COVERSTORY-ISLAMIC BANKS

Poised for a quantum leap

Despite being at its embryonic stage, Islamic finance is predicted to have the potential to redraw the banking landscape of the Sultanate in the years to come. Being the first full-fledged Islamic bank in the country, Bank Nizwa is apparently in the vanguard of Omans historic tryst with faith-based finance. Its CEO Dr Jamil El Jaroudi exudes confidence that the bank is geared up to assume this challenging responsibility, in an interview with Muhammed Nafie
It was only a couple of months ago that Bank Nizwa started its commercial operation as the first full-fledged Islamic bank in the Sultanate. How is the initial response from the market? The response has been very enthusiastic as we expected. We receive a lot of people who come to inquire about our services and open accounts with us; and they are very much impressed by the manner and the promptness and speed with which we can open an account for them. We promise that if you are eligible we can open your account, get your check book and ATM card before you leave the branch. But as the number of the visitors has increased steadily, and as those who come with a volley of questions about our services and facilities have required more time, we have arranged some of our staff exclusively to handle such queries, so that others can complete the process without any delay. What are the Islamic banking products and services that Bank Nizwa offers right now? And what sharia contracts/ tools does each of them apply? Basically, people expect us, as a bank, to offer current accounts and saving accounts; and many of them want it along with additional facilities. Today we already offer these services, and we allow our current account holders to use the ATMs of all other banks in the country at our expense. It means all ATMs in the Sultanate are ipso facto Bank Nizwas ATMs. As a new bank, we cannot set up ATMs across the length and breadth of the country overnight and therefore we had to find out a mechanism to serve all people who bank with us. For instance, people who live 500 kilometres away from Muscat cannot wait to open an account with Bank Nizwa till we set up an ATM machine there. We also offer saving accounts, personal finance, auto finance and home finance.

Dr Jamil El Jaroudi, CEO, Bank Nizwa

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In home finance, the sharia model we started with isIjarah Muntahiyah Bittamlik (a sharia leasing contract whereby at the end of the contract the ownership is transferred from the lessor to the lessee). This is very practical and more effective at this stage. But sooner we are looking to introduce other facilities such Istisna where people can come with a design in their mind and ask us to build a house of their willing wherever they want, instead of buying an already built house. We build it and lease it for them with an option to own it later. Istinsa is the Islamic tool for what you call project finance in the conventional stream. We can also apply other models depending on the requirements of our clients in the future, whether it be setting up the headquarters for a company or building its warehouse or manufacturing facility. Apart from Murabaha, Ijara and Istinsna, we will also be doing in the future equity participation, either through direct ownership or Mudharaba participation wherein the investors who give us the money would be called Rabbul Mal (owner) while we will be the Mudharib (those who deploy money and invest it for them). What about your ATM and branch network? Where else do you want to start branches this year? Right now we have three branches located in Muscat, Sohar and Nizwa. But by the end of 2013 we plan to open other five branches, to end the year with eight branches across the country. And as I mentioned earlier, all ATMs in the Sultanate will be part of our network. You have a huge paid up capital of RO150mn. What is your comment on the the recent CBO relaxation for Bank Nizwa in overseas investment ceiling? The Central Bank of Oman allowed us to do that because there are not many Islamic instruments available in the Sultanate where we can invest our money. But the concession the CBO extended to us is only for a stipulated period and once it is over we will come under the normal regulation as any other bank in the country.

It is obvious that the concession was on the basis of our request. Islamic finance is predicted to make rapid headway in the country with its asset base reaching RO1.5bn by the end of 2013. How prepared are you for this as you have to compete against numerous windows of conventional players who have already started operation? It might be too early to talk about competition, actually. We have not run into each other so far. There is enough room for everybody. We kept saying form a practical point of view that we welcome competition because first of all it helps the clients. On the other hand, it helps us to create awareness rather than one company doing it alone. And thirdly, we exchange with them products. Today if they have problem of liquidity, I can help them out; or tomorrow if we have the problem they can help us. The monopoly of one single bank does not work. With more players we will have a vibrant Islamic banking market. But still there needs to be a limit on how much competition you can bring to the Sultanate at this stage and there should not be an oversupply of institutions. And I think the Central Bank of Oman is the best judge to decide when to stop giving licenses. Islamic finance is still in the fledgling state in Oman. What are the major challenges you confront at this stage? The biggest challenge is to create awareness among people about Islamic finance. People have to understand what Islamic finance is, rather than saying I love therefore I want. They have to understand the importance of Islamic finance and what it can bring to the economy and that takes time. This is one of the biggest challenges because people might be confused by inaccurate information and descriptions presented by some for marketing purposes. People want to understand the fundamental difference between the new and conventional banks. There are many things that they still want to know. We are generating awareness through various types of forums, seminars and conferences.

