'First sukuk issue to create new wave in Islamic finance'

Muscat:  Al Madina Investment recently organised an event to celebrate the issuance of the first sukuk in Oman. Sheikh Abdullah Salim Al Salmi, the executive president of the Capital Market Authority (CMA), attended the event.

'First sukuk issue to create new wave in Islamic finance'

‘First sukuk issue to create new wave in Islamic finance’

Al Madina acted as the principal advisor, joint lead arranger and joint lead manager for the OMR50 million Sukuk Al Ijarah issued by Modern Sukuk on behalf of Tilal Development Company (TDC). The proceeds from the sukuk will be utilised for the expansion of TDC’s flagship project — the Tilal Complex.

Khamis Al Kiyumi, vice-chairman and managing director of Al Madina, said, “The issuance of the sukuk will lead to a new wave in the Islamic finance industry in the Sultanate, mainly in the Islamic Capital Market. Al Madina has been always a believer in Sharia-compliant offerings and this sukuk issuance has positioned us as one of the innovative institutions in the Islamic finance arena in Oman.”

Tilal Complex expansion

Abdul Rahman Barham, board member of the TDC, added, “We were always optimistic about this innovative transaction. Being the first corporate to issue the sukuk, we are delighted that we managed to play a historic role in the Islamic finance sector in Oman.
With the successful issuance of the sukuk, we are in line with our aim for the expansion of Tilal Complex which will benefit the retail market in the Sultanate.”
At the event, Al Madina honoured various stakeholders and also the participants in the sukuk by presenting them with an award for their contribution to successful issuance of the sukuk.

Abdul Samad Al Maskari, chief executive officer of Al Madina Investment, said that among the recipients of the award was Bank Nizwa for its involvement as joint lead arranger and joint lead manager. Bank Dhofar, Meethaq Islamic Banking (Bank Muscat) and Qatar International Bank were also appreciated for their role as joint lead manager.

First of its kind

Amanie Advisors were also awarded for their contribution as Sharia advisor. The legal advisors namely, Morgan Lewis & Bockius, who acted as the lead legal counsel advising Al Madina, supported by Al Busaidy, Mansoor Jamal & Co who advised regarding the local regulations and Trowers & Hamlins who acted on behalf of TDC were among the recipients.
TDC’s flagship Tilal Complex is the first of its kind, offering mixed-use development comprising residential and retail units as well as a shopping complex known as Muscat Grand Mall.
© Times of Oman 2013


Oman Up and coming

Oman may be the last GCC country to join the Islamic finance industry, but it’s making up for lost time.

Oman Up and coming

Oman Up and coming

Oman quietly dismissed Islamic banking while its neighbours happily deposited funds from Omanis wishing to bank in accordance with their faith. By the time Oman woke up and smelled the money, it had the strength of other markets to draw on.

Taking its pick from the best in the world, Oman quickly built an Islamic finance framework and within two years its first Islamic bank, Bank Nizwa, opened its doors.

Oman Up and coming

Oman Up and coming

Oman waited until the appeal of Islamic finance was well and truly established before it jumped in – and it seems its strategy is paying off, with Omani banks set to benefit from tried-and-tested business models. “We view this as credit positive for the banks as expansion into Islamic banking has the potential to strengthen their franchises and diversify revenue generation, particularly for the largest banks in the system, which will be able to leverage their existing infrastructure and networks,” said Moody’s Investor Services in a recent analysis.


Moody’s estimates that Oman’s Islamic banks could capture a six to eight per cent share of system assets within the next three to five years, as Oman’s Muslim population takes advantage of the option to bank in accordance with religion.

“This share will come primarily from the ‘conversion’ of customers from conventional to Islamic banking services, given the pent-up demand for such services, with the balance coming from IFIs capturing a disproportionate share of the anticipated annual system growth of eight per cent to 10 per cent over the next three to five years,” it said.

