A sustainable approach to finance in Oman

Oman

Khalid Al Kayed, CEO of Bank Nizwa, talks to The Energy Year about the bank’s key role in introducing and shaping the Islamic banking sector in Oman and opportunities it sees in providing financing for the domestic energy industry. Bank Nizwa is Oman’s first dedicated Islamic bank, with fully sharia-compliant products and services.

What is your assessment of the role the banking sector plays in supporting the country’s economic development?
Generally speaking, the banking sector is a major partner in any national development as its main objective is to back the economy and the community, through facilitating business and providing the appropriate financial support to the projects the country and its players undertake.
In Oman, both conventional and Islamic banking have a solid basis and infrastructure to attract investors and businesses. Banks in Oman have a good reputation in terms of transparency and a robust network with international banks when it comes to trade, transfers and finance.
Besides this, the sultanate’s banking structure is multifaceted since the regulators opted for a dual system, with the coexistence of both conventional and Islamic banking, extending the bank’s offer in terms of services and products in line with the government’s diversification strategy.

What are the key differences between conventional and Islamic banks?
Islamic Banking operates according to sharia principles. It is based on the concept of profit and loss sharing (PLS) and prohibits the payment or receipt of interest (riba). Islamic banking also prohibits investment in businesses that are considered haram (forbidden), such as those related to alcohol, gambling or pork products.
In essence, Islamic banking is a subset of Islamic finance that operates according to sharia principles. It seeks to promote ethical and responsible financial practices while offering financial services that are in line with Islamic principles. Sharia, on the other hand, is the broader framework that governs all aspects of Islamic life, including finance and banking.
In Oman, Islamic banking is still a novelty. In terms of governance, we are more conservative than conventional as we have additional auditing levels: an internal and external auditor and an internal and an external sharia auditor; one board and one sharia board. To give you a concrete example: during the sharia transactions’ review, if the auditors will find out any discrepancies with sharia guidelines, all the profits generated by that non-compliant transaction will be segregated in a separate account and not be included in the shareholders’ revenues, but will be devoted as a donation, under the supervision of the sharia board itself.

From the perspective of a sharia-compliant institution, how do you view the rising trend of IPOs in the GCC region?
It is encouraging that Oman is taking steps in this direction too because this will bring more support to the liquidity and the investment – more liquidity into the system, basically. However, as an Islamic bank, we have to deal with IPOs that align with sharia requirements.
This means, for instance, that the interest-based income should be less than 5% of the total revenues, while the percentage of debt to the bank is less than 30%. Nonetheless, whenever there is an IPO in line with sharia, we are ready to participate because we have the capacity and the infrastructure. We can be the arranger, the adviser and the collector bank.
Again, from a governance perspective being sharia-compliant is more elaborate to manage, but it entails being more sustainable and this translates into clients being more loyal to you. This is because they see that you can provide the same services and products as conventional banks, but combining sharia, ESG practices and sustainable investments to promote long-term and quality financial performance.

How does Bank Nizwa’s establishment relate to the Islamic banking industry in Oman?
Bank Nizwa is Oman’s first dedicated Islamic bank, with a fully sharia-compliant portfolio. When we started business in 2013, Islamic banking was new in Oman and we had to create awareness around it. Now, Bank Nizwa can be considered as the mirror of the Islamic banking sector in Oman because we initiated it and we have moved hand in hand along the path.
We can divide the journey Islamic banking, and our bank, have been through into three different phases: the start-up phase, from 2013-2015, when we began preparing the infrastructure; the framework and the offering of the products, on a small scale, but bringing up to 6% the share of the Islamic banking within the domestic sector; the growth phase from 2016 to 2020, when we started acquiring more market share; the ongoing affirmation phase, when Islamic banking holds an 18% share of the sector in Oman and is expected to grow even more, reaching 20% by 2025. Such an increase means that Islamic banking is now more than competitive, able to support syndicated activities and thus be involved in larger projects.

How well positioned is the bank to offer syndicated services?
Islamic banking has grown consistently and now it has a well-capitalised position, with strong finance, good liquidity and robust asset quality. The single-obligor limit increased, reaching USD 100 million, which raised the appetite for potential investors to come. This means that today, Bank Nizwa can go up to that amount for a single financing and we can undertake large government and PPP projects through bilateral or syndicate form, by joining forces with other Islamic banks through first local and then regional and international syndication, we have the capabilities.

Can you walk us through the challenges Bank Nizwa has faced in being the