COVID-19 impact on Islamic banking and finance in Oman

This article is a chapter out of the e-book, "Impacts of the COVID-19 outbreak on Islamic finance in the OIC countries" that is available as a pdf download from HERE. Read the article in the e-book for the complete set of tables, charts and references. 

The first reported case of the COVID-19 in Oman was on February 24, 20201 and as of May 3, 2020, the Sultanate recorded 2,568 cases, including 750 recoveries and 12 deaths, according to the Ministry of Health (MOH). 

The crisis caused by the spread of COVID-19 is expected to disrupt the development of Islamic finance in the Gulf Cooperation Council (GCC) countries, including in Oman.

The Islamic banking and finance industry in Oman

The Islamic finance industry is still in its infancy in Oman and it is not easy for it to compete with the same zeal as its conventional counterpart while adhering to Islamic injunctions. The Islamic finance industry started in early 2013 after the issuance of Royal Decree 69/2012 of December 6, 2012. The main purpose of the Royal Decree was to add six additional articles, 120-126, in the Banking Law of Oman under a new section for Islamic banking. These articles cover the general provisions of the legal framework, supervision and advisory of Islamic banking, the jurisdiction of the Board of Governors of the Central Bank of Oman (CBO) to set regulations and guidelines as well as its authority to license Islamic banks and Islamic windows.

Banking

Currently, Oman has two full-fledged Islamic banks, Bank Nizwa and Alizz Islamic Bank, and six Islamic windows: Al Yusr Islamic Banking (under Oman Arab Bank), Meethaq Islamic Banking (under Bank Muscat), Muzn Islamic Banking (under National Bank of Oman), Sohar Islamic Bank, Maysarah Islamic Bank (under Bank Dhofar), and Al Hilal Islamic Bank (under Bank Al Ahli). However, after the merger of Oman Arab Bank and Alizz Islamic Bank, the number of Islamic windows in Oman will decrease to five, as OAB’s Al Yusr merges with Alizz to become a full-fledged Islamic bank and a subsidiary of Oman Arab Bank. Oman Arab Bank will become a parent company of a new Alizz Islamic  Bank noting that these two entities have their own BODs and Managements. Alizz Islamic Bank will have its own Shariah Supervisory Board that has no relationship with Oman Arab Bank.

Although Oman was the last country in the Middle East to introduce Islamic finance, all sectors - Islamic banking, takaful, sukuk - have managed to maintain healthy double digit growth since inception. The future for Islamic banks in Oman is promising as compared to many other countries. The market share of assets held by Islamic banks jumped from 7.75% in 2015 to 10.3% in 2016 to 13% in 2018 to 13.9% in 2019, when it reached 4.9 billion Omani rials ($12,78 billion).

This rapid growth is partially due to learning from the experiences of other jurisdictions. The central bank still does not allow Islamic banking institutions to use the contract of bai’ al-‘inah and tawarruq because these contracts are still being debated among some Shariah scholars.

Takaful

Like the Islamic banking segment, takaful is also burgenoning apace. The sector has been able to record double digit growth in 2018 by 17% and in 2019 by 20%, according to the Annual Report of the Capital Market Authority (CMA) for the years 2018 and 2019. This is because Shariah-compliant insurance appeals to more customers in the Sultanate, whereby the total gross contributions reached over 64 million rials ($164.1 million) during 2019 as compared to 53.6 billion rials in 2018. As of end 2019, the total market share of takaful companies in Oman increased from 12% to 13.2% of total gross direct premiums.

Sukuk issuance represents 57% of the total volume of the capital market within the Sultanate, according to data from the Capital Market Authority.

Unlike the Islamic banking and takaful sector, the Shariah-compliant MSM index is declining. As at the end of 2018, the Sharia MSM index closed the year at 591.9 points, a yearly decrease of 17%. The Shariah-compliant index comprises 15 companies in which the performance measures of the shares is  reviewed on a quarterly basis in accordance with Shariah rules and principles issued by the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI). However, according to the Capital Market Authority, as at the end of 2018, the value of the Islamic capital market reached approximately 1.91 billion rials (comprising of Shariah-compliant shares, investment funds and sukuk), representing 10.37% of the total market market value. This figure does not include the additional sovereign sukuk issuance issued outside of Oman by the government of Oman through the Ministry of Finance, totalling $2.5 billion thus far, and the latest Meethaq Sukuk issuance of 44.61 million rials ($ 115.49 million) that was issued in 2017.

Before the COVID-19 pandemic spread throughout the world, Islamic banking and finance entities in Oman were expected to continue a record of remarkable achievement. However, the crisis adds its own challenges to the ones already faced by the sector within the Sultanate. These include the lack of awareness about Islamic banking and finance transactions and activities, a limited supply of qualified human capital, insufficient liquidity instruments in the Islamic money market, and lack of sukuk issuance and its availability in the secondary market. Shariah governance also needs to be incorporated into the sector’s corporate governance frameworks.

These challenges need to be addressed collectively by stakeholders of the Islamic finance industry in order to achieve sustainable growth for the industry amid the COVID-19 crisis.