“Given the zero starting base, we would expect an average compound annual growth rate of 50 per cent to 70 per cent over this initial period of the market’s formation. These projections for high growth are based on

(1) Oman’s solid economic environment that will drive rising credit demand – a sizable part of which will be financed by the Islamic banks and

(2) the strong appeal of Islamic banking to a largely Muslim population,” it added. “Indeed, we anticipate that the Omani operating environment will remain supportive of credit growth and enable the IFIs to build their market shares over the next three to five year period.

“Credit expansion in the system will also be fuelled by public spending on infrastructure and other projects, for which the Government has budgeted OMR 18 billion ($47 billion) for 2011-16 – amounting to roughly 10 per cent of GDP expected per year for the period based on 2012 levels. This will, in turn, drive credit growth in the corporate and retail sectors, given the resulting job creation.”

Banks are stepping up to meet increasing demand, with many announcing expansion plans for 2014. Bank Nizwa, Oman’s debut Islamic institution, is set to open another 10 branches before the end of 2014. “We are delighted to announce our expansion across Oman,” said Dr. Jamil El Jaroudi, CEO of Bank Nizwa. “We are committed to expand our branch network across the Sultanate to answer the needs of our customers for Shari’ah-compliant banking.”

New products are also being launched, most recently Bank Sohar’s Islamic home finance programme – the first in the Sultanate. Dr Mohamed Abdulaziz Kalmoor, Chief Executive of Bank Sohar, was quoted by Times of Oman as saying, “Launching our Islamic housing finance programme is within the bank’s plan to cover this essential financial need of the Omani market. We had designed and continue to do so our products and services according to the requirements and expectations of our customers to guarantee that we continue to fulfil their needs.”

The bank is also planning to roll out Shari’ah-compliant automobile finance, term deposits, housing finance, savings accounts and current accounts.

As well as Islamic windows, new fully Islamic banks are also appearing on the horizon, with alizz islamic bank opening its doors in October. “The launch of alizz islamic bank is an exciting opportunity for the banking industry in Oman, representing new vehicles for investment and equity in line with Islamic beliefs,” said Jamal Darwiche, Acting Chief Executive Officer of alizz islamic bank. “In Oman, the Islamic finance sector is expected to play a key role in the country’s economic growth and with the forthcoming launch of alizz islamic bank as a fully integrated Islamic bank, alizz aims to meet the growing demand for new financial offerings.”


Although the potential these banks are tapping is undeniable, there are numerous problems that must be overcome to realise it. “Despite these solid growth prospects, the industry will need to manage various challenges over the next three to five year period to deliver this growth,” warned Moody’s. “In particular, we anticipate that Islamic Financial Institutions (IFIs) will face:

(1) sizable costs to establish brand new Islamic banking franchises and build operational risk management infrastructures that ensure Shari’ah-compliance.

(2) risks related to the management of potential real estate concentrations and

(3) constraints in liquidity management given the lack of domestic Islamic instruments.”

All of the institutions offering Islamic banking services will need to develop a full range of Shari’ah-compliant asset and liability products, which will, in turn, need to be promoted to a largely unfamiliar customer base in Oman, explained Moody’s. “Also, IFIs will need to build new risk-management systems and processes to ensure and maintain product and operational compliance with Shari’ah rules and policies,” it said. “This last point is particularly important, as Islamic banking operations will expose conventional banks with Islamic windows to new operational risks arising from Shari’ah compliance requirements.

Failure to comply with these could result in reputational damage, a loss of confidence in the bank and loss of business. These demands on bank resources will be further compounded by the need to train staff and develop Islamic banking expertise.”

Banks such as Bank Nizwa have had the challenge of growing an Islamic finance team from scratch, and have formed agreements with training institutions such as Malaysia’s INCEIF and introduced employee training programmes to counter a talent shortage.

Jaroudi said, “At Bank Nizwa we have adapted a philosophy of investing in our people. We have tailored our induction programme for our new team in order to ensure that each employee can grow within Bank Nizwa and is motivated to perform at his or her best for the good of our company and our customer.”

Moody’s also warned Oman’s Islamic banks against an over-reliance on real estate. “Shari’ah strongly encourages investment and financing of tangible assets and IFIs therefore tend to have a strong bias toward residential and commercial real estate financing,” it said.