We are working with universities by delivering lectures and presentations in order to explain to the students who are going to be the future operators in the market. We need to reach out to more youngsters who constitute a huge chunk of Omans population. We also make use of media as a channel to send our message across. It needs to be a collective effort between us, the policy makers, education institutions etc. to ensure that the message comes from more than one source. The second challenge is reaching out to as many people and areas as possible in the Sultanate because everybody in Oman wants Islamic banking. But we have to walk before we run and therefore we gradually want to accommodate everybody aspiring to do business with us. We have to explore more innovative and creative ways to reach out to everybody. One solution is to open new branches but it will take time to open a physical branch by recruiting new employees as it involves getting them relieved from their previous employers and giving them proper training. The third challenge is that peoples expectations are high and our ability to expand is controlled. It is not as easy as being a bank and turning it into an Islamic one. How do you manage to find experienced Islamic bankers? Although we have very good bankers in Oman, it is difficult to get experienced Islamic banking employees. We are trying to bring Omanis who are working outside the country in Islamic banks such as Saudi Arabia, UAE, Bahrain and Qatar. In addition, all our employees have to go through an intensive training programme. Even when we open a new branch we do training to the new comers for three weeks from 8am to 5 pm. In addition, every month they undergo a refreshing course where we have our Sharia experts interacting with them. We also get our feedback from our call centre about the most frequented questions asked by people. We train our people to give everybody the same answer to the same questions.

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Building on a strong legacy

Being part of a strong brand of Bank Muscats stature has been immensely helpful for Meethaq to put itself on strong footing in a highly competitive Islamic banking market, says Sulaiman Al Harthy, Group General Manager- Islamic Banking, Bank Muscat. An OER interview
How is the initial response to Meethaq? The response has been quite exciting and the number of inquiries has been more than what we expected so that we are forced to double the number of the staff. There are two types of customers: those who come after making up their mind and those who initially come just to inquire and then come back to us after going to other banks and understanding what distinguishes our products and services. What are the Islamic banking products and services Meethaq offers right now? And what sharia finance models they apply? For the time being we offer current account, savings accounts, home finance, and auto finance. We have also launched corporate financing and have already started financing a number of projects of which the biggest one accounts for about RO12mn. And a number of bigger projects are in the pipeline. In general, we apply three sharia contracts. For project finance, we primarily use Musharaka and Ijara while for auto finance we use Murabaha, as most of the banks do because it is easier. We are using Murabaha for savings accounts and Qardhul Hasan for current accounts. However, we have not yet started the more complicated contracts such as Istisna and Salam etc. We have a lot of products in the pipelines which will be out in a few months time. Where else in Oman do you want to open branches of Meethaq this year? We have planned to open seven branches this year. It looks a bit slower than we expected, but hopefully we will have seven branches in Muscat and other cities towards the end of this year. Could Meethaq leverage Bank Muscats existing brand image in the market to address new Islamic banking customers? The Central Banks regulation requires that the window should remain as a bank within a bank, need to have a separate balance sheet and separate loss and profit account. We do a lot of awareness and education. Recently, we trained about 200-300 customers and had a one week training forum in Nizwa. We were doing this even before we got the license. We have explained to people that how different the Islamic banks are from the conventional banks and how a window can operate as a window and still be Islamic even though the parent bank is riba-based. Some of our existing customers are shifting to Meethaq. Earlier the existing customers did not have a choice;

The Central Bank of Omans regulation requires that the window should remain as a bank within a bank

