With Islamic finance becoming increasingly sophisticated, Oman may paradoxically stand to benefit from its late entry to the market.
Until very recently Islamic finance in Oman was not permitted. Indeed, in 2007 the Central Bank declared that banking should be “universal”, and conducted within the framework of international financial norms – leaving it the only member of the GCC not to make a legal differentiation between conventional and Islamic finance. In May 2011, however, a Royal Decree announced that Islamic banking regulations would be added onto the existing Banking Law, enabling Oman’s banks to offer Sharia-compliant products.
The decision was likely driven by a variety of factors. Prime among them is the inescapable advance in recent years of “Sharia-compliant” as a global financial model for Muslims and the growing significance of Islamic banking, not least in London.
Modern Islamic banking began in the 1950s and 1960s in two very different locations: Upper Egypt and Malaysia. Since then, the concept has gained in sophistication and gradually expanded to new markets. While Malaysia remains prominent (and indeed has a state-sponsored national Sharia Board to regulate the sector), the Gulf has emerged as a significant player on the scene. Bahrain, for example, hosts the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). It is thought that globally the sector now accounts for some $1.7trn of assets.
The rapid expansion of Islamic finance thus made it an increasingly difficult prospect to ignore, and the absence of a regulatory framework for the sector in Oman was likely seeing potential investment for the Sultanate head elsewhere. Not to mention the fact that some of the country’s 3 million Muslims were increasingly rejecting conventional finance due to its associations with ‘riba’, or usury – the Islamic prohibition against which Sharia-compliant finance was designed to counter. It was thus hoped that the option of Islamic finance would not only improve foreign investment, but also meet latent demand for financial services among the domestic population.
It is in this context that the second Oman Islamic Economic Forum was held (the first having taken place two years ago in 2011). Among items on the agenda were improving human capital in the nascent Omani sector (an area in which Malaysian officials were keen to collaborate), as well as examining opportunities for expanding Islamic finance to small and medium-sized enterprises (SMEs) and the role of Islamic venture capital in improving research and design in the Muslim world.
The conference was not merely a chance to extol the opportunities provided by Islamic finance. Some used it to vilify conventional finance, and suggest that Shariah-compliant banking offered an alternative to a discredited financial order. Khalid Hilal Alyahmadi, whose Amjaad Development recently signed a contract with Islamic bank Meethaq to roll out a further 50 branches in the Sultanate, told audiences that “the current financial crisis was driven by greed, and there is no doubt that there is a need for an alternative financial system, one in which ethics and justice form the foundation.”
Such strong – and extremely general – characterisations, while perhaps shared by some bankers as well as a proportion of the public, Muslim and non-Muslim, risk clouding the issue and confusing greed with profit. Shariah-compliant financial institutions exist to make a profit as well as provide a service. Whether that profit is derived from the time principal of money (interest as in conventional banking) or a ‘management fee’ as in Islamic finance, essentially the same dynamics apply. In the sense that they are specialised lending institutions with their own rules, Islamic banks are not so different from other specialist institutions already operating within the global financial system (for example, many large banks today have divisions specialising in managing lending for charitable institutions, while others follow a co-operative model of profit sharing, or promote ‘ethical’ lending).
However, rather than being a total antidote or straight alternative to the ills of global financial capitalism, Islamic models of finance involve additional formal procedures that tend to increase transaction costs, while the need to secure loans against tangible assets reduces the liquidity of cash held in Islamic banks. With Islamic finance still playing a relatively minor role in the global financial system, these and other problems remain under-exposed. Yet as the sector continues to expand and gain credibility, more attention will necessarily be paid to them.
Regulations and guidelines One solution, as the authorities in the Sultanate have demonstrated, is to provide a proper regulatory framework for the sector issued by the central bank. Rules released in Oman at the beginning of this year provide a thorough grounding for Islamic banking, and include guidelines for shariah scholars.
The specialised knowledge needed to issue fatwas on specific potential transactions is often restricted to no more than a handful of scholars. The Omani rules would encourage more scholars to specialise in Islamic finance by providing a six-year time limit for individual scholars sitting on bank advisory boards; they also limit potential conflicts of interest by restricting scholars to a single bank at any time.
With Islamic finance becoming increasingly sophisticated, Oman may paradoxically stand to benefit from its late entry to the market. Learning from where others have previously gone wrong has enabled the Sultanate to draw up a robust regulatory framework, which could well succeed in attracting risk-averse investors. This is particularly the case given the fraught state of regulation in some other Islamic finance markets, where disputes between secular and religious authorities over what constitutes Shariah-compliance have occasionally resulted in certain products suddenly being declared Haram. And if Oman’s prior commitment to the ideal of universalism can also be maintained, there is no reason why, when it comes to banking, the Sultanate cannot offer the best of both worlds.