These high sector concentrations leave the banks vulnerable to property market stresses and indeed have proven to be a key driver of high non-performing financing levels amongst many IFIs in the region.

“Although Oman has not witnessed property market stresses to the same extent as UAE or Qatar, exposure to the construction and real estate sector remains a key source of credit risk, with delinquencies arising from these sectors at higher levels than other asset classes for the conventional banks.

Although we expect that IFIs will likely aim to be more prudent when extending real estate-related loans given the experience from the conventional counterparts, we expect that real estate financing will remain a risky area with potential negative consequences for IFIs’ asset quality.”

Liquidity management remains a bugbear for the entire industry, and Oman is no different. “Shari’ah principles prevent IFIs from investing in interest-bearing assets, which makes liquidity management more difficult,” explained Moody’s. “Currently, there is a lack of domestic instruments available in which Omani institutions can invest their excess liquidity.

While the IBRF gives some guidance on Shari’ah-compliant money market instruments, a local Islamic interbank money market will take time to develop with the new IFIs having to pay a significant risk premium on such funding. As a result, we anticipate that over the next 12-18 months, banks will maintain large cash balances at a significant opportunity cost, which in turn will impact margins.

“However, in line with the other GCC countries, Omani government’s initiatives to develop a local Sukuk market will help banks address these liquidity management challenges over the medium-term. More specifically, the Omani government has begun taking steps to issue the first sovereign Sukuk with the aim of

(1) providing the Shari’ah compliant instruments the banks need to invest their excess liquidity; and

(2) using the proceeds to finance upcoming infrastructure projects. As this is the first Sukuk issuance in Oman, the authorities anticipate that it will take time before it is launched to the market, with the government targeting early 2014.

“In the meantime, IFIs are allowed to invest part of their funds in regional sovereign Sukuk, although investments in these instruments must remain within a limit of 30 per cent of net worth, while the total amount of foreign-currency denominated assets cannot exceed 40 per cent of banks’ capital and reserves.”

Banks are already teaming up to overcome the issue of liquidity. Bank Nizwa has signed Wakala agreements with Al Hilal Islamic Banking Services, Ahli bank’s Islamic windows and Maisarah Islamic Banking Services, the Islamic window for BankDhofar, to facilitate interbank placements. The AAOIFI-compliant agreement aims to see Omani banks engaging with international Islamic banks for interbank liquidity management.

Sohail Niazi, Chief Islamic Banking Officer for Maisarah Islamic Banking Services, said, “The Wakala agreement is a major step in creating the best context possible for a successful Islamic banking industry in Oman.”

Abdullah Salim Al Jabry Deputy GM and Head of Al Hilal Islamic Banking Services explained, “This agreement epitomises the commitment and focus of the Islamic finance institutions to move in the right direction towards building a foundation for the growth of Islamic finance in the Sultanate. One of the key indicators of growth is more interaction between the entities in the industry and a closer understanding of the market requirements. This agreement will be beneficial for both entities and for the Islamic finance industry in the country.”


Where there are challenges there is also opportunity. Moody’s believes that Omani IFIs that are successful in building strong Islamic franchises domestically will also be able to tap into regional business and participate in Islamic tranches of government projects, as well as mandates for international sovereign Sukuk issuance.

The lack of domestic IFIs has also so far induced the more orthodox Omani customers to keep their funds with Islamic banks abroad. According to Ernst and Young estimates, there are $6 billion of Omani assets in Islamic banks abroad (compared with total Omani banking system assets of $54 billion), which could return to the system.

“Although competition will likely intensify as the Islamic banking market develops and new Islamic banks come into the market, we do not expect fundamental changes in the Omani banking landscape over the next three to five year period,” said Moody’s.

“This is because we consider that the new Islamic windows of the existing conventional banks, particularly that of Bank Muscat – the country’s largest bank – will likely be well placed to capture market share in Islamic banking, given their ability to leverage much of the existing infrastructure, employees and brand of the parent franchise. They can also share some back-office operations with their conventional operations to achieve cost-savings.