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but now they have a choice of either staying with Bank Muscat or going to another Islamic bank. So they prefer to stay with Bank Muscat. We dont hide our identity, contrary to some other Islamic windows who dont use their parent companys logos and where if you walk in it will be very difficult to make out their real identitywhether they are new banks or whether they are part of an established entity. But we are more transparent on this. Everybody knows that Meethaq is attached to Bank Muscat and a window of Bank Muscat, so why do we hide it? Bank Muscat is a very strong brand and if you are associated with a bigger brand, its good. How prepared are you to compete against full-fledged Islamic banks, especially when there are concerns about the feasibility of conventional banks offering Islamic services through window operations? The competition is intense. Now, every client you speak to, especially the corporate clients, are talking to other banks as well. After all, what matters to them is the pricing- the cost of financing. So it is very difficult. On one hand, the window operations can take advantage of the parent banks support functions such as HR, IT etc. But on the other hand, this can also be very difficult because people with the conventional bank used to do banking in a given way and now they have to do in a different way. So we have got a lot of challenges in terms of convincing them that they are different and they have to be dealt differently. Money has to be segregated; there could not be the commingling of the funds. As far as full-fledged banks are concerned their entire operation is focused on one thing. However we are giving training to them. Right now, five of my staff members are abroad undergoing on-job training in a bank in Bahrain to raise their knowledge, ability and confidence. So they can understand how to do it here in Oman. They may be more skilled than the Bahrainis they work with, but we sent them to get more confidence.

Sulaiman Al Harthy, Group General Manager- Islamic Banking, Bank Muscat

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Ahmed Al-Musalmi, Deputy Chief Executive Officer, National Bank of Oman

On a solid footing
National Bank of Omans Muzn Islamic Banking plans to open seven more branches across the Sultanate this year. Muzn is equipped with a robust system and qualified staff to offer a broad spectrum of sharia-compliant products and services, says Ahmed Al-Musalmi, Deputy Chief Executive Officer, National Bank of Oman
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How is the initial response for Muzn? The initial response from the market is remarkable. We were amazed with the positive response from the public and the high demand for shariacompliant products. Since Muzn was launched, we have been receiving lots of customers opening accounts with Muzn and conducting Islamic transactions, be it placing of funds or financing requirements. We strongly believe that our market share of Islamic banking will be very high compared to our competitors, noting the high demand for the services and the products offered by Muzn which are by far the best in the market. What are the Islamic banking products and services Muzn offers right now? And what sharia finance models they apply? Muzn Islamic Banking caters for the retail and corporate requirements and our products cover the needs on both the assets and the liabilities sides, from Mudaraba accounts for retail saving accounts; Wakala for corporate and retail deposits; and Flexi wakala for call accounts. Also, the asset side includes Ijara for home finance, home construction finance and term financing; Murabaha for cars and assets financing as well as trade finance services. What about your ATM and branch network? Where else in Oman do you want to open branches of Muzn this year? Currently we have one branch in Muscat. However, our plan is that we will cover the entire Oman by the end of 2013 as Muzn will open seven more branches in all the regions of Oman to cover customers needs. We are facing increasing customer demand from all the regions requesting for Muzn

services which will drive us to speed up the process of opening more Muzn branches to fulfill our customers needs and expand our reach. Currently all Muzn customers can use the National Bank of Oman ATMs free of charge, which reflects Muzns commitments to its customers and community. Islamic finance is predicted to achieve an asset base of RO1.5bn by the end of 2013. How prepared are you for this as you have to compete against full-fledged Islamic banks with huge paid-up capital? Muzn is the first Islamic banking window to open its doors to the public. It is also the first Islamic bank to register with the Ministry of Housing and the first to offer Ijara services to the customers, which gives a clear idea of how Muzn is well prepared. We are well ahead in the market with our dedicated and well trained Islamic banking team and our product suite which is geared up to cover all market requirements. Could Muzn leverage the National Bank of Omans existing brand image in the market to address new Islamic banking customers? Muzn is supported by the National

Bank of Oman from an operational perspective; being the parent company of Muzn, National Bank of Oman provides special treatment, services and rates to its customers to promote Islamic banking within the group. There were concerns about the feasibility of conventional banks offering Islamic services through window operations. What are the measures you have taken to alleviate such concerns? Muzn is operating with the concept of an Islamic bank within a bank, with a separate balance sheet, separate paid-up capital to support its operations, separate IT system and separate core banking system. This will allow Muzn to offer its services in the market as a full-fledged Islamic bank. Our services with National Bank of Oman are mainly concentrated in the field of operational support. Muzn sharia supervisory board comprises three of the best scholars in the Islamic banking field in the world with extensive experience in this field. They are Sheikh Dr Mohamed bin Ali Al Qari, chairman of Muzns Sharia Supervisory Board (SSB) and board member in many Islamic organisations. He is also a sharia professor in king Abdulaziz University in Saudi Arabia as well as penned so many articles on Islamic banking. We also have on board Sheikh Dr Mohamed Daud Baker, chairman of the Central Sharia Advisory Council of the Central Bank of Malaysia, Securities Commission of Malaysia, and Labuan Financial Services Authority as well as many other Islamic organisations, and Sheikh Khalfan Al-Esry, member of Muzn SSB and a well-known Sharia scholar in Oman with solid experience and knowledge of Islamic banking.

