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23-01-2012

Islamic Banking

‘The New Form of Banking in Oman’

Table of Contents

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Concept of Islamic Banking

How Islamic Banking differs?

Growth Factors for Islamic banking

Islamic banking windows

Way Forward

How Islamic Banking Differs?

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What is Riba in Holly Quran?

.

Transactions must typically be backed by assets. No returns on lending of cashAsset backed

Payment / receipt of interest is prohibited. Profit is encouragedInterest free

Investments, or the tangible assets backing investment instruments, should not belong to prohibited industries (e.g. alcohol)

Restricted investments

Extreme uncertainty and/or lack of transparency (Gharar) is prohibited (e.g. in options, futures and other derivatives)

Extreme uncertainty

Based on the principle of assuming risk to obtain rewards to foster justice in transactions; risk sharing is fine but risk transfer is notRisk-sharing

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Key Differences with Conventional Banking

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Asset Products Structures

Islamic products can be structured using different underlying contracts vis-à-vis risk implications,

regulatory directions, market dynamics and sharia advisor.

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Liabilities Products Structures

Potential of Islamic Banking

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Estimated over US$ 1 trillion in 2011Market size

Presence in over 75 countriesGeographic reach

Approx. 20% over the past decadeGrowth rate

15-20% p.a. in the foreseeable futureExpected growth rate

Over 450 Islamic financial institutions worldwide, another 100-150 likely to come into existence in the next 10 yearsIndustry players

Source: Industry reports

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Global Industry Highlights

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Islamic banking Potential in Oman

GCC Islamic banking represents 26% of total market size (EnY)

IFIs will have 60% market share in GCC by 2015 (IFSB)

Islamic banking assets in Oman will be 8-10% over next few years (Oliver Wyman)

Given GCC fact sheet, Islamic banking assets in Oman could be $10 bio

59% very interested and 26% quite interested (IFAAS)

Source : S& P report

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Meethaq home finance

Started operations in 2008Total portfolio is over RO 75

MioTotal Meethaq customers are

over 2000Majority of the customers are

first time borrowersPioneer of Islamic Banking in

Oman

Drivers for Growth in Oman

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Window’s business model Muslim Population Growth

Sharia governance structure Government Support

Oil Revenues of GCC States

Legal System/ Accounting Standards

Training / AwarenessRegulatory Reforms/ Legal

FrameworkIslamic Finance Growth

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Driver for Growth in Oman

Islamic banking Windows

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Pros & Cons of Window

ADVANTAGES

Easy head- start in new market

Leverage on existing infrastructure

Instant tweaking to gear up IT systems

Cost to do the business is lower

Value added services to customers

DISADVANTAGES

Public perception – too close to parent

CHALLENGES

Need public awareness about window’s operations

Windows Operation

s

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CBO Framework

Sharia Framework

Business Ethics

Corporate Governance

Fundamentals

Funds Segregation

Funds Segregation Assurance

IT SystemSeparate

Book

External/ Regulator’s

Audit

Funds Segregation

Policies

IIFM, AAOIFI & IFSB

Sharia Inspection

ALM Guidelines

S y s t e m a n d C o n t r o l s

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Window’s Governance Structure

• Separate capital allocation• Stand alone Islamic branches (vs. Islamic counters in

conventional branches)• Separate books of accounts• Separate IT system• Reporting standard (AAOIFI vs. IFRS with additional

disclosures)• Organization structure• Independent Sharia Board

Way forward

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