Fitch Ratings-Dubai/London-23 March 2021: Oman’s Islamic banking sector growth is likely to continue apace in 2021-2022 following strong momentum in 2020 despite the pandemic and lower oil prices, Fitch Ratings says. Islamic financing in Oman grew by 9.5% in 2020, compared with the conventional banks’ loan growth of 2.1%. This was driven by demand for Islamic products, support from conventional banks offering Islamic products through their Islamic windows, and regulations supportive of Islamic finance.

The market share of Islamic banking and Islamic windows increased to 14.3% at end-2020 (end-2019: 13.6%), with total assets of OMR5.1 billion (USD13.5 billion). This is high considering that Oman was the last Gulf Cooperation Council (GCC) country to introduce Islamic banking in 2013. In contrast, Islamic banking has been present in Indonesia and Turkey for more than two decades but market shares there are below 8%.

Omani Islamic banks are adequately capitalised with reasonable profitability and asset quality indicators, reflecting conservative regulation and relatively low-risk business models. Payment holidays and flexibility allowing banks not to classify financing as impaired when payments are deferred mask underlying asset quality. We expect the weakening operating environment to pressure profitability and asset quality in 2021-2022, particularly in the real estate, construction and manufacturing sectors.

However, the sector’s growth potential is high given Oman’s Muslim-majority demographics and low banking penetration. Only 56% of the adult population had a bank account in 2016, with 14% of adults citing religious reasons for not having an account, according to the World Bank. Islamic banking penetration is likely to increase through training and awareness campaigns, new products and the greater use of fintech to target customers.

Challenges for the sector include limited short-term sharia-compliant investment options to place excess liquidity, a relatively low capital base and low customer awareness of Islamic products. Short-term sharia-compliant investment options are limited due to regulations preventing Islamic banks and Islamic windows from placing funds with conventional banks or parent banks, and the regulatory ban on ‘tawarruq’ products, which in other Islamic finance jurisdictions are typically used for interbank funding and personal financing.

These factors constrain profitability. Islamic banks can, however, receive money from conventional banks and parent banks, provided the underlying contract is sharia-compliant. There are no Islamic repo facilities with the central bank, which is problematic during tight liquidity conditions, but Islamic windows have the benefit of largely fungible capital and liquidity from their conventional parent banks.

The Central Bank of Oman (CBO) is working on offering Islamic liquidity management through remunerative deposit accounts and a standing liquidity facility, and by acting as lender of last resort. It is also working to expand domestic-currency sukuk issuance, which should increase sharia-complaint options for Islamic banks and help them to manage their liquidity. Sukuk issuance currently represents about 22% of total listed bond and sukuk issuance in Oman.

Omani Islamic banks have smaller capital bases than their conventional peers, hindering their ability to participate in large government financing projects. Government and public enterprise projects represented only 4.6% of the financing mix of Islamic banks and windows at end-2020, compared with 15% for conventional banks. Sector consolidation would therefore be credit-positive. A notable development in 2020 was the takeover of Alizz Islamic Bank by Oman Arab Bank.

Under Oman’s Islamic Banking Regulatory Framework, any losses on ‘mudaraba’- and ‘musharaka’-based profit-sharing investment accounts (PSIAs) are borne by the account holders, although we have not seen cases of PSIAs bearing losses in practice. In future, PSIA losses will be covered by a sharia-compliant version of the Bank Deposits Insurance Scheme, currently under development.

Contact:
Bashar Al Natoor
Senior Director, Global Head of Islamic Finance
Courtesy by: https://www.fitchratings.com/research/islamic-finance/oman-islamic-banking-growth-to-continue-despite-pandemic-23-03-2021

This, the report said, is the highest increase in assets in a year since 2012 and in deposits since 2015. Over the last five years, both assets and deposits of the Islamic banking industry have more than doubled. “This growth in assets and deposits of the Islamic banking industry is encouraging, particularly due to the fact that the industry was also faced with the Covid19 pandemic challenges during 2020,” the report added.

