Oman, which borders the UAE and Saudi Arabia, is a natural candidate for Islamic finance. However, NAZNEEN HALIM learns that sometimes location is not everything.

Despite its relatively small population of 2.8 million; all of whom are Muslim, oil-rich Oman seems the perfect candidate for Islamic finance. Oman has also, in recent years, announced its intentions to diversify away from being an oil-dependent economy whilst looking into other sectors such as construction and project financing. However, the ongoing debate since 2006, about whether to introduce Islamic finance into the sultanate and provide the necessary regulations to mobilize the sector, has become relatively muted.

The scene
At its peak in 2001, Oman’s oil production hit 350 million barrels a day, which has fluctuated over recent years and stood at 300 million at the end of 2008. The sultanate’s attempts at delving into real estate and project finance had also left it tarnished with debt in light of the Dubai debacle, with the National Bank of Oman exposed to US$22.6 million via Dubai World. However, other banks such as Dhofar Bank, which is the country’s second-largest lender by market value, had claimed no such exposure for itself.

Compared to other GCC and Middle Eastern countries which were slapped with major defaults and debt all around post-credit crunch, Oman had escaped relatively unscathed. It was reported that the sultanate had received US$2 billion in support, of which only US$300 million was utilized to mobilize its economy. The central bank had allocated US$2 billion to local banks to provide dollar liquidity in November 2009 while the economy was unraveling.

Hamood Sangour al-Zadjali from the Central Bank of Oman revealed that the remaining US$1.7 billion was not to be drawn as the country’s economy was set to bounce bank. “The global financial crisis is receding and the activities are coming back to normal,” Zadjali said. “Since our banks are not dependent on foreign markets, I doubt there will be much demand to access the funds, but we are still keeping this as a buffer.”

The banking sector in Oman, which also set up a US$390 million market-maker fund in February last year, was relatively shielded from the global financial crisis. However, the country’s banks have faced a risk closer to home with two lenders — Bank Muscat, the country’s biggest, and National Bank of Oman — saying they had exposure to troubled Saudi conglomerates Saad Group and Ahmad Hamad Algosaibi.

Waiting in the wings?
The sultanate — compared to its neighbors Saudi Arabia and the UAE, and relatively close by Bahrain and Qatar — has over the years taken a relatively lax stand with regard to competing for a piece of the Islamic finance pie.

It is, however, a member of the Islamic Development Bank and is the birthplace of Bank Muscat, whose Islamic finance activities are mainly carried out in Saudi Arabia. Bank Muscat currently specializes in consumer and corporate banking services and is looking at more investment and private banking in the near future.

The National Bank of Oman has also been touted a leader in this realm within the sultanate. However, with sufficient oil reserves and salient leadership by the Central Bank of Oman and the Capital Markets Authority on the conventional front, there is perhaps no real urgency to delve into Islamic finance just yet.