Oman’s Islamic Deposits Surge, Adding Pressure On Liquidity Tools

Oman’s two full-fledged Islamic banks have yet to post a profit but their customer deposits are surging, increasing pressure on authorities to develop sharia-compliant money market tools and make a long-awaited issue of Islamic bonds (sukuk).

Oman was the last country in the six-nation Gulf Cooperation Council to introduce Islamic finance, granting licences to Al Izz Islamic Bank and Bank Nizwa in 2013.

Combined customer deposits at the two full-fledged Islamic banks and Bank Muscat, which operates the largest Islamic window in Oman, almost tripled in the year to March. They reached a combined OMR440.4 million ($1.14 billion) against OMR154.8 million a year earlier, according to Reuters calculations based on company financial statements.

This compares with 4.5 per cent and 15.1 per cent increases in deposits at Bank Sohar and Ahli Bank respectively during the same period. HSBC Bank Oman saw a 0.1 per cent drop in deposits.

While the Islamic banks’ deposit growth is welcome, it puts them in a difficult position because in contrast to conventional banks, whose markets are much more developed, they still have few tools which they can use to manage the money profitably. This could hurt their bottom lines, and may already be doing so.

Al Izz saw financing receivables grow five-fold for the quarter to March compared to a year earlier, but total income was insufficent to cover expenses; it posted a net loss of OMR1.6 million rials for the quarter, compared to a OMR1.5 million rial loss in the same period last year.

Bank Nizwa saw net losses after tax of OMR1.6 million in the latest quarter. That figure was 19 per cent smaller than its losses a year earlier.

Islamic banks elsewhere in the Gulf use sukuk to manage their liquidity, but Oman has so far seen only one issue of corporate sukuk and bankers say sovereign issuance is needed to energise the market.

A sovereign deal has been delayed by the plunge of oil prices and the uncertainty it is creating over state finances, however. The sultanate now plans to make its first sovereign issue of sukuk, a OMR200 million ($520 million) deal, by mid-2015, the head of Oman’s central bank said last month.

The central bank has set up a task force to develop sharia-compliant money market tools, which could resemble the short-term instruments offered by the Bahraini central bank. But it is not clear when the Omani tools will be available.

As of January, total assets held by Oman’s Islamic banks and the Islamic windows of conventional banks reached OMR1.4 billion, representing a five per cent share of total banking assets, central bank data showed.

There is further room for growth, as that figure is well below the roughly 25 per cent market share that Islamic banks enjoy in the Gulf Arab region.