Introduction
During the last decade of the twentieth century, Islamic finance experienced flourishing existence with the recent focus on Islamic financial products in money markets locally and internationally. The establishment of dedicated Islamic entities and banks enhanced Islamic financing to offer their services to the global economy. At first, the geographic distribution of Islamic financing entities was restricted to countries in the Middle East and Iran mostly. However, with the beginning of the 21st century, Islamic financing system expanded its activity to 75 countries across the world. The growth of the industry was remarkable during the last decade with assets reaching US$1.1 trillion in 2012. However, the situation is different in the Sultanate of Oman, where Islamic financing existence is not obvious; this reduced the possibility to assess the performance of this sector in the Sultanate, but with the identification of potential demand and opportunities offered by this industry the way can be paved for a dual financial system for investors in Oman for both conventional and Shariah financing products. (Watson, 2013)
An overview of the article
This paper investigates the barriers that the Sultanate of Oman experiences from the adoption of Islamic financing system along with the available system it has. Regarding the nature of Oman, its main religious is Islam and is one of the Muslim Arabic countries which provides it with the suitable attributes to adopt Islamic financing system. However, the environment in Oman puts some barriers in the face of adopting the Islamic finance system. In spite that Oman is considered as a part of the Muslim society, certain factors such as brand recognition and lack of knowledge of product features which can reduce the possibility to penetrate the financial market of Oman. To introduce Islamic financing system in a country like Oman, demand indexes must exhibit certain growth in terms of considering market share of the financial products or securities used under Islamic finance system. Currently, and since 2001, there appeared future growth opportunities in the industry which can provide chances for Islamic finance to extend its activity beyond the Middle East or at least be syndicated in all Arabic countries, including the Sultanate of Oman. However, based on potential demand and opportunities offered in Oman by the Islamic financing system, 85% of consumers in Oman are willing to invest their money in this sector which can give a clear image of the potential successful opportunity for it in Oman. Consumers are in fact driven by certain reasons to invest in Islamic banks, such as the religious motivation as the only accepted alternative to Riba for Muslims in general. Another factor is the quality provided by Islamic instruments that offer Shariah compliant products. However, certain barriers stand in front of the adoption of Islamic financing system in Oman, such as institution branding, which is related to banks reputation; the role played by educational institutions is another contributing factor to restrict the adoption of the system in Oman, which may cause loosing the potential benefits behind its application, such as reducing country reliance on oil revenues and potential employment opportunities both on the short and long run. (McCoy et al, 2014)
An evaluation of the article using other articles
This article highlights the barriers that stops the Sultanate of Oman from adopting Islamic financing system alongside with the current conventional applied banking system. The country main revenue source is oil production which increased by 339% during the past 50 years. According to this article, Oman is not one of the Muslim countries that apply Islamic financing system because of certain barriers that bounds its capacity to adopt this system and make useful benefits out of its application, such as finding an alternative source of profitability other than oil investments and creating many employment opportunities for Omani citizens. The study recommends that there are specific factors that Islamic financing system needs to enhance in order to find the proper environment for its application, which are supporting customer service by helping customers who are interested in this new investment system to have a better understanding of its different attributes, such as emphasizing product knowledge, excelling customer care and consider the technology aspect. The article also suggests that branding the industry in Oman must be experience-oriented, while focusing on financial prospects and service legitimacy. (M Iqbal et al, 2016)
According to the report of Muscat bank, " Developing a Sustainable Islamic Banking Industry in Oman; Shaping the Future of the Islamic Finance Industry", Oman is the last countries in the gulf to adopt Islamic banking. Based on the thorough analyzing of Omani citizens preferences for Islamic products, researchers in the field found that they strongly prefer it based on the religious background it offers them as the best alternative to Riba. At the beginning, the growth rate sounds slow a bit, as it depends on consumers needs it can be raised dramatically if the Islamic financing products fulfilled these needs, compared to conventional banking products. A serious challenge faces Islamic banks which is the need to generate profits to depositors while make sufficient investments in the development of a broad offering of their financial products. Nevertheless, sukuk markets in Oman need to develop its pricing without dependency on vibrant bonds market in order to reach a yield curve that is not built on a sovereign issuance program. This can encourage issuers to speed up issuance process with the available flexible and affordable financing of Islamic banks. As these sukuk are considered safe for investors, investment can be expanded more in Islamic financing system. The researchers in this regard put some recommendations that can make Islamic financing system more syndicated in countries like Oman which is adopting a conventional financing system:
- Provide funds for both staff and banking services in Islamic banking sector