Muzn is the first Islamic banking window to open its doors to the public. It is also the first Islamic bank to register with the Ministry of Housing

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Abdullah Al Jabri, Deputy General Manager, Head of Al Hilal Islamic Banking Services, Ahlibank

Spreading its net

Ahlibank started the operation of its Islamic banking window with five branches, and the sixth one is expected to open in April. Abdullah Al Jabri, Deputy General Manager, Head of Al Hilal Islamic Banking Services, Ahlibank, is optimistic that the crescent moon, which Al Hilal is named after symbolising the start of a new era of Islamic banking, will mutate into a full moon as the bank goes along. An OER interview
Can you explain about the branch network of Al Hilal Islamic banking Services? Al Hilal started its operation with five branches in Samail, Bahla, Rustaq, Saham and Muscat from day one. The fact that we launched the operation with five full-fledged branches offering all Islamic products shows our readiness to offer Islamic banking services across the Sultanate. In addition, our sixth branch is coming up very soon in Salalah. The Salalah branch will be operational before the end of April. Opening new branches will depend on the market requirements and customer demand. We also think about converting some of our existing branches to the new mould if there is a lot of demand for Islamic services. All our branches are equipped with independent ATMS and all our customers can use both the conventional and Islamic ATMs of Ahli bank, although we have segregated the systems; and since we are part of Oman Net our customers can use all other ATMs in the country as well.

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While all the Islamic banks and windows started their businesses in Muscat why did you go to Samail for the opening ceremony? We opened five branches in the very first day of operation, but we did the opening ceremony in Samail as a symbolic gesture because the region is the cradle of Islamic civilisation in the country. The first Omani to accept Islam, Mazin bin Adhouba, was from Samail and the first ever mosque in the country was set up in the same place. Even the name of our Islamic window Al Hilal denotes the crescent moon in Islamic tradition symbolising the start of a new era of banking in the country and we are optimistic that the crescent moon will mutate into a full moon brining more brightness as we go along. How are your Islamic banking products being accepted across the branches? The initial response has been great. Our Islamic products have been accepted very well and the demand is steadily on rise. This prompts us to open up more branches and expand our networks to more areas in the country. Our initial strategy is to tap into the largest segment of new customers looking for faithbased banking services followed by converting our existing customers who are willing to migrate to the Islamic mould. Now, the demand is very high from both sides. Can you explain about the products and services Al Hilal offers right now? The products we offer are almost similar in nature to what other Islamic banks and windows offer. But the difference lies in the way we offer them. We have all the products on both sides of asset and liability. We have auto financing, home financing and personal financing for buying goods and materials. On the liability side, we have both savings and current accounts. All our branches are fully equipped for serving the customers with dedicated staff which include our direct sell team who go out to visit the customers. We also have our

independent ATMs and very soon we will be introducing our Islamic credit card facility. We also issue checkbooks and we are going to introduce internet banking and SMS services very soon. Most importantly, we are also going to launch our exclusive investment fund, called Islamic MENA fund, which has been approved recently by the regulators. Its the first of its kind Islamic fund in the country. Islamic finance is predicted to achieve an asset base of RO1.5bn by the end of 2013. How prepared are you for this as you have to compete against full-fledged Islamic banks with huge paid-up capital? We are placed very strong compared other window operators in the country because we have the largest Islamic banking networks spread across the length and breadth of the country. We always position ourselves to be the leader of the Islamic banking services and this will continue. What distinguishes us is that we did not have a soft operation nor we started with one or two products. We started with the full range of products across all our five branches and with the launch of Salalah branch we will be the only Islamic operator with six fullfledged branches in the first quarter. Could Al Hilal leverage Ahlibanks existing brand image in the market to address the new target Islamic banking customers? We are under the umbrella of Ahlibank, the fastest growing bank in the country. And now Al Hilal has

