Oman Islamic Finances - Young populace to boost Islamic banking

By Samuel Kutty

Apart from the stable economy, the presence of a favourable demography in Oman provides ample potential for the growth of Islamic banking in Oman.

According to reports, about 20 per cent of adult Omanis prefer a Sharia compliant bank for their banking needs. This trend is similar to overall 22 per cent Sharia compliant assets in the GCC region. In Oman 60 per cent of the population is less than 30 years of age.

“Also with the government plans towards diversification of economy we anticipate the financing needs to increase in Oman thereby providing opportunities for the newer banks”, say analysts of Gulf Baader Capital Market in a report on Bank Nizwa initial public offering.

Since the launch of Islamic products in the GCC region, all individual countries have reported higher levels of growth in Islamic assets and liabilities. Islamic banking assets in the GCC region have reported compound annual growth rate (CAGR) of 20.4 per cent over the last three years.
“We expect Oman to follow a similar trend and grow at a faster pace in the initial years of operations led by substantial unfulfilled demand for the Sharia products”, says the report.

In the Sultanate there are a number of conservative customers, who want to deal only with Sharia compliant banks. Further there remains the possibility that Sharia compliant funds parked by Omani investors overseas will come back to the local banking system with the opening up of Islamic banks.
As per market reports, during 2010 the global Sharia compliant assets were estimated at $1 trillion with retail banking continuing to be the main driver of the industry’s growth.

The Islamic finance represented only 1 per cent of the total global financial assets, which provides a case for higher growth rates going forward.
“With the emergence of Islamic banking in Oman, not only a new market is being formed with wider variety of products and services, there is also expectation of shift from the conventional banking to the Islamic banking”, says the report. Referring to Bank Nizwa, the first dedicated Islamic bank in

Oman, the report says:
“The bank will be better placed to attract high-margin retail and institutional clients who are inclined to opt for Sharia compliant products. However, overall the industry is likely to become more competitive, which would in turn put pressure on the margins of all banks”.
In the Mena region, the Islamic banking assets are worth $400 billion, forming about 14 per cent of the total asset base of $3 trillion. As per the prospectus, the global Sharia banking industry has been growing at higher rates between 2003 and 2010.
In the GCC Region, the Islamic Banking assets stood at about $285 billion (as at end 2008).

The total Sharia compliant banking assets forms about 22 per cent (end 2008) of the total banking assets in the region. This shows the potential demand of Islamic Finance in Omani market too.

Oman’s financial system is dominated by banks which account for more than 90 per cent of total assets and liabilities of the financial sector as a whole.
The combined balance sheet of commercial banks exhibited healthy growth in all major banking aggregates.
Total assets increased by 18 per cent to RO 18503.1 million in February 2012 compared to RO 15693.7 million in February 2011.
Credit constituted bulk of the banks’ assets which remained by and large stable.
While credit to government declined by 51 per cent in February 2012 reflecting revenue surplus arising out of higher realisation of international crude oil prices, credit to public enterprises and the private sector increased by 47.6 per cent and 15 per cent, respectively.
On a year-on-year basis, total credit expanded by 17.9 per cent to RO 12,782.2 million at the end of February 2012 and accounted for 69 per cent of total assets.

The banking industry around the world has been passing through a critical phase since 2008.

Most of the banks and financial institutions, particularly in the western countries, were busy in repairing their balance sheets, infusing capital, and recovering from the state of credit crunch.

Source: http://main.omanobserver.om/node/96460

Posted via email from IBFN (Islamic Banking & Finance Network) at Posterous

Oman Islamic Finances - Young populace to boost Islamic banking

By Samuel Kutty

Apart from the stable economy, the presence of a favourable demography in Oman provides ample potential for the growth of Islamic banking in Oman.

According to reports, about 20 per cent of adult Omanis prefer a Sharia compliant bank for their banking needs. This trend is similar to overall 22 per cent Sharia compliant assets in the GCC region. In Oman 60 per cent of the population is less than 30 years of age.