COVID-19 impact on the corporate and SME sector

The impact of the outbreak of COVID-19 especially pertains to supply disruption and demand shocks that have already had global repercussions. Boone3 identifies at least three main channels through which these measures spill over globally:

1. Supply: significant disruptions in the global supply chain, factory closures, cutbacks in many service sector activities;
2. Demand: a decline in business travel and tourism, declines in education services, a decline in entertainment and leisure services;
3. Confidence: uncertainty leading to reduced or delayed consumption of goods and services, delayed or foregone investment.

However, the sector that will experience the biggest and the greatest losses is the small and medium enterprises (SMEs), not only in Oman but also in other countries that are affected directly or indirectly by the outbreak. However, SMEs in Oman contribute only 15% to the national GDP.

SMEs and the role of Islamic banking and finance

Businesses have been given some reprieve during the downturn caused by the pandemic. The Central Bank of Oman (CBO) through its circular BSD/CB/2020/1 dated March 18, 2020, allowed for financial institutions, including banks and financing leasing companies, to defer up to six months the repayments of financing facilities, rental as well as profit for customers affected by the COVID-19 crisis. This especially pertains to SME customers. This could be a lifeline for SMEs facing cashflow challenges.

The are several advantages that can be seen from the circular, such as to support business continuity and jobs sustainability as well as to overcome the ensuing impacts of large-scale bankruptcy and unemployment.

In addition, Islamic banks could take a role with the support from the government and concerned authorities to provide COVID-19 financing programmes that encourage the financial institutions to expand their businesses amid the pandemic.

In this case, Islamic banking and finance can play a pivotal role by supporting the government to strengthen economic activities within the Sultanate. Islamic banks have already taken on some measures to help businesses mitigate the crisis by:

1. deferring monthly installments and upcoming repayments for a period of 6 months from the existing respective due dates,
2. offering a grace period or repayment holiday until September 30, 2020, and offering rescheduling and restructuring of financing,
3. reducing existing fees related to various banking services and not introducing new ones during 2020.
4. On the takaful side, takaful companies may provide a discount to premium contribution on a certain percentage.

In addition, the Central Bank of Oman in March unveiled an economic stimulus package of 8 billion rials ($20 billion). The package is aimed at tackling the outbreak and to combat the impact of COVID-19 on the local economy as an additional channel of liquidity to the country’s financial institutions. The stimulus includes a reduction of capital conservation buffers (CCB) for banks, from 2.5% to 1.25%. CBO also increased the Financing Ratio for Islamic banking entities by 5% from 87.5% to 92.5% with the condition that the additional financing portfolio be channeled to productive sectors of economy, including healthcare and food security.

Prospects, Opportunities and Challenge

Oil

Oman and its neighbouring GCC countries depend on oil to support their economies. Therefore, oil prices will remain a main factor for the development of Islamic banking and finance in Oman and the overall GCC market.

2019 has been an interesting year for the political environment and volatility of oil prices especially after the September 2019 drone attack on Saudi Arabia’s largest oil field and oil infrastructure. 2020 will become the toughest challenge for Oman’s Islamic banking and finance sector and other GCC countries as the coronavirus pandemic has severely disrupted the demand for energy. These disruptions have left the Islamic banking and finance sector on a very cautious footing because oil prices will remain the main factor for growth of the industry in the region.

Tech

Another challenge faced by the Islamic banking and finance industry in Oman is how to digitalize services and payments. Especially during the coronavirus pandemic, banknotes have become a burden because they facilitate transmission of the virus. Therefore, the World Health Organization (WHO) recommends the use of contactless payments, that will make Islamic banks rely on digital technologies and minimize use of physical branches. Oman’s Islamic banking and finance entities should take advantage of this opportunity to leverage a new operating business model in order to adapt to the changes in market reality.

Therefore, it is time for players in the Islamic finance industry in Oman to change their strategy, and revise their budgets to meet new targets. The Islamic banking and finance industry should focus on two main categories for financing: the health sector, and agriculture and the food sector.

In the short run, Oman’s Islamic banks should shift a big part of their financing portfolio to health as this sector contributes a lot to the current economic activities. Therefore, this sector should be given a lot of focus and emphasis.

In particular, the focus should be given to medical-related manufacturing and services that can be made locally by domestic companies, such as production of hospital beds, masks, ventilators, test kits, hospital equipment, medicines, and vaccines as these are of paramount importance to tackle the current pandemic and any future outbreaks.

The current outbreak also shows that food security is given a lot of priority by the government. The government should ensure adequate stocks of food and consumable items in the Sultanate for a long period of time so that people will not panic buy.

Conclusion

Amid the pandemic, Islamic banking and finance can seize a major role. The question is whether the industry is able to evolve its business models, transform its processes, and if organizations can adapt. Despite all the challenges faced by the Islamic banking and finance institutions amid COVID-19, we still expect the industry to continue to grow albeit at a slower pace than previously expected.

The full e-book, "Impacts of the COVID-19 outbreak on Islamic finance in the OIC countries" is available as a pdf download from HERE. The e-book is published by Indonesia's Islamic Finance and Economy Committee (KNEKS) in partnership with DinarStandard and Salaam Gateway. It was launched on May 27, 2020. The 12 countries covered are: Bahrain, Bangladesh, Brunei, Indonesia, Iran, Malaysia, Nigeria, Oman, Pakistan, Saudi Arabia, Turkey, and UAE.