emerged as the fastest growing Islamic window in terms of branch network, the products offered, expertise and technical knowhow. In addition, we are the first bank to introduce Islamic core banking system. In a short span of two months we have shown all the signs of growing fast like Ahlibank. There were concerns about the feasibility of conventional banks offering Islamic services through window operations. What are the measures you have taken to alleviate such concerns? One of the biggest challenges is to create awareness about Islamic banking and to make people understand the differences between our conventional and Islamic operations. As an Islamic window, we ensure the segregation through fully independent branches, dedicated capital, sharia auditing, sharia supervisory board giving the approval to all kinds of products and services, dedicated ATM services etc. His Majesty Sultan Qaboos bin Saids instructions to launch Islamic banking came a year back and from that day up until now, we have spent all our efforts to educate the public about Islamic banking through seminars. I think we have attained a good level of knowledge on the part of the public and our staff. But we need to have more educational sessions with customers because the more they understand the concept, the easier will be for us to provide them with the most suitable product. The key is to explain the differences between conventional and Islamic banking. They should be aware that although the results may be the same, the documentation, the agreement and the process itself are completely different. We have done a lot of awareness campaigns in these regions which were led by our sharia scholars and experts from the office of the Grand Mufti. Apart from our sharia scholars, we also invited scholars from other banks, because for Islamic banking to grow in Oman, we require collective efforts from everybody to create awareness of Islamic banking among the public.

One of the biggest challenges is to make people understand the differences between conventional and Islamic operations

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On an upswing
BankDhofar forayed into Islamic banking by opening two branches of its Islamic window Maisarah in Muscat and Salalah. Sohail Niazi, Chief Islamic Banking Officer, Maisarah, talks about how the fledgling Islamic banking industry is going to unfold in Oman and how equipped BankDhofar is to avail itself of this opportunity. An OER interview
How is the introduction of Islamic finance going to affect Omans economy? His Majestys decree to open up Islamic banking has been very well received by the market and the people of Oman. The country has been enjoying a positive economic growth, while at the same time its population has been growing. In order for this economic growth to be sustained, financial services and banking industry will have to play an important role in the overall economy. Islamic finance within the broader financial services industry will contribute directly to the economic growth by offering choices and alternatives to consumers, small businesses, corporations and government institutions alike. It will fill the gap that existed before the introduction of Islamic finance in Oman. Could you talk about the results of Bank Dhofars feasibility studies and market plans ahead of your launch? As part of our analysis we conducted a comprehensive study of local and regional markets with the help of a leading consulting firm. We wanted to assess the true demand for Islamic banking products and services and determine the role Maisarah, BankDhofars Islamic window, can play in meeting that demand. There were two key themes that emerged from the study that I would like to highlight: First, BankDhofar has a very loyal customer base and many of them showed keen interest in Islamic banking in the wake of Islamic finances introduction in Oman. Secondly, the demographics and trends of the market that will derive demand for Islamic products are SMEs

Sohail Niazi, Chief Islamic Banking Officer, Maisarah, BankDhofar

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and young consumer segments. We at Maisarah will ensure that we offer best Islamic products and services that are in line with what our customers require. It is predicted that prospects are bright for Islamic banking as a viable alternative to the conventional banks especially in the aftermath of global financial crisis. Your comments: Islamic finance is based on principles of transparency, ethics, fairness and sharing of risk and reward. The global financial crisis and difficult economic environment that ensued has highlighted a need for better governance and alternative options. The Islamic finance offers complementary and alternative solutions to existing products and services offered by conventional finance. The tremendous growth experienced by Islamic finance industry over the last few years testifies to its acceptance as a viable complementary and alternative option. A lot of market participants are considering it as a serious and viable option not only in the Muslim countries but also in nonMuslim countries, as evident in the issuance of Islamic bonds (sukuks) by some major international corporations such as GE Capital and Nomura. What are the Islamic banking products and services that Maisarah offers right now? On retail side, we are offering saving, checking and deposit accounts, priority banking, home and auto finance through our two branches in Muscat and Salalah, We also have other products in the pipeline. Similarly, on corporate side, we have goods murbaha and kafala products ready to be offered to corporate clients soon, along with host of other products to be launched in the near future. Where else do you want to open branches of Maisarah this year? Based on our comprehensive feasibility study and market research, we have started our operations right now in Muscat (Azaiba) and in Salalah. We selected Azaiba and Salalah after looking at the demographics, commercial environment and other business factors. As far as the future