"Also with the government plans towards diversification of economy we anticipate the financing needs to increase in Oman thereby providing opportunities for the newer banks", say analysts of Gulf Baader Capital Market in a report on Bank Nizwa initial public offering.

Since the launch of Islamic products in the GCC region, all individual countries have reported higher levels of growth in Islamic assets and liabilities. Islamic banking assets in the GCC region have reported compound annual growth rate (CAGR) of 20.4 per cent over the last three years.
"We expect Oman to follow a similar trend and grow at a faster pace in the initial years of operations led by substantial unfulfilled demand for the Sharia products", says the report.

In the Sultanate there are a number of conservative customers, who want to deal only with Sharia compliant banks. Further there remains the possibility that Sharia compliant funds parked by Omani investors overseas will come back to the local banking system with the opening up of Islamic banks.
As per market reports, during 2010 the global Sharia compliant assets were estimated at $1 trillion with retail banking continuing to be the main driver of the industry's growth.

The Islamic finance represented only 1 per cent of the total global financial assets, which provides a case for higher growth rates going forward.
"With the emergence of Islamic banking in Oman, not only a new market is being formed with wider variety of products and services, there is also expectation of shift from the conventional banking to the Islamic banking", says the report. Referring to Bank Nizwa, the first dedicated Islamic bank in

 

Oman, the report says:
"The bank will be better placed to attract high-margin retail and institutional clients who are inclined to opt for Sharia compliant products. However, overall the industry is likely to become more competitive, which would in turn put pressure on the margins of all banks".
In the Mena region, the Islamic banking assets are worth $400 billion, forming about 14 per cent of the total asset base of $3 trillion. As per the prospectus, the global Sharia banking industry has been growing at higher rates between 2003 and 2010.
In the GCC Region, the Islamic Banking assets stood at about $285 billion (as at end 2008).

The total Sharia compliant banking assets forms about 22 per cent (end 2008) of the total banking assets in the region. This shows the potential demand of Islamic Finance in Omani market too.

Oman's financial system is dominated by banks which account for more than 90 per cent of total assets and liabilities of the financial sector as a whole.
The combined balance sheet of commercial banks exhibited healthy growth in all major banking aggregates.
Total assets increased by 18 per cent to RO 18503.1 million in February 2012 compared to RO 15693.7 million in February 2011.
Credit constituted bulk of the banks' assets which remained by and large stable.
While credit to government declined by 51 per cent in February 2012 reflecting revenue surplus arising out of higher realisation of international crude oil prices, credit to public enterprises and the private sector increased by 47.6 per cent and 15 per cent, respectively.
On a year-on-year basis, total credit expanded by 17.9 per cent to RO 12,782.2 million at the end of February 2012 and accounted for 69 per cent of total assets.

The banking industry around the world has been passing through a critical phase since 2008.

Most of the banks and financial institutions, particularly in the western countries, were busy in repairing their balance sheets, infusing capital, and recovering from the state of credit crunch.

 

Source: http://main.omanobserver.om/node/96460

 

How is Islamic microfinance different?

How is Islamic microfinance different?

Islamic banking was created as a separate path of financing in order to comply with prohibitions stipulated by Islamic law. Also referred to as Sharia law, Islamic law can be considered God's law as interpreted by Muslims.

Islamic scholars called Muftis in the Sunni tradition and Mullahs in the Shia tradition are charged with interpreting this law. The central texts of Sharia law are the holy book of the Qur'an, and the examples set forth by Muhammad and his early followers are documented in a collection of texts called the Hadith. To render a legal opinion, scholars weigh an action or principle against these texts and determine if it is in accordance with the spirit of the law.

Sharia law is very clear about charging interest on loans. The Qur'an forbids usury, or riba, in four different revelations based on the belief that money is only a medium of exchange and has no value in itself. Islam has not relented to pressures from the marketplace and has maintained its stance that charging interest on loans is usurious and a violation of Islamic law.

