Faith In The System

Islamic Banking

Ernst & Young’s (EY) World Islamic Banking Competitiveness Report 2013-2014 put the total Islamic assets of commercial banks worldwide at $1.7 trillion, underpinned by annual growth of 17.6%. Looking forward, […]

Ernst & Young’s (EY) World Islamic Banking Competitiveness Report 2013-2014 put the total Islamic assets of commercial banks worldwide at $1.7 trillion, underpinned by annual growth of 17.6%. Looking forward, EY also forecasts total assets as set to exceed $3.4 trillion by 2018, on the strength of growing and diversifying economic activity in key Islamic finance markets. And a significant first for sharia-compliant banking, the combined profits of the six markets of Qatar, Indonesia, Saudi Arabia, Malaysia, the UAE, and Turkey (QISMUT) exceeded $10 billion at end-2013. Should the global climate and local realities permit sustained growth at current rates, “The Islamic banking profit pool across QISMUT markets is set to exceed $25 billion by 2018.”


The potential for still further growth is visible in some basic metrics. The profit figures mentioned above, while dynamic, remain on average 15-19 pps below those of the traditional banks in QISMUT markets. The impressive performance of Islamic banking is being generated by the transactions of around 38 million customers globally, and the figure is on the ascent. Yet significantly, most have yet to withdraw from conventional banking and fully adopt Islamic financial practice. As a result, EY says, the average number of Islamic banking products per customer remains at a smidgen over two, in contrast to the average of five products per customer at the large conventional banks. The Islamic banks, then, need to expand their service offering to win customer confidence as a comprehensive alternative. Given the sheer scale of SMEs in these markets, sharia-compliant commercial banking has the scope to turn huge volumes of business, not least of all cross-border transactions.


Tellingly, the scope of the EY report does not encompass Oman, to which sharia-compliant banking made a late appearance by Royal Decree in 2012. The Sultanate was in fact the last among the six GCC nations to cater to its Islamic market. Sharia-compliant operations in Oman have exceeded 4% of total banking assets over the past two years, and could reach 8% by 2018.

Today, two exclusively Islamic banks and six Islamic windows make up Oman’s sharia market, with combined assets of $2.9 billion as of June 2014. In early 2013, Bank Nizwa made history by becoming Oman’s first dedicated Islamic bank. Its launch was timed in the wake of the Islamic Banking Regulatory Framework released by the Central Bank of Oman (CBO). The framework, recognized as being stricter than that of other markets, encapsulates banks’ liquidity policy, the administration of boards of sharia scholars who validate the operation of Islamic financial institutions, and the operation of conventional banks’ Islamic windows., “A notable stipulation restricted the use of tawarruq [reverse murabaha] as a money market instrument available to banks.” Certain scholars argue that the absence of any real economic activities involves the creation of interest, anathema to sharia practice. In 2014, the CBO established a centralized sharia supervisory board to oversee strict compliance among the Islamic banking community.

Award-winning institution Meethaq, the sharia window of the Sultanate’s largest conventional bank, BankMuscat, in June 2014 signed a memorandum of understanding (MOU) with Al Salam Bank Bahrain and Bahraini retail and commercial bank BMI Bank to pool expertise and resources to broaden the spectrum of Islamic banking offers to grow sustainably. In conversation with TBY, Sulaiman bin Hamed Al Harthy, Group General Manager of Meethaq Islamic Banking Group, on the topic of client profile, explained that the bank offers “…both retail and corporate products and services, and have also done a few transactions on the investment side.” Meanwhile, its established corporate relations have seen the signing of “…agreements for the development of the first sharia-compliant five-star hotel in Oman, and an integrated residential and commercial complex.”

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