branches are concerned, we are evaluating new locations in the country, but we will strategically consider customers expectations and market demand. Any decision on launching a future branch will be based on these factors. However we are open to opportunities anywhere in the country and are constantly keeping an eye on the competition in the market. How could Maisarah leverage Bank Dhofars existing brand image in the market to address new target Islamic banking customers? We have an advantage as the window operation of an established conventional bank, as opposed to a standalone bank. We have a big network of clients with long and deep relationships; we can get their feedback, and based on this feedback we can specifically address their needs. Our strategy is to understand the true demand for the products from the customers and deliver exactly what they are looking for. We are also talking to our existing clients who have shown interest in Islamic banking. We can also leverage BankDhofars existing infrastructure, technology, and market knowledge. If you are a new bank you have to start everything from the scratch and your challenge will be bigger. There were concerns about the feasibility of conventional banks offering Islamic services through window operations. What are the measures you have taken to alleviate such concerns? First of all this model is not a new one, as it has been practiced in

many countries. But since its new in Oman, the customer awareness and education are very important. People have to realize that Maisarah, the Islamic window is a very distinct and separate operation. We are part of a larger organisation, but we operate a very segregated business; we have a separate Islamic banking team, separate premises, independent accounting systems, policies and procedures based on generally accepted Islamic finance principles, separate and independent sharia board which supervises and oversees the entire operation to ensure not only that we are sharia-compliant but also we are completely segregated from the conventional businesses. That is the most important element of segregation. We have to ensure that segregation remains in place, not only because it is sharia and regulatory requirement, but is also very important from customer perception point of view. The segregation is not physically a difficult exercise; we have already managed to hire very experienced professional team with deep experience in Islamic finance and set up a segregated Islamic banking services business. How prepared are you to compete against another full-fledged Islamic bank and numerous windows of conventional players? We have a dedicated team working hard to ensure that we come out with the best offerings for our customers. With BankDhofars aim to be the best bank in the Gulf, we are focused on ensuring that our Islamic division Maisarah also will be the best in Gulf. Under the supervision of Sharia board, a separate brand for the Islamic banking which will be operating from a separate office with a skilled team, we will strive to meet the needs of our customers and community. We are going to achieve the vision of being best in the Gulf, simply by providing the best banking experience to our clients, to create the best opportunities for our employees, to establish the best and responsible relationship with our community and to deliver the best results for our shareholders.

The tremendous growth experienced by Islamic finance industry testifies to its acceptance as a viable complementary and alternative option

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Primed for action

Bank Sohar is all set to launch its Islamic window Sohar Islamic with four branches coming up in Muscat, Batinah, Salalah and Dakhiliya regions. Mohammad Haris, Head - Islamic Banking, talks about the preparations to launch a unique, authentic and reliable Islamic banking window. An OER interview
Bank Sohar has already announced that Sohar Islamic will be its Islamic banking window. When and where will Sohar Islamic be starting its operation and what are your expectations? We are in the final stages of preparations and plan to launch Soha Islamic in a few weeks time. The intention is to make sure that when we launch the window, we are fully prepared in terms of products, systems, procedures and sharia-compliant governance structure. Our expectations are quite high for Sohar Islamic. Islamic banking has done well in all the countries it has been introduced to so far. This is especially true for Muslim countries. It may take some time to gain momentum as people in Oman are still to come to grasp with the basic principles of Islamic finance. But with time it will grow to be a sizable component of Omani banking industry. As Sohar Islamic, we expect to get our fair share of the market by focusing on customer service and convenience. What are the Islamic banking products and services that Sohar Islamic will offer initially? And what sharia finance models they apply? Sohar Islamic plans to offer a comprehensive suite of products and services for retail and corporate customers. Our deposit products include current accounts; savings accounts and term deposits. The above products will be based on Qard and Mudaraba structures. Our retail financing products are mortgage financing; automobile financing; debit card; and internet banking. These products will be based on Ijara, Murabaha, and Musharaka