However, by differentiating trade from usury, the Qur'an reaffirms the practice of trading as a respectable profession. The importance of trading partnerships has motivated financial intermediaries to find creative ways to help Muslims access loans without violating Islamic law.

Some of Kiva's Field Partners that serve Muslim borrowers have created loan products based on Islamic principles to better serve their clients. These products have 0% interest and vary in design and delivery mechanisms. While some charge a service fee to cover the costs of administering loans, others share risk between lenders and borrowers or lease assets to borrowers (see next section for more details).

To certify that these products are compatible with Islamic principles, it is important for a microfinance institution to receive a fatwa, a legal pronouncement made by an Islamic scholar or religious leader, that officially condones its work.

Why does Kiva support Islamic microfinance?

The prohibitions against usury in the Qur'an are designed to protect weaker individuals from exploitation. Islamic microfinance attempts to capture the spirit of Sharia law by allowing financial tools that create and maintain a just economic system -- one that protects clients through built-in mechanisms like risk sharing.

Kiva believes in supporting products that are culturally compatible and designed to protect borrowers.

What Islamic loan products appear on Kiva?

Kiva Field Partners post the following loan products to serve Muslim clients (adapted from traditional Islamic financial principles):

1) Oard Hassan: Interest free loans, usually to students or the very poor.

2) Murabaha: Purchasing goods for borrowers and charging a fee* or mark-up.

3) Musawama: The seller and buyer arrive at an agreed price for a commodity.

4) Mudaraba: A limited liability partnership (not allowing for direct investor involvement).

5) Musharaka: A joint venture with profit and loss sharing.

6) Salam: An advance purchase of goods delivered on a future date set by the buyer and seller.

7) Ijarah: Leasing of goods with a second contract to purchase them at the end of a lease period.

8) Joala: Payment of upfront fees.*

*How much are the fees associated with Islamic loans?

The fees associated with Islamic loans vary from one microfinance institution to another. As with all loans on the Kiva site, the best measure of fees paid by a borrower is the Portfolio Yield, displayed on borrower profile pages as well as Field Partner profile pages.

How is paying a fee on a loan different than paying interest?

For many Muslim borrowers, paying a fee on a loan is like paying a service fee on any other service transaction. Borrowers are purchasing the service of being provided with money. They pay a fee in the same way they would pay for consulting or advisory services.

When a borrower is about to receive a loan, he or she pays a fee to the microfinance institution before receiving the funds. In contrast, interest paid during the course of a loan is seen as money earned by the microfinance institution on the money itself, rather than a fee for the service.

Kiva lends to thousands of entrepreneurs in countries where Islamic law impacts how people can borrow money and pay it back. Below, learn how Kiva's Field Partners approach these loans, which will be identified in loan descriptions going forward.
http://kivanews.blogspot.in/2012/05/kivas-approach-to-lending-and-islamic.html

Posted via email from IBFN (Islamic Banking & Finance Network) at Posterous

How is Islamic microfinance different?

How is Islamic microfinance different?

Islamic banking was created as a separate path of financing in order to comply with prohibitions stipulated by Islamic law. Also referred to as Sharia law, Islamic law can be considered God's law as interpreted by Muslims.

Islamic scholars called Muftis in the Sunni tradition and Mullahs in the Shia tradition are charged with interpreting this law. The central texts of Sharia law are the holy book of the Qur'an, and the examples set forth by Muhammad and his early followers are documented in a collection of texts called the Hadith. To render a legal opinion, scholars weigh an action or principle against these texts and determine if it is in accordance with the spirit of the law.

Sharia law is very clear about charging interest on loans. The Qur'an forbids usury, or riba, in four different revelations based on the belief that money is only a medium of exchange and has no value in itself. Islam has not relented to pressures from the marketplace and has maintained its stance that charging interest on loans is usurious and a violation of Islamic law.

However, by differentiating trade from usury, the Qur'an reaffirms the practice of trading as a respectable profession. The importance of trading partnerships has motivated financial intermediaries to find creative ways to help Muslims access loans without violating Islamic law.

