Muscat – Oman’s Islamic banking assets crossed the RO10bn mark in July, nearly 14 years after the launch of Islamic banking in the sultanate, as demand for Sharia-compliant financing continues to drive the sector’s expansion.

The combined assets of Islamic banks and Islamic windows of conventional banks rose 10.5% year-on-year to RO10.1bn at the end of July 2026, according to the latest data from the Central Bank of Oman (CBO).

Islamic banking now accounts for about 19.1% of total assets in Oman’s banking system, underscoring its growing importance in the financial sector.

Financing extended by Islamic banks and windows increased 10.9% year-on-year to RO8bn by the end of July, while deposits also rose 10.3% to RO8bn, CBO data showed.

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

The sector has been expanding faster than Islamic banking markets elsewhere in the Gulf. Moody’s Ratings said Oman recorded the highest compound annual growth rate among GCC Islamic banking markets over the past five years, at 12%, compared with 10% in Saudi Arabia, the UAE and Kuwait.

The rating agency expects demand for Sharia-compliant products among both retail and corporate customers to support further long-term growth, with Islamic banking entities maintaining significant shares of the wider banking market.

Moody’s, in a report, also pointed to Oman’s regulatory changes requiring a gradual transition towards standalone Islamic banking structures as a factor supporting consolidation in the sector.

Bank Nizwa has proposed acquiring and merging Alizz Islamic Bank through incorporation. If completed, the transaction would create Oman’s largest standalone Islamic bank, Moody’s said, potentially increasing scale and competition in the sector.

“GCC Islamic banks’ structural strengths will continue to support stronger credit metrics than those of conventional peers. We expect Islamic banks to continue expanding faster, supported by solid demand for Shariah-compliant finance, while higher exposure to the public sector across both their retail and corporate books underpin superior loan quality,” Moody’s said.

S&P Global Ratings also expects Islamic banking to continue expanding at a faster pace than conventional banking in Oman, although growth is likely to moderate as the industry matures.

Islamic banking assets represented about 19% of the banking system at the end of 2025, while Islamic deposits and credit accounted for about 22%, S&P said in a recent report. The higher shares of deposits and credit reflect the generally smaller securities portfolios of Islamic banks compared with conventional lenders, it added.

“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,” S&P had said.

The rating agency also noted that Oman’s new Banking Law of 2025 broadened the scope of financial activities that can be licensed by the CBO and carried out in accordance with Sharia principles, including activities of finance and leasing companies.

Corporate financing drives growth

Financing has emerged as the main driver of Islamic banking growth, with corporate customers accounting for an increasing share of portfolios.

Corporate financing represented 63% of total gross Islamic financing at Oman’s two fully fledged Islamic banks in 2025, while retail financing accounted for 37%, down from 42% in 2020, according to S&P.

The shift reflects faster growth in corporate financing, which expanded at a compound annual rate of 12% between 2020 and 2025, compared with 8% for retail financing, the agency noted.

S&P attributed the trend to Oman’s development of non-oil sectors and the continued dominance of conventional banks in retail banking.

The expansion, however, is also bringing greater attention to asset quality as Islamic financing portfolios mature.

S&P estimated that Islamic banks’ non-performing financing (NPF) ratio stood at 3.6% at the end of 2025. It expects the ratio to gradually converge with that of conventional banks, whose non-performing loan ratio reached 4.6% in the first quarter of 2026.

“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.