A new era in banking

The banking and finance industry will witness further growth with the stage being set for the launch of Islamic banking in the Sultanate. Termed as a ‘unique model’,

The recent Islamic Banking Draft Framework of the Central Bank of Oman suggests to constitute a five-member Sharia board, exclusive branches for window operation, clear cut segregation of conventional and Islamic banking with separate teams of people and accounts and a 12 per cent capital adequacy ratio. Despite reservations being expressed by some bankers, the CBO model has received wide acclaims.

The draft has “outstandingly recapped the best practices in the Islamic banking and finance industry worldwide and combined them for a robust and incomparable model,” said Sulaiman al Harthy, Group General Manager of BankMuscat. The bank had earlier announced that its Islamic banking brand will be called Meethaq, and will comprise a three-member Sharia-board.

According to the Central Bank, the regulator is still working on the regulation and may incorporate changes on the basis of feedbacks from banks, before announcing it.

The draft model is expected to enhance customer confidence on Islamic banking and finance industry as stress has been laid on requirement of separate capital, single obligator limit, risk management tools, fund segregation, separate books of account, core banking system, separate Islamic banking branches and proper profit distribution mechanism.

The adoption of AAIOFI standard is also expected to streamline the banking and finance industry practices in the country. Researches and studies say that principles of transactions at the Islamic economy provide satisfactory and fair solutions for the society.

According to reports, more than 2 billion rials (over $5 billion) are semi frozen money or interest free deposits. This amount accounts for one-third of the total deposits at local banks. The reports also say that two-third of the Omani society prefer to deal with financial solutions that are Sharia compliant. The size of Islamic banking industry in the world is expected to touch around $1 trillion, a rise of 7 per cent, in near future. The projected growth is possible from the fact that Islamic banks managed to remain immune, while the traditional banks have been affected in the global financial crisis.

At the same time, experts say, Islamic banks, which have witnessed robust growth since their launch, are also facing challenges in developing a relationship among them, the central bank and other regulatory bodies.

Creating a proper supervisory system for the Islamic financial industry, diversification of Fatwas issued by Sharia Audit authorities, lack of standard criteria for contact, lack of efficiencies and talent crunch are also posing major challenges to these banks.

Lack of availability of Sharia scholars is a major challenge. Also people without relevant experience in Islamic banking can be major handicap.

Yet the Central Bank offers to review regulatory issues at the legislations and revise the legislations from time to time based on the developments at the local and world markets.

As Tun Abudllah Bin Haji Ahmed Badawi, former prime minister of Malaysia, pointed out at a recent seminar: “There is a need for global standards in Islamic banking and finance to help it emerge as an international alternative in the sector. Various countries have their own standards of Islamic banking and financial system. But this creates lots of difficulty in its progress”.

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