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OUR ISLAMIC BANKS CAN BREAK EVEN IN 3 YEARS [Business Benchmark Middle East](Business Benchmark Middle East Via Acquire Media NewsEdge) Executive President, Central Bank of Oman HAMOOD SANGOUR AL ZADJALI There were apprehensions expressed by certain quarters of the banking sector in Oman and elsewhere about the prospects of the two Islamic banks being able to perform well in the current scenario. But Hamood Sangour Al Zadjali, Executive President of the Central Bank of Oman, scotches them off saying: "These Islamic banks entered the market fully knowing about the challenges before them and they can break even in three years." The central bank will continue to allow conventional banks to operate Islamic windows, Sangour tells CL Jose of Business Benchmark in an exclusive interview. The two Islamic banks, Bank Nizwa and alizz Islamic Bank, that commenced full- fledged operations in Oman from last year had a good start and are set to break even at least by the third year, according to Hamood Sangour Al Zadjali, Executive President of the Central Bank of Oman (CBO). It was only in 2012, Oman opened up its doors for Islamic banking though many Western markets including Lon- don had done it a few years back. While allowing new institutions to apply for Islamic banking licence, the Sultanate also allowed the established conventional banks to run Islamic subsidiaries. Though there were apprehensions ex- pressed by certain quarters of the banking sector in Oman and elsewhere about the prospects of the two Islamic banks being able to perform well in the current scenario, the CBO chief scotched them off saying, "These Islamic banks entered the market fully knowing about the challenges before them." He said CBO will continue to allow conventional banks to operate Islamic windows. On the other hand, Qatar two years ago, asked all conventional banks to discontinue with the Islamic window operations and this, ac- cording to market experts, strengthened the standing of the stand-alone Islamic banks in Qatar. In fact, the Islamic banking failed to perform as expected during 2013, according to a Bank Nizwa report. The share of Sharia-compliant financing as a percentage of total bank credit reached only 2.8 per cent compared with 4 per cent that was expected across the industry. Similarly, on the deposits side, while the overall growth reduced slightly, the market share of Islamic banks fell far short of expectations and was only 1.1 per cent as compared with the 4 per cent general expectations of the market. On the question of allowing invest- ment banking to be independent from the commercial banking operations in Oman, Sangour said CBO doesn't have immediate plan to do so. Though several banks have made requests to the apex bank on this, CBO has ruled out any immediate move to decide in favour of that move. However, banks talking to Business Benchmark said, the CBO is seriously weighing the option of allowing independent investment banking operations not before long. Separate licence Though most GCC countries including UAE allow banks to run their in- vestment banking operations, Saudi has made it mandatory for institutions to have separate licence for investment banking. One key issue faced by banks in Oman is the absence of a proper pricing benchmark for corporate loans where price is very sensitive given the size of the deals. Sangour said that though an interbank market is very much existent in Oman, as all banks remain liquid, an active interbank is yet to be a reality. "However, the Central Bank CDs that are issued to banks in order to mop up the surplus liquidity can very well function as a proxy benchmark for banks," Sangour said. CBO's policy interest rate for absorption of surplus liquidity in the form of CDs of 28 days maturity inched up to 0.130 per cent in January, 2014 from 0.110 per cent in January 2013. The central bank's policy rate for injection of liquidity - repo rate - remained un- changed at one per cent since March 2012. The overnight Omani-rial (RO) domestic inter-bank lending rate declined from 0.143 per cent in January 2013 to 0.135 per cent in January 2014. In respect of domestic interest rate structure of commercial banks, both deposit and lending rates softened during this period. The weighted average interest rate on RO deposits declined from 1.313 per cent in January 2013 to 1.141 per cent in January 2014 while the weighted average RO lending rate decreased from 5.664 per cent to 5.397 per cent during the same period. Corporate governance Central Bank of Oman has called upon all the banks operating in the Sultanate to ensure that there was no con- flict of interests in the positions held by senior management staff and board members that they ensure compliance with the corporate banking norms set by the regulator. Inviting reference to Circular BM 932 dated February 2002, the current circular BM 1119 said: "It is observed that some of the proposals, received of late, for approval of senior management and memberships in boards imply conflicts of interests intended to be avoided by demarcation. For in- stance, board members are proposed to be appointed as senior management in banks and senior management staff are proposed to be nominated as advisors, consultants and in other positions," the circular noted. Reminding the clauses of the BM 932, the Circular said that among others, the BM 932 stressed upon the principles of demarcation on the scope and roles/ responsibilities of board of directors and management in banks and licensed financial institutions. While, among others, the policy formulation shall rest with the board and the board needs to have supervision, management needs to assume responsibility for implementation with reports to the board. "Although banks have provided for in respective Articles of Association the prohibition of chief executive officers (CEOs) becoming independent directors within two years, the CBO as banking regulator, shall be concerned with other scopes of conflicts too," the circular added. It said that any position, existing as of now (even with approval), should be diligent and transparent in addressing risks of conflicts and banks' boards of directors shall exercise control suit- ably. "Banks are advised against any future positions; involving scope for conflicts (senior management and membership in boards) shall seek clarifications if required from CBO," the circular said. BB NO BENCHMARK: One key issue faced by banks in Oman is the absence of a proper pricing benchmark for corporate loans where price is very sensitive given the size of the deals These Islamic banks entered the market fully knowing about the challenges before them. cbo will continue to allow conventional banks to operate Islamic windows Executive President, Central Bank of OmanLONG INNINGS Oman Central Bank's Executive President Hamood Sangour Al Zadjali is one of the longest serving central bank chiefs in the region. With strict regulations on capital requirements for banking and other financial institutions, Oman is known for its sound financial system. Most in the industry credit this to the foresight of al Zadjali. He has a degree in Business Administration from Boston University, and began his professional career in 1963 in the Administration and Personnel Department of the Sultan's Armed Forces. He moved into the banking sector in 1969, working with the British Bank of the Middle East. In 1975 he became Director of the Oman Currency Board, which was transformed into the Central Bank of Oman (CBO) later in the year. Between 1978 and 1979 he was Vice President of the CBO. Between 1985 and 1990 he was General Manager of Oman Housing Bank, briefly then becoming Deputy Executive President of the CBO before being appointed to this current position in 1961. (c) 2014 Solus Globus Media Solutions FZ LLC. All rights reserved. Provided by Syndigate.info, an Albawaba.com company |