Islamic banks must focus on project financing: CBO

Islamic banks have to change perception: H E Zadjali

Muscat - 

Islamic banks can succeed within the current banking structure, despite competition from conventional banks, but they will need to involve themselves in development projects, according to H E Hamood al Zadjali, executive president of the Central Bank of Oman (CBO).

“There's not much to be changed. But they [Islamic banks] have to really be inventive. They have to change their perception,” H E Zadjali said.

He was speaking on the sidelines of a symposium at the College of Banking and Financial Studies on Thursday.

The central bank chief said that Islamic banks have struggled to establish themselves in the ‘real’ sectors of the economy, such as financing of development projects, where conventional banks thrive.

Dr Abbas Mirakhor speaking at the symposium

Dr Abbas Mirakhor speaking at the symposium

“At the moment, I'm afraid that Islamic banks have not been [very] active in the real sectors. They have to concentrate on financing of projects,” he said. “They have to collect investors, deposit money and invest in these projects, so that investors and banks get much higher returns.”

According to a 2014 study by Thomson Reuters, Islamic banks in Oman held 4.4 per cent of total assets. And according to the report this could double by 2018. Thomson Reuters rated Oman as the third-top performer in Islamic finance, after Malaysia and Bahrain.

Islamic banking was introduced in Oman in 2012. There are two full-fledged Islamic banks and six Islamic ‘windows’ operating out of conventional banks in the country.

Speaking at the seminar, H E Zadjali admitted that Islamic banks in Oman face challenges, such as ways to manage liquidity. However, he highlighted an opportunity through the proposed sukuk set to be issued by the government later this year.

“This is expected to give the Islamic banking industry a pricing benchmark and a liquidity management tool,” he said.

He also said Islamic banks would also need to meet the challenge of attracting a qualified workforce.

“Educational institutions [must] play a significant role in providing a sustainable workforce for Islamic financial institutions by producing graduates with industry relevant knowledge and skills,” he said.

“Oman already has a competitive banking sector and the opening of the Islamic segment of the market is expected to strengthen the financial system,” H E Zadjali added.

Dr Abbas Mirakhor, former executive director of the International Monetary Fund, said, “The present configuration of the Islamic finance industry does not allow it to compete with conventional finance. The first and foremost challenge is the fact that there is no level playing field between Islamic finance and conventional finance.”

He argued that conventional banks benefit from both ‘direct and indirect subsidies’ from government, society, and the system itself.

For example, fiscal and monetary policies throughout the world are based on interest rates, which is contrary to Islamic banking, he said.

“The system itself is geared towards strengthening interest-rate companies,” he said. “These advantages put any system that is going to basically stay away from the interest rate mechanism at an extreme disadvantage,” said Dr Mirakhor. 

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