Banks To See Cost Benefit

Conventional banks that fail to offer Islamic Banking services risk an exodus of customers in favour of market rivals suitably equipped for the fast-approaching era of sharia-compliant financial services in the Sultanate, says a leading industry expert.

In fact, conventional banks with Islamic Windows will enjoy a significant cost advantage over full-fledged Islamic banks when sharia-based banking and financial services become a reality in the Sultanate sometime during this quarter, according to Khalid Yousaf, Director — Islamic Finance Advisory Services, KPMG Oman.

“Conventional banks are likely to lose some customers, if they do not offer Islamic banking services through window operations. Hence their positioning through Islamic window is to counter the threat of losing customers to other competitors. Opening an Islamic window operation is a safe strategy because it requires less capital while sharing a common cost base with additional business. This strategy therefore, compares favourably against establishing a full-fledged Islamic banking subsidiary,” said Yousaf.

“Given these cost advantages, conventional banks will have the capacity to offer their products and services at lower prices than full-fledged Islamic banks. They are also expected to leverage their existing brand image in the market to address new target Islamic banking customers,” he added in comments to the Observer.

A consummate banking professional with longstanding experience in both conventional and Islamic Banking, Yousaf has worked in senior positions with Citibank and Bank of America in the UK, Turkey, USA, Belgium, Greece and Pakistan. He has also played a pivotal role in setting up an Islamic Banking Unit within the International Bank of Azerbaijan in Baku, and an Islamic Fund for Gulf Global Group which is engaged in real estate and financial services in the UAE.

On balance, full-fledged Islamic Banks are likely to position themselves as authentic Islamic Banking institutions to win customers, Yousaf argues.

“Full-fledged Islamic banks will enjoy a better image and perception as ‘truly Islamic’ banks and being closer to Sharia principles than Islamic windows of conventional banks. For Islamic windows, there are always concerns about co-mingling of ‘halal’ with ‘haram’ funds; (lack of) complete independence from parent company’s operations and overall control and supervision exercised by the conventional banking parent.

Thus Bank Nizwa, Bank al Izz and any other full-fledged Islamic bank will enjoy a better public perception than Islamic windows and being independent, whereas Islamic windows may always be perceived as operating in the shadow of a haram conventional bank.”

The Central Bank of Oman (CBO) has opened the door for licensing to full-fledged Islamic Banks, as well as Islamic Windows to conventional domestic and foreign banks operating in the Sultanate. While two Islamic Banks — Bank Nizwa and Bank Al Izz – are preparing to launch services, a number of conventional banks are also gearing up to roll out Islamic Window operations. The latter category comprises bank muscat, National Bank of Oman, BankDhofar, Bank Sohar, ahlibank, National Bank of Abu Dhabi and Oman Arab Bank.

Significantly, the Islamic Banking Regulatory Framework (IBRF) governing Islamic Banks and Islamic Windows is likely to be issued sometime during September. The promulgation of the framework is expected to pave the way for licenses to be issued to the dedicated Islamic banks as well as windows for the commencement of sharia-compliant products and services in the market.

Explaining the importance of the IBRF framework, Yousaf said: “The IBRF is a comprehensive set of rules and regulations for Islamic banks and windows in Oman. Being the latest addition to the list of countries offering Islamic banking, Oman has had the advantage of evaluating and comparing similar regulations around the world and cherry picking the best-practices.”

The draft IBRF, which may still be subject to modification, comprehensively covers the Licensing requirements; General obligations and governance; Accounting Standards and Audit reports; Supervisory powers and control; Capital Adequacy; Credit Risk; Market Risk; Operational Risk; Liquidity Risk and other pertinent operational requirements.

“Although these rules and regulations still form part of the overall banking laws in Oman, they are unique to Islamic banks and window operations. Their robust and comprehensive structure will not only give a powerful supervisory and monitoring tool in the hands of the Central Bank of Oman, but also give confidence and trust in the minds of general public.”

“If the promulgation of the IBRF materialises during September 2012, the last quarter will be abuzz with Islamic banks and windows racing to launch their branches and open doors to their target customers,” the expert added.

Oman Daily Observer