The assets of the Islamic banking industry increased to 4,269 billion Pakistani rupees ($27.50 billion), while deposits reached 3,389 billion rupees ($21.3 billion) by the end of December 2020. Financing of the Islamic banking industry has also grown by 16% during 2020.

“In continuation of its on-going strategy, State Bank remains committed towards promotion of Islamic banking industry on sound and sustainable basis in the country by providing a level playing field”, the report concluded.

Currently, apart from five full-fledged Islamic banks, over a dozen conventional banks are offering Islamic banking services in Pakistan.

Courtesy by: https://www.aa.com.tr/en/asia-pacific/pakistan-reports-30-growth-in-islamic-banking-assets/2186617

LONDON – Islamic finance industry infrastructure bodies AAOFI and IFSB are working together to develop a standard on Shariah governance.

Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions and Kuala Lumpur-based Islamic Financial Services Board signed a memorandum of understanding in October 2018 to cooperate by jointly undertaking technical activities and revision of prudential, Shariah, accounting and governance standards as well as to raise awareness on issues in the Islamic finance industry.

The standard originates from the MoU in late 2018 signed between AAOIFI and IFSB, according to Dr. Rizwan Malik, Senior Manager, Standards Implementation & Strategic Developments at AAOIFI.

He said the standard, which will be the first since the MoU, is part of the AAOIFI-IFSB joint project “IFSB-AAOIFI Revised Shariah Governance Framework Standard”.

“The aim is to develop a comprehensive Shariah corporate governance standard,” Malik explained, adding that it is in the development stage and the exposure draft is expected to be ready by the end of 2021.

“Like all our exposure drafts there will be at least four public hearings on this standard.”

The forthcoming standard may cover:

• Shariah Supervisory Boards
• Board of directors
• Senior Management
• Shariah compliance/ review
• Internal Shariah Audit
• External Shariah Audit
• Central Shariah Supervisory Board

An IFSB spokesperson declined to comment when contacted by Salaam Gateway.

AAOIFI issues standards for accounting, auditing, Shariah, governance, and ethics for use by financial institutions such as Islamic banks.

IFSB works on prudential standards and guiding principles in areas including disclosure, solvency, and capital adequacy.

Their standards are not binding on Islamic financial institutions and regulators but they are adopted in many countries and jurisdictions.

“The [upcoming] standard will apply to the whole Islamic banking and finance industry,” said Malik.

“However, it will also depend on the specific regulator to make it mandatory / recommend it / allow voluntary adoption by Islamic financial institutions (IFIs).”

*Update: “Shariah non-compliance risk management functions” was removed from the list of issues the coming standard may cover, as it will not be included.

Courtesy by: SalaamGateway.com

Servet Bayindir, who is also a member of Turkey’s Presidential Economic Policies Board, told Anadolu Agency that Turkey is in a more advantageous position than Malaysia or the UK, two vital players, in terms of applying Islamic finance and attracting foreign capital.

“But for this, Turkey urgently needs to overcome the deficiencies in the legal infrastructure in banking, insurance, fund management and most importantly money and capital market products in accordance with Islamic principles,” he said.

The enactment of an interest-free finance law would increase confidence in the sector, said Bayindir, who noted it would create a flow into Turkish markets from those who have domestic and overseas capital and interest sensibility.

The economic reform package introduced last week by President Recep Tayyip Erdogan showed that Turkey is preparing uniform legislation that will accelerate the development of the participation banking sector.

Erdogan said that with the regulation, a Central Advisory Board for the sector will be set up while participation in the financing sector will be gathered under a single roof.

Bayindir said that the Board is expected to produce and publish principles and standards regarding Islamic finance. “The Board should act as an arbitrator in eliminating the application differences between the institutions.”

It also should supervise and inspect the sector in terms of compliance with Islamic financial principles, which ensures the reliability of the system, he added.

*Writing by Yunus Girgin in Ankara

https://www.yenisafak.com/en/news/turkey-to-become-attractive-for-islamic-finance-prof-3563010