70%), showing the potential for a Sharia compliant banks.

Interest-bearing accounts • 36% of Omanis, 38% of expatriates surveyed stated that they kept their saving in accounts with zero interest.• When asked why; 59% of Omanis, 14% of expatriates who responded “want their accounts to be Sharia

compliant .

Sharia compliant retail market size • 87% of Omanis households make life (including banking) decision strongly on the basis of Islam values.

Corporate highlights • Trade finance, corporate loans and cash management services are three most important banking product.• Sharia compliance is not as important for corporate customers, particularly large corporates. Only 13- 22%.

Versus 82% in the retail segment.