Some of Kiva's Field Partners that serve Muslim borrowers have created loan products based on Islamic principles to better serve their clients. These products have 0% interest and vary in design and delivery mechanisms. While some charge a service fee to cover the costs of administering loans, others share risk between lenders and borrowers or lease assets to borrowers (see next section for more details).

To certify that these products are compatible with Islamic principles, it is important for a microfinance institution to receive a fatwa, a legal pronouncement made by an Islamic scholar or religious leader, that officially condones its work.

Why does Kiva support Islamic microfinance?

The prohibitions against usury in the Qur'an are designed to protect weaker individuals from exploitation. Islamic microfinance attempts to capture the spirit of Sharia law by allowing financial tools that create and maintain a just economic system -- one that protects clients through built-in mechanisms like risk sharing.

Kiva believes in supporting products that are culturally compatible and designed to protect borrowers.

What Islamic loan products appear on Kiva?

Kiva Field Partners post the following loan products to serve Muslim clients (adapted from traditional Islamic financial principles):

1) Oard Hassan: Interest free loans, usually to students or the very poor.

2) Murabaha: Purchasing goods for borrowers and charging a fee* or mark-up.

3) Musawama: The seller and buyer arrive at an agreed price for a commodity.

4) Mudaraba: A limited liability partnership (not allowing for direct investor involvement).

5) Musharaka: A joint venture with profit and loss sharing.

6) Salam: An advance purchase of goods delivered on a future date set by the buyer and seller.

7) Ijarah: Leasing of goods with a second contract to purchase them at the end of a lease period.

8) Joala: Payment of upfront fees.*

*How much are the fees associated with Islamic loans?

The fees associated with Islamic loans vary from one microfinance institution to another. As with all loans on the Kiva site, the best measure of fees paid by a borrower is the Portfolio Yield, displayed on borrower profile pages as well as Field Partner profile pages.

How is paying a fee on a loan different than paying interest?

For many Muslim borrowers, paying a fee on a loan is like paying a service fee on any other service transaction. Borrowers are purchasing the service of being provided with money. They pay a fee in the same way they would pay for consulting or advisory services.

When a borrower is about to receive a loan, he or she pays a fee to the microfinance institution before receiving the funds. In contrast, interest paid during the course of a loan is seen as money earned by the microfinance institution on the money itself, rather than a fee for the service.

Kiva lends to thousands of entrepreneurs in countries where Islamic law impacts how people can borrow money and pay it back. Below, learn how Kiva's Field Partners approach these loans, which will be identified in loan descriptions going forward.
http://kivanews.blogspot.in/2012/05/kivas-approach-to-lending-and-islamic.html

 

Qatar ban on Islamic windows of banks fetches no windfall!

A year after Qatar asked conventional banks to stop offering Islamic financial services, an expected windfall for its Islamic banks has yet to materialise. Nor is it clear that banks’ customers are benefiting from the policy.

The episode illustrates the difficulties that countries face as they manage the relationship between conventional and Islamic banking. Trying to adjust that relationship carries risk, for both regulators and the banks themselves.

The Qatar Central Bank (QCB) last year announced that at the end of 2011, conventional banks would no longer be allowed to run “Islamic windows” — sections of the banks which operated according to religious, or Shariah, principles. Islamic banking services could only be offered by separate, dedicated institutions, QCB said.

The central bank’s move was designed to ensure the purity of Islamic finance, by removing any possibility that Islamic loans and deposits could mingle with conventional funds bearing interest, which is forbidden to Muslims.

Before the ban, Islamic windows saw a significant amount of business in Qatar; they accounted for QR54.6bn ($15bn) or 31% of all Islamic banking assets in the country during 2010, according to the International Monetary Fund. Combined assets at all banks, both conventional and Islamic, totalled QR572bn.

So the QCB move looked set to have a seismic impact on Qatar’s banking industry. One institution affected was HSBC Amanah, the Islamic arm of global giant HSBC Holdings; it opened its doors in Qatar in 2010, only to have to close months later.

