Muscat – Oman’s Islamic banking sector continued its steady expansion in the first five months of 2026, with the combined assets of Islamic banks and Islamic windows of conventional banks rising 9.2% year-on-year to RO9.8bn by the end of May, according to the latest data released by the Central Bank of Oman (CBO).

The sector now accounts for around 19% of the sultanate’s total banking system assets, underlining its growing role in the country’s financial system, supported by sustained growth in Sharia-compliant financing over recent years.

Islamic banks and windows extended financing worth RO7.9bn as of the end of May 2026, an increase of 10.5% compared with the same period last year. Total deposits with Islamic banking entities also rose 11% year-on-year to RO7.8bn, CBO data showed.

Oman’s Islamic banking industry comprises two fully fledged Islamic banks and five Islamic windows operated by conventional banks.

According to a report by S&P Global Ratings, Islamic banking has become an increasingly significant component of Oman’s banking sector.

‘Islamic banking in Oman continues to expand and now represents a meaningful share of the country’s banking system. Islamic banking assets amounted to about 19% of the banking system’s total assets. The share of deposits and credit was slightly higher, at 22%, reflecting Islamic banks’ generally smaller securities portfolios than those of conventional banks,’ the rating agency said.

S&P expects Islamic banking in Oman to continue growing faster than the conventional banking sector, although the pace of expansion is likely to moderate gradually as the industry matures.

‘The appetite for Sharia financing, product innovation, and digitalisation will underpin this growth, as will the Omani government’s plan to deepen the capital markets, including Islamic finance. The new Banking Law of 2025 broadened the scope of financial activities licensed by the CBO that can be carried out in accordance with Sharia principles to include those of finance and leasing companies, among others,’ S&P said.

The agency identified financing activity as the principal driver of growth in Oman’s Islamic banking industry. Corporate financing accounted for 63% of total gross Islamic financing at the country’s two Islamic banks in 2025, while the retail segment contributed 37%, down from 42% in 2020.

‘The relative drop in the contribution from retail financing was due to a faster rise in the corporate portfolio. Corporate financing grew by a solid compound annual rate of 12% over 2020-2025, while retail activity expanded at a slower pace of 8%. Oman’s active development of non-oil sectors and conventional banks’ dominance in the retail segment fueled these trends,’ the S&P report said.

S&P estimated that Islamic banks’ non-performing financing (NPF) ratio stood at 3.6% at the end of 2025. However, it expects the ratio to gradually converge with that of conventional banks, which reached 4.6% in the first quarter of 2026, as Islamic banks’ financing portfolios continue to mature.

‘We expect Islamic banks’ asset quality to approach the industry average over the medium term. Their exposure to cyclical sectors – such as real estate and construction – supports this view. These sectors account for approximately 12% of Islamic banks’ portfolios,’ S&P said.

The rating agency also noted that the CBO’s introduction of Islamic liquidity management instruments at the end of 2025 is expected to support the sector’s future growth by improving Islamic banks’ access to central bank liquidity and narrowing their competitive disadvantage relative to conventional banks.

However, S&P cautioned that the domestic Islamic derivatives market remains at an early stage of development, while the local sukuk market is still relatively limited, restricting investment opportunities for Islamic banks.