Mohammad Haris, Head - Islamic Banking, Bank Sohar

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Mutanaqisa structures. Our corporate financing products are working capital financing; asset purchase financing; import financing and project financing (Ijara, Diminishing Musharaka). The above products will be based on Mudaraba, Murabaha, Ijara and Diminishing Musharaka structures. We hired a world renowned consultancy firm Dar Al Sharia Legal & Financial Consultancy to help us with all the important aspects of launching our Islamic banking window. Dar Al Sharia is providing its expertise in Sharia related matters, product design, sharia governance and sharia documentation to help Bank Sohar launch a unique, authentic and reliable Islamic banking window. Where do you want to open branches of Sohar Islamic this year in Oman? Sohar Islamic intends to commence operations soon (after obtaining all necessary approvals) with four branches covering Muscat, Batinah, Salalah and Dakhiliya regions. We plan to subsequently expand our network with focus on financial inclusion of the unbanked population of Oman. ATMs will typically be installed next to the branches. This network will also be expanded later. Sohar Islamic customer will have the freedom to use any ATM on Oman Net network absolutely free of charge. Islamic finance is predicted to achieve an asset base of RO1.5bn by the end of 2013. How prepared are you for this as you have to compete against full-fledged Islamic banks with huge paid-up capital? These numbers are mere estimations. There are various studies coming out with different estimates of the size of Islamic banking after one year, three years and five years. Only time will tell what size Islamic banking attains in Oman over the next few years. However, while the estimates may be questioned, one thing is quite certain: Islamic banking is here to stay and to grow. It is expected to follow suit of Islamic banking industries in

other GCC and Muslim countries. Oman is a market of reasonable size. Vision 2020 envisages Oman to be a non-oil dependent country and increase the diversification of the economy into the services, industrial and financial sectors. With eighth five-year plan underway projecting GDP of over five per cent and with enhanced government expenditure in health, education and infrastructure and with implementation of an industrial strategy focusing on IT, petrochemicals, free zones, assembly and re-export, and tourism, I am pretty sure that all players including Islamic windows will get their share of business. Could Sohar Islamic leverage Bank Sohars existing brand image in the market to address new target Islamic banking customers? In a short span of five years, Bank Sohar has emerged as one of the leading banking institutions in the Omani market setting benchmarks in the banking sector. The bank has done extremely well during the past five years of its operations in the Sultanate marking its footprint within the economy. The banks management ensures that the strategy followed by the bank revolves around the economy and therefore with the evolution of the banking sector within the country to introduce Islamic banking, Bank Sohar has planned for the introduction of its Islamic banking window Sohar Islamic. The logo which has previously been revealed represents

a new bloom or start of a new era in Islamic banking in Oman. Each form is inter-connected to reflect the bond between the customer and the bank as well as on the bond between the customer and their Islamic values. The identity is ever growing and evolving, in essence sharing the promise of Sohar Islamic, to provide its customers with dynamic products and services, that is in line with the Islamic principles. The bank had also taken initiatives to educate the public on Islamic banking by conducting customer awareness programmes in Muscat, Sohar and Salalah. This is a key initiative in preparing the public for the dynamic change in the banking industry. Bank Sohar has always strived to provide customers with a unique experience in all its services and the Islamic banking will be no different. The bank is working on offering its Islamic banking window services at four different locations within the Sultanate and has taken various initiatives simultaneously to ensure excellence in all its offerings. There were concerns about the feasibility of conventional banks offering Islamic services through window operations. What are the measures you have taken to alleviate such concerns? Sohar Islamic intends to adhere to the highest level of sharia-compliance by meeting certain key conditions including: complete segregation of funds; stand-alone and independent branches, separate sales staff, existence of a sharia supervisory board and sharia audit and compliance unit; committed management; the worlds best Islamic banking software; and compliance with the standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). To ensure the highest level of sharia governance and to have access to unmatched sharia advice and guidance, the bank has constituted its sharia board comprising four reputed international and local scholars.