In the wake of the decision, the shares of the country’s several full-fledged Islamic banks, such as Qatar Islamic Bank and Masraf Al Rayan, surged on expectations that they would attract money leaving the defunct windows.

“We’ll have a much bigger customer base. We see it as a very positive move,” Adel Mustafawi, chief executive of Masraf Al Rayan, said at the time.
Credit rating agency Moody’s Investors Service declared the “segregation of Islamic banking in Qatar is credit negative for conventional banks, positive for Islamic banks.”

It predicted Islamic banks would benefit from access to a larger pool of customers and improve their profit margins. Conventional banks would lose between 8% and 16% of their deposit bases, assets and profits, Moody’s estimated.

It hasn’t happened that way. There was little sign of the expected flow of money into Qatar’s Islamic banks last year; their total assets grew 35%, according to central bank data, but that marked a slowdown from 39% expansion in the previous year.

Masraf Al Rayan’s assets soared 59% last year but profitability declined as measured by return on assets, dropping to 2.55% in 2011 from 3.49% a year earlier.
Meanwhile, the performance of Qatar’s conventional banks improved; their assets grew 23% in 2011, up from a 16% rise in 2010. The biggest negative impact, Moody’s predicted, would be felt by the country’s largest lender, QNB.

But assets at QNB jumped 35% last year and its return on assets actually improved slightly.

The figures suggest that either depositors kept much of their money in conventional banks as Islamic windows closed, or Islamic banks suffered a growth slowdown that more than offset the benefits of the windows closing - or a combination of both.

Globally, banks’ customers can be divided into three categories, according to consultants AT Kearney: loyalists of conventional banks, loyalists of Islamic ones, and a “floating mass” — by some estimates, 60% or 70% of the total — who base their choice of bank primarily on pricing and service quality rather than religious permissibility.

Qatar’s data implies many conventional banks continued to attract the floating mass after their Islamic windows closed.

Most of Qatar’s conventional banks have still not fully divested their Islamic loan portfolios; instead, they have taken advantage of a provision in the ban which, according to commercial bankers, allows them to hold existing Islamic loans until maturity, as long as they do not extend fresh ones.

At Doha Bank, for example, Islamic financing activities represented 7.4% of total loans for 2011, down from 12.6% in the previous year.

Qatar’s move on Islamic windows contrasts with most Muslim countries, which permit the windows to operate as long as the banks show they are taking steps to prevent any mingling of their conventional and Islamic funds.

Islamic banking resembles conventional banking in many respects, with modifications to respect religious principles. For example, depositors do not receive interest but may get a share of profits from funds invested by the bank; loans do not charge interest but may carry certain fees.

Commercial bankers said that in addition to protecting the purity of Islamic finance, the QCB apparently wanted to level the playing field in banking: conventional institutions with Islamic windows were larger than pure Islamic banks, and so enjoyed better economies of scale.

More competition in one area, however, may be offset by the loss of it in another area. Islamic finance customers now have fewer options; an IMF report in January this year said there was a need to “manage the impact on banking sector competition in view of the decline in the number of institutions providing Islamic banking services from 12 to 4.”

http://www.gulf-times.com/site/topics/printArticle.asp?cu_no=2&item_no=503043&version=1&template_id=48&parent_id=28

Posted via email from IBFN (Islamic Banking & Finance Network) at Posterous

Qatar ban on Islamic windows of banks fetches no windfall!

A year after Qatar asked conventional banks to stop offering Islamic financial services, an expected windfall for its Islamic banks has yet to materialise. Nor is it clear that banks' customers are benefiting from the policy.

The episode illustrates the difficulties that countries face as they manage the relationship between conventional and Islamic banking. Trying to adjust that relationship carries risk, for both regulators and the banks themselves.

The Qatar Central Bank (QCB) last year announced that at the end of 2011, conventional banks would no longer be allowed to run "Islamic windows" — sections of the banks which operated according to religious, or Shariah, principles. Islamic banking services could only be offered by separate, dedicated institutions, QCB said.