- Develop long term banking strategies
- Develop committee to discuss regular or emergent issues
- There should be regular issuing of sukuk guaranteed by the government of Oman
- There should be issued short term sukuk to ensure liquidity management as well. (Johari et al, 2015)
There are many reports and studies that investigate the issue of Islamic financing application in Oman, one of these studies was Anthony Watson's " Islamic Finance in Oman - New Horizons for Growth". According to Watson, Islamic financing appeared in Oman since 2012 as part of the growing financial services industry in the area. Based on the decree issued by Sultan Qaboos bin Said Al Said that authorizes the adoption of Islamic financing system and opens the gates in front of the establishment of Islamic banks, the Central Bank of Oman issued the IBRF (Islamic Banking Regulatory Framework) which identify different rules that regulate the financial sector in Oman for both conventional and Islamic banking systems. Watson supports the last report point of view regarding sukuk and its importance to Oman economy as a successful Islamic capital market instrument that is capable of keeping liquidity when issued for short term periods. Sukuk is secured by different legislation terms, such as being Shariah compliant, compared to bond issue. Nevertheless, sukuk holder has partial ownership of its underlying asset, while conventional instruments like bonds is a debt obligation only that provides zero ownership to its holder. Sukuk is defined as negotiable capital market instruments that guarantee partial interest in underlying profits and assets. (Johari et al, 2015)
The current article, hence, proves consensus with the other two articles in terms of the late of adopting Islamic financing system in Oman, in spite of being an Islamic Arabic country, the current article finds different barriers as reasons behind this late adoption, such as the role of educational institutions and institution branding problem; it suggests that it is difficult to measure the market share of Islamic products or put expectation regarding its gains in the future, however, other articles suggest that the adoption began since 2012 with the declaration of Sultan Qaboos bin Said Al Said that authorizes the adoption of Islamic financing system. Another point of difference, the other two reports discussed sukuk as safe Islamic capital market instruments and how they are dependent on Shariah which make them suitable to Muslims in Oman as religious oriented capital market instruments compared to bonds; which was not widely mentioned in the current article. (Johari et al, 2015)
An application of your evaluation to the Omani market
Based on the last evaluation of Omani Market, we can find that Oman still adopt its conventional financing system with bonds as the main capital market instruments, it also recently allowed the entry of Islamic financing instruments, sukuk, which are distinguished by being safe and Shariah committed. While being a Muslim country, Oman did not apply Islamic financing system until 2012 after the issuance of the decree, issued by Sultan Qaboos bin Said Al Said that authorizes the adoption of Islamic financing system and opens the gates in front of the establishment of Islamic banks. Islamic financing can make greater benefit to Oman money market in case of making full use of sukuk and Islamic banking products and services. For instance, by the adoption of Islamic financial instruments, customers in Oman who are interested in banking investment will find sukuk as Shariah compliant and provide them with a more legitimate investing tool compared to Riba that bonds represent under the conventional capital market already applied in Oman. Nevertheless, sukuk are distinguished by providing its holder with partial ownership compared to bonds that grants holder interest value only. The adoption of Islamic financing system in Oman must be paired with syndicating sukuk sales in different areas with different prices according to customers' needs. Therefore, pricing must be time-based, so short term sukuk are meant for customers seeking for quicker liquidity, its price must be aligned with its time frame. On the other hand, long term sukuk can be provided for investors who are willing to invest in Islamic banks for years. Interest rates and pricing must be set according to timing and value of the instrument. Also, Oman can expand its Islamic markets in other countries by opening the gates in front of Islamic banks that have good reputation in other countries to create new investments on its territories. (Watson, 2013)
Conclusion and/or recommendation
The current article discusses the barriers that face the adoption of Islamic financing system in Oman and how this can affect the opportunities of future investments both regionally and internationally. The article found that there are some reasons behind the late adoption of Islamic financing in Oman, such as institution branding, this barrier is related to banks reputation, another barrier is the role played by educational institutions as a main contributing factor to restrict the adoption of the system in Oman, which may cause loosing the potential benefits behind its adoption, such as reducing country reliance on oil revenues and increased potential employment opportunities both on the short and long run. After reviewing other relevant articles, we found that most researchers agrees on the late adoption of Islamic financing system in Oman market, however, other articles discussed how valuable are sukuk as capital market instruments that are more suitable in nature to Muslims as they are Shariah committed and provide partial ownership compared to bonds as conventional capital market instrument that only give its holder the specified interest with no ownership in assets. Finally, the article referred to potential benefits behind the adoption of Islamic financing system and relates it to the availability of multiple employment opportunities for Omani citizens and the reduced dependency on revenues generated from oil production only. (Johari et al, 2015)
No comments:
Post a Comment