Three-horse race

Oman was the last Gulf country to license Islamic banks late last year. Early indications are that three institutions will dominate the market. Published in The Gulf, November 2013

It was a busy September for Alizz Bank, Oman’s newest financial institution. On 9 September it gained final approval from the Central Bank of Oman for its licence. A number of senior management appointments were also made, including Jamal Darwiche as acting chief executive and Saif al Yarubi as chief financial officer, and at the end of the month it opened its flagship branch in the Alizz Tower in the central business district of Muscat.

Alizz is the second standalone Islamic bank to start operating in Oman, following the debut of Nizwa Bank in January. Nizwa plans to have eight branches open before the end of the year which will give it a healthy lead over Alizz in terms of reach and analysts say they expect it to maintain that lead over its rival in the coming years.

Oman was the last of the Gulf Co-operation Council (GCC) states to license Islamic banks, with the central bank only enacting the necessary legislation in December 2012.

The regulations set out by the central bank have been seen as tighter than those in some other Gulf markets and, given the size of the economy, the market opportunity is also relatively small compared to the United Arab Emirates or Saudi Arabia. Nonetheless, it has already attracted eight competitors.

The Islamic banking market is not just being fought over by standalone banks. Most of the conventional banks in the country have also opened Islamic subsidiaries or ‘windows’ under new brand names. National Bank of Oman was the first into the market when its Muzn Islamic Banking subsidiary started operations on 16 January. Four days later Bank Muscat followed with a dedicated branch for its Meethaq subsidiary in Al Ghubra.

Since then Bank Dhofar has launched its Maisarah brand and Bank Sohar has opened Sohar Islamic. The other two entrants into the market are Al Hilal Islamic Banking, which is part of the Ahli Bank group, and Al Yusr which is the Islamic window of Oman Arab Bank. The only major bank in the country that is not competing for Islamic deposits is HSBC Oman.

These new subsidiaries have some natural advantages over their standalone rivals according to Khalid Howladar, vice president at Moody’s Investors Service, a credit ratings agency.

“The new Islamic windows of existing conventional banks will likely be well placed to capture market share, given their ability to leverage much of the existing infrastructure, employees and the brand of the parent franchise,” he says. “They can also share some back-office operations with their conventional operations to achieve cost-savings.

“We anticipate that Islamic banking operations in Oman could capture a six to eight per cent share of system assets within the next three to five years, primarily from the conversion of customers from conventional to Islamic banking services.”

The signs to date are that there will be a clear leader among the conventional banks’ subsidiaries, however.

According to their most recent financial results, Bank Dhofar had attracted RO869,000 ($2.26 million) in Islamic deposits by the end of June this year, while Bank Sohar had brought in RO5.5 million and National Bank of Oman RO13.8 million. All three are easily overshadowed by Bank Muscat, the country’s largest bank, which reported RO124 million-worth of Islamic deposits by the end of September.

In the longer term the market may well turn out to be a three-horse race, with Bank Muscat and the two new Islamic banks fighting for dominance. Dubai-based Arqaam Capital Research predicts that Bank Muscat will have 36 per cent of the country’s Islamic banking market by 2017, followed by Nizwa with 33 per cent and Alizz with 23 per cent.

The other banks will be left with just eight per cent to share between them. Arqaam suggests National Bank of Oman and Bank Sohar will have three per cent each, while Bank Dhofar will have two per cent.

But the sharia-compliant market is expected to form a relatively small proportion of the overall banking market. Islamic financial institutions as a whole will generate around 15 per cent of all loans by 2017, according to Arqaam.

The plans drawn up by Islamic banks look to be in line with that.

“We are expecting to have a year-on-year growth between 15 and 20 per cent, be it for assets, financing or deposits,” says Alizz Bank’s Darwiche. “The strategy forecasts a 3.5 per cent market share [of the total banking market] by 2018.”

Alongside the banks, a second area of Islamic finance is also gradually opening up in Oman, with the Capital Markets Authority starting to issue licences for Islamic insurance (takaful) companies. As with the banking sector this market is being shared by standalone start-ups and existing firms adapting to the new opportunity. Among the new companies is Takaful Oman which is being set up with backing from the Oman National Investment Corporation, among others, while Al Madina Insurance Company is transforming itself into Al Madina Takaful from 1 January next year.

The overall economic prospects for Oman are reasonably positive, which should help Islamic insurance firms and banks alike to bed in and grow.

In other countries like the UAE, Qatar and Saudi Arabia, sharia-complaint banks and insurance companies have already captured significant market share and tend to be growing more quickly than their conventional counterparts. Moody’s estimates that Islamic banks now account for around 50 per cent of total banking assets in Saudi Arabia, for example, and between 15 and 40 per cent of bank assets in other GCC markets.

“We think Islamic banking will continue to increase its market share in the Gulf,” says Timucin Engin, credit analyst at Standard & Poor’s, another ratings agency. “We expect the operating environment over the next two years to remain supportive for Islamic banks’ credit quality.”

There is no reason to suppose that the situation in Oman will be radically different, which should mean healthy growth for the sharia-compliant industry in the years ahead.

For Alizz, Nizwa and Bank Muscat’s Meethaq subsidiary the opportunities look particularly strong, but for the other banks it could be a tougher market to survive and prosper in.