Islamic Banking ‘The New Form of Banking in Oman’

1. Islamic Banking‘The New Form of Banking in Oman’ 23-01-2012 www.bankmuscat.com

2. Table of Contents • Concept of Islamic Banking • How Islamic Banking differs? • Growth Factors for Islamic banking • Islamic banking windows • Way Forward www.bankmuscat.com www.bankmuscat.com

3. How Islamic Banking Differs? www.bankmuscat.com

4. What is Riba in Holly Quran? www.bankmuscat.com

5. Key Differences with Conventional Banking . Transactions must typically be backed by assets. No returns on lending of cash Asset backed Payment / receipt of interest is prohibited. Profit is encouraged Interest free Investments, or the tangible assets backing investment instruments, should not belong to prohibited industries (e.g. alcohol) Restricted investments Extreme uncertainty and/or lack of transparency (Gharar) is prohibited (e.g. in options, futures and other derivatives) Extreme uncertainty Based on the principle of assuming risk to obtain rewards to foster justice in transactions; risk sharing is fine but risk transfer is not Risk-sharing www.bankmuscat.com

6. Asset Products Structures Islamic products can be structured using different underlying contracts vis-à-vis risk implications, regulatory directions, market dynamics and sharia advisor. www.bankmuscat.com

7. Liabilities Products Structures www.bankmuscat.com

8. Potential of Islamic Banking www.bankmuscat.com

9. Global Industry Highlights Estimated over US$ 1 trillion in 2011 Market size Presence in over 75 countries Geographic reach Approx. 20% over the past decade Growth rate 15-20% p.a. in the foreseeable future Expected growth rate Over 450 Islamic financial institutions worldwide, another 100-150 likely to come into existence in the next 10 years Industry players Source: Industry reports www.bankmuscat.com

10. Islamic banking Potential in Oman Source : S& P report • GCC Islamic banking represents 26% of total market size (EnY) • IFIs will have 60% market share in GCC by 2015 (IFSB) • Islamic banking assets in Oman will be 8-10% over next few years (Oliver Wyman) • Given GCC fact sheet, Islamic banking assets in Oman could be $10 bio • 59% very interested and 26% quite interested (IFAAS) www.bankmuscat.com

11. Meethaq home finance • Started operations in 2008 • Total portfolio is over RO 75 Mio • Total Meethaq customers are over 2000 • Majority of the customers are first time borrowers • Pioneer of Islamic Banking in Oman www.bankmuscat.com

12. Drivers for Growth in Oman www.bankmuscat.com

13. Driver for Growth in Oman Oil Revenues of GCC States Muslim Population Growth Window’s business model Islamic Finance Growth Training / Awareness Regulatory Reforms/ Legal Framework Sharia governance structure Government Support Legal System/ Accounting Standards www.bankmuscat.com

14. Islamic banking Windows www.bankmuscat.com

15. Pros & Cons of Window • ADVANTAGES • Easy head- start in new market • Leverage on existing infrastructure • Instant tweaking to gear up IT systems • Cost to do the business is lower • Value added services to customers • DISADVANTAGES • Public perception – too close to parent • CHALLENGES • Need public awareness about window’s operations Windows Operations www.bankmuscat.com

16. System and Controls Funds Segregation Fundamentals IT System Separate Book Sharia Framework Funds Segregation Policies CBO Framework Funds Segregation Assurance IIFM, AAOIFI & IFSB Business Ethics ALM Guidelines Corporate Governance External/ Regulator’s Audit Sharia Inspection www.bankmuscat.com www.bankmuscat.com

17. Window’s Governance Structure • Separate capital allocation • Stand alone Islamic branches (vs. Islamic counters in conventional branches) • Separate books of accounts • Separate IT system • Reporting standard (AAOIFI vs. IFRS with additional disclosures) • Organization structure • Independent Sharia Board www.bankmuscat.com

18. Way forward www.bankmuscat.com