Oman’s new Islamic banks to struggle at launch, says Fitch (By IFN)

Thursday 4^th October 2012

OMAN: Newly set up Islamic banks in the sultanate will struggle to compete with conventional peers as customers are likely to opt for banks with established names, said Fitch. In its report on Islamic banking in Oman, the rating agency noted that: “We believe the combination of a well-known brand, an established network and service quality and cost-efficiency savings will give the incumbents a significant advantage. While the established banks will need to keep their existing and Islamic operations separate at the point of contact with the customer, there will be plenty of opportunities for cost savings at the operational level.” Fitch highlighted incumbents such as BankMuscat and HSBC Bank Oman, which are setting up Islamic banking windows and are expected to pose stiff competition to newly created Islamic banks in the sultanate. To-date, Bank Nizwa and Alizz Islamic Bank are the only two fully-fledged Islamic banks in Oman. Both have been set up in the past two years. Fitch also said that difficulties faced by the Islamic banking sector in Oman will be two-pronged; as Shariah compliant banks will have to compete with conventional banks in addition to having to compete with Islamic windows of the conventional banks. It also cited Qatar’s experience with Islamic banking, noting that: “When rule changes barred conventional banks from offering Islamic financial services, Islamic banks had expected an influx of customers as people with Shariah compliant accounts switched banks. In practice the impact was small and many customers decided to switch back to conventional accounts with their existing banks instead.” The same is expected to occur in Oman, with customers likely to retain their existing and conventional bank accounts, “assuming there are no significant differences in the terms on offer,” said Fitch. Nonetheless, the rating agency said that substantial government spending will create opportunities for Islamic banks to expand, especially in the area of retail banking. “Furthermore, the new Islamic banks are likely to have funding cost advantages as they raise low-cost deposits,” it said.