By Hasan Kamanpoori -
The Royal Directive of His Majesty the Sultan in May this year on starting Islamic banking has not only opened up new opportunity for the Sultanate’s banking industry but it is set to change the face of banking itself.
In the GCC, until recently, Oman alone did have Islamic banking. After the Royal decree, almost every bank in Oman is considering launching an Islamic window.
The Central Bank of Oman (CBO) has decided to establish a national authority for monitoring Islamic finance and banking sector.
According to some of the directives issued by the CBO all Islamic finance and banking organisations will be required to set up Sharia Boards to ensure that their products and services are in accordance with the principles enshrined in the Holy Quran.
The CBO has so far granted licenses to Bank Nizwa and Al Izz International Bank to operate as fully Sharia-compliant institutions. These banks are expected to be up and running by early 2012.
Global Sharia-compliant assets are estimated to have crossed $1 trillion and are expected to grow annually at the rate of around 20 per cent. More than 600 Islamic financial institutions now operate in more than 75 countries. However, only two countries, Iran and Sudan, boast 100 per cent Islamic banking landscape with not a single interest-based bank. In view of the rapid worldwide growth of Islamic banking, the Organisation of Islamic countries (OIC) Fiqh Academy has so far issued 200 rulings about Islamic banking product offerings.
Dr Mozer Kahf, (pictured) an expert on Islamic banking, says the amazing strides made by Islamic banking and this has prompted even the Western financial institutions to expand their Sharia-compliant instruments. Malaysia, Bahrain, Iran and other countries have had their heydays since long.
It is the right time that a prudent leader like His Majesty Sultan Qaboos has seized the opportunity to attract the much needed investment into the Sultanate from foreign investors who have been disillusioned otherwise since the 2008 financial crises and would like to invest in stable environments like that of the Sultanate.
With its noble reputation Oman has a potential to overtake Malaysia and Bahrain in a short time. This is equally true about the potential of local savings which otherwise shied to deposit and invest in conventional banks.
A significant trend in global finance over the last two decades has been the rapid growth of Islamic banking and finance (IBF), which has gathered momentum to become a significant feature of the financial landscape in the present century.
Why is Islamic banking a boon for the world? Islam prohibits making money by money, but it allows legitimate profit by allowing money to be used to trade tangible assets. The only means to benefit from the money is to convert its monetary function to economic function through either trading or investment.
Says Dr Mozer Kahf, “In Islamic finance one cannot make money out of thin air. One’s dealings have to be tied to actual economic activity, like an asset or a service. One cannot make money off of money. In Islamic banking, depositors are like partners — their money is invested, and they share in the profits or, theoretically, the losses that result”.
Interest and speculation-free Islamic financial model is attracting worldwide attention not only for the huge business prospects but also for the stability that it provides. Islamic banks operate an interest-free system, in which depositors share the risk of investment and either partake of the resulting profits or bear part of the losses.
The IBF is characterised by prohibition of riba (interest), speculation and gharar (ie exposure to excessive, unnecessary risk or uncertainty in a business transaction, such as undefined quality of purchased goods, not specifying the delivery date) which result in stability and higher return over investment. Islamic economic system helps promote justice, equality, and well-being of the society.
So Islamic bank cannot just solve the issues of interest but will also deal with other matters, such as the issue of Gharar (excessive risk or uncertainty).
Islamic banks are untouched by the current crisis due to the nature of Islamic banking, especially that it does not deal in debt trading and distances itself from market speculation that takes place in European and American banks.
Islamic banks have not been affected by the mortgage crisis that afflicted the international financial markets and that they are largely immune against such crisis thanks to inherent factors within Islamic banking. The most important of these factors is the prohibition of debt trading, taking precautions against money laundering, as well as gharar (caution against embarking upon projects that entail excessive risks).
Islamic banks are not involved in the buying and selling of debt unlike most conventional European and US banks. Islamic banking is distinguished by the fact that it is prohibited from buying debts under Islamic Sharia; therefore, Islamic banks remained safe from the effects of the global financial crisis.
That explains why Islamic banks are also popular among non-Muslims. They offer higher rate of return; lower risk exposure and better risk management compared to conventional banking.
Islamic banks have become a safe haven for secured liquidity and are in a good position. The success of Islamic banking has led to serious consideration of Islamic economics, which continues to realise numerous achievements, as a viable alternative to the current global economic system which continues to be hit by these crises.
The subprime crisis exposed to the world the worst part of the interest-based debts and debt-based consumerist society. It is traceable to the huge volume of speculative activities in the world trade. Both debt purchasing and interest are out of Islamic finance landscape.
Amid the 
worst financial crisis of our time, Islamic Finance emerged as a new window of hope. Islamic banks not only withstood the financial crisis, they also demonstrated a boom in the same period.
Even the independent sources like International Investment Bank (IIB) had to confess, “Indeed, Islamic banking has not only become a mainstream activity in several countries but a global booming industry throughout the world. The confidence in the sector has grown even further lately as Islamic banks were not directly affected by the sub-prime crisis.”
In a nutshell, Islamic banking and the peaceful country like Oman are suited to each other and one hopes Oman will emerge as a regional centre for Islamic banking and finance in near future.