Islamic banking is here to stay and to grow. It is expected to follow suit of Islamic banking industries in other GCC and Muslim countries

 COVERSTORY-ISLAMIC BANKS

Tapping the potential

Islamic banking windows constitute a close alternative to full-fledged Islamic banks and, as it has been observed in other countries, can even compete with full-fledged Islamic banks, observes Azmat Rafique, Head of islamic Banking, Al Yusr, Oman Arab Bank. An OER interview

Azmat Rafique, Head of islamic Banking, Al Yusr, Oman Arab Bank

98

April 2013

Oman Arab Bank (OAB) has already announced its Islamic banking window Al Yusr. When and where Al Yusr will be starting its operation and what are your expectations? OAB has recently unveiled its Islamic banking brand Al Yusr. This is our dedicated Islamic banking department. We have planned to launch our operations officially by mid-year. Our flagship branch will open its doors to OAB customers and other respectable clients in Muscat. Further four branches will also open within one year in other major cities of Oman. We expect positive and good response to our Islamic banking services. This expectation is backed by the demand of our existing clients in OAB and also based on the nature of our products which will soon enter the Islamic banking market in Oman. What are the Islamic banking products and services that Al Yusr will offer initially? And what sharia finance models they apply? We plan to focus on the retail, SME and mid-tier corporate sectors in the country. The choice of products has been made carefully after assessing the market, products that have been offered so far by our competitors and keeping in view our strong commitment to meet genuine needs and demands of Omani customers. We have plans to launch innovative and value-added products that will not only satisfy unique needs of our targeted market segments but will also help in the maturity of overall Islamic banking industry through availability of diversified products in the market space. Al Yusr is committed to its strict compliance to sharia rules and regulations. We have built our overall organisational structure in compliance with the Central Bank of Omans guidelines in this respect. We adhere to AAOIFIs accounting, auditing and sharia standards. Al Yusrs operations are being supervised by a competent and renowned sharia supervisory board. Dr Esam Al Enzi is the chairman of our sharia board. He is being assisted by Dr Khalid Al Siyabi and Dr Ahmad

Al Ayadi. Al Yusr also has a fully functional sharia control department. This department provides valuable guidance and consultation on the sharia issues to the banks management and is equally entrusted to closely monitor the routine operations of Al Yusr to ensure sharia compliance. Where do you want to open branches of Al Yusr this year in Oman? And what about your ATM networks? Al Yusr will have its dedicated Islamic banking branches. We will start our operations with five branches in the first year. These branches will be located in the cities of Muscat, Salalah, Nizwa, Sohar and Sur. All branches will have ATMs but our customers will also be able to use OABs ATMs as well as other banks ATMs. Al Yusr will bear the cost of OAB ATM network use as this is a sharia requirement. Islamic finance is predicted to achieve an asset base of RO1.5bn by the end of 2013. How prepared are you for this as you have to compete against full-fledged Islamic banks with huge paid-up capital? This is an interesting question. We understand the potential in the market as well as the intense competition that will gradually emerge in the future. Al Yusr plans to focus on carefully selected market segments and our same strategy to focus on the niches drives the nature and design of our products. We intend to achieve the market leadership in our chosen areas. We do not wish to compete with full-fledged banks on product-by-product basis.

Will Al Yusr leverage OABs existing brand image in the market to address new target Islamic banking customers? Oman Arab Bank enjoys the reputation of a solid, stable and committed bank. Indeed we wish to continue this legacy of prudent banking. Our overall Islamic banking strategy draws its strength from our time-tested business values. Our customers will experience the same benefits through Al Yusr that they have historically experienced with the additional assurance of sharia compliance. They will also have a thoroughly enhanced experience due to our recent technology investments for Al Yusr. There were concerns about the feasibility of conventional banks offering Islamic services through window operations. What are the measures you have taken to alleviate such concerns? Islamic banking windows have emerged as a successful business model in various countries like UAE, Bahrain, Pakistan, Malaysia, and Bangladesh. Window can easily tap to the existing clientele of the conventional bank, leverage on its relationships with corporates and regulators and rely on the existing operations, wherever allowed by the sharia. Hence, in my opinion Islamic banking windows is a close alternative to full-fledged Islamic banks and, as it has been observed in other countries, can even grow to a size where they directly compete with full-fledged Islamic banks. Al Yusr, in line with Central Bank of Omans directives, is about to launch its dedicated branches where only Islamic banking services will be offered to our customers. We have also acquired a sharia-compliant core banking system for Islamic set up. We have put in place a robust corporate governance sharia supervisory structure. Moreover, we have raised separate capital to run our Islamic business. Al Yusr also has a well-trained and experienced Islamic banking management team. All these initiatives make Al Yusr a fully sharia-compliant and will for sure remove any doubts from the minds of our customers.

Al Yusrs operations are being supervised by a sharia supervisory board headed by Dr Esam Al Enzi