OREANDA-NEWS. The central bank of Oman inaugurated its specialist department for overseeing Islamic banking today, which will build up resources and expertise and centralise all aspects of Islamic banking regulation and issuance. Effective regulation and supervision of Islamic banks achieved through a dedicated unit is positive for the sector as it should strengthen early detection of risks and support growth, says Fitch Ratings.

Oman's financial regulators were the last amongst GCC peers to authorise the establishment of Islamic banking. There are only two Islamic banks operating in Oman but the bulk of the country's commercial banks provide these services through their "Islamic windows". Islamic banking represents only 5% of total banking assets in Oman but could grow rapidly, as it has in neighbouring countries where market shares range between 20% and 30%.

Despite high concentrations in Oman's banking sector, we believe Islamic banks will be able to make inroads because demand for sharia-compliant products and services is growing in neighbouring countries, driven by religious preferences. Islamic banks are increasingly able to structure products that enable them to compete with those offered by conventional banks.

In the coming months, Oman is expected to raise OMR200m through a sukuk issue, the first of this type. Sovereign sukuks can be bought by Islamic banks and provide an attractive option for placing excess liquidity in a lowly risk weighted asset. Previously, Omani Islamic banks tended to hold excess liquidity in cash due to sharia constraints. By diversifying liquidity portfolio investments, Oman's Islamic banks will be able to reduce concentration risks and boost profitability as they benefit from participation in sukuk profit distributions. A limited number of Omani corporates have issued sukuk and the country's banks may follow. Global demand for sukuk generally exceeds supply.