The central bank's move was designed to ensure the purity of Islamic finance, by removing any possibility that Islamic loans and deposits could mingle with conventional funds bearing interest, which is forbidden to Muslims.

Before the ban, Islamic windows saw a significant amount of business in Qatar; they accounted for QR54.6bn ($15bn) or 31% of all Islamic banking assets in the country during 2010, according to the International Monetary Fund. Combined assets at all banks, both conventional and Islamic, totalled QR572bn.

So the QCB move looked set to have a seismic impact on Qatar's banking industry. One institution affected was HSBC Amanah, the Islamic arm of global giant HSBC Holdings; it opened its doors in Qatar in 2010, only to have to close months later.

In the wake of the decision, the shares of the country's several full-fledged Islamic banks, such as Qatar Islamic Bank and Masraf Al Rayan, surged on expectations that they would attract money leaving the defunct windows.

"We'll have a much bigger customer base. We see it as a very positive move," Adel Mustafawi, chief executive of Masraf Al Rayan, said at the time.
Credit rating agency Moody's Investors Service declared the "segregation of Islamic banking in Qatar is credit negative for conventional banks, positive for Islamic banks."

It predicted Islamic banks would benefit from access to a larger pool of customers and improve their profit margins. Conventional banks would lose between 8% and 16% of their deposit bases, assets and profits, Moody's estimated.

It hasn't happened that way. There was little sign of the expected flow of money into Qatar's Islamic banks last year; their total assets grew 35%, according to central bank data, but that marked a slowdown from 39% expansion in the previous year.

Masraf Al Rayan's assets soared 59% last year but profitability declined as measured by return on assets, dropping to 2.55% in 2011 from 3.49% a year earlier.
Meanwhile, the performance of Qatar's conventional banks improved; their assets grew 23% in 2011, up from a 16% rise in 2010. The biggest negative impact, Moody's predicted, would be felt by the country's largest lender, QNB.

But assets at QNB jumped 35% last year and its return on assets actually improved slightly.

The figures suggest that either depositors kept much of their money in conventional banks as Islamic windows closed, or Islamic banks suffered a growth slowdown that more than offset the benefits of the windows closing - or a combination of both.

Globally, banks' customers can be divided into three categories, according to consultants AT Kearney: loyalists of conventional banks, loyalists of Islamic ones, and a "floating mass" — by some estimates, 60% or 70% of the total — who base their choice of bank primarily on pricing and service quality rather than religious permissibility.

Qatar's data implies many conventional banks continued to attract the floating mass after their Islamic windows closed.

Most of Qatar's conventional banks have still not fully divested their Islamic loan portfolios; instead, they have taken advantage of a provision in the ban which, according to commercial bankers, allows them to hold existing Islamic loans until maturity, as long as they do not extend fresh ones.

At Doha Bank, for example, Islamic financing activities represented 7.4% of total loans for 2011, down from 12.6% in the previous year.

Qatar's move on Islamic windows contrasts with most Muslim countries, which permit the windows to operate as long as the banks show they are taking steps to prevent any mingling of their conventional and Islamic funds.

Islamic banking resembles conventional banking in many respects, with modifications to respect religious principles. For example, depositors do not receive interest but may get a share of profits from funds invested by the bank; loans do not charge interest but may carry certain fees.

Commercial bankers said that in addition to protecting the purity of Islamic finance, the QCB apparently wanted to level the playing field in banking: conventional institutions with Islamic windows were larger than pure Islamic banks, and so enjoyed better economies of scale.

More competition in one area, however, may be offset by the loss of it in another area. Islamic finance customers now have fewer options; an IMF report in January this year said there was a need to "manage the impact on banking sector competition in view of the decline in the number of institutions providing Islamic banking services from 12 to 4."

 

http://www.gulf-times.com/site/topics/printArticle.asp?cu_no=2&item_no=503043&version=1&template_id=48&parent_id=28