“Bank Muscat controlled a 38 per cent share of system assets at end-2012, and we expect it will likely enhance its market-leading position through the addition of Islamic operation to its conventional business.”

Bank Muscat received board approval to allocate up to OMR 150 million in capital for Islamic banking (relative to total equity of OMR 1.07 billion as of end-2012), which compares with a OMR 10-25 million capital allocation for the Islamic windows of the second-tier banks and the total paid-up capital of OMR 150 million for Bank Nizwa and OMR 100 million for al izz islamic bank, the two new Islamic banks, according
to Moody’s.

Bank Muscat may have advantage at the moment, but given the industry is coming from nothing there will no doubt be plenty of Islamic banking customers to go round.

Moody’s predicts the primary demand areas for growth in Islamic finance will be in the:

(i) Retail segment

“Retail customers are likely be the primary drivers of growth of Islamic banking operations on both the asset and liability side. More specifically, we anticipate that many retail customers will shift their deposits to Islamic banks, particularly current account deposits (estimated at 33 per cent of domestic deposits as of end-2012), which are typically held by Islamic institutions in other systems.

“Also government initiatives to increase employment opportunities in the country, along with increases in minimum wages, will also support lending growth in the retail sector, part of which will be financed by the IFIs. Given the difficulty that Islamic banks will likely face in building a corporate client base during their start-up period, the CBO has supportively raised the 35 per cent limit on consumer loans (as a percentage of total loans) to 60 per cent during the first 12-months of operations, while the 15 per cent limit on housing loans remained unchanged.”

(ii) Public-sector entities

“Developing an Islamic banking sector is a government initiative, and as such we expect that public-sector entities will establish relationships with Islamic institutions. We estimate that public sector financing comprised 12 per cent of total credit outstanding as of end-2012 and part of this financing will shift to Islamic banks.”

(iii) Private corporates

“As IFIs will gradually need to comply with the 50 per cent limit on total retail exposures, we also anticipate competitive pricing on corporate loans will gradually induce private-sector companies to bank with IFIs.”

© Islamic Business and Finance 2013



In keeping with the ongoing efforts prior to the introduction of Islamic finance in Oman, Amjaad Develop-ment has organised the Oman Islamic Economic Forum 2011 on December 17 and 18.


The event will be held at Al Bustan Palace Ritz Carlton Hotel and see 680 participants, including local and global organisations related to the field.

Several high profile speakers are on the agenda, including Tun Abdullah bin Haji Ahmad Badawi, ex-prime minister of Malaysia, who is known for promoting economic and technological development through Islam.

“As we’re starting Islamic banking in Oman, we want to bring experts from overseas to share their knowledge,” said Khalid al Yahmadi, chairman of Amjaad Development. “The forum will provide awareness, training and education about Islamic finance and the structuring of Islamic products.

We have support of the Fatwa Office at the Ministry of Awqaf and Religious Affairs, which was important for credibility.”Bank Nizwa, Oman’s first Islamic bank, will be supporting the event as strategic partner.

“We have entered a partnership with Amjaad Development because we believe that our commitment to Sharia-based financial services and their professionalism will make the forum a success, create awareness on Islamic finance in Oman, showcase our country’s potential and lead to new trends in Islamic banking,” said Ahmed Saif al Rawahi, chairman of the founding committee of Bank Nizwa, in a press release.

On the agenda will be topics such as best practices in Islamic finance, the positive effect Islamic finance can have on Oman’s and the global economy, the Malaysian experience in Islamic finance, as well as opportunities for Omani companies and key players to network with foreign stakeholders.

“We’d like to focus on all the elements and strengths of the Islamic economic system. In order to have a proper and fully compliant Islamic banking system, one should consider all relevant aspects of the Islamic economy,” Khalid said.

A highlight of the event will be the announcement of the annual Global Islamic Finance Awards, which honours institutions and individuals for promoting and developing the Islamic finance market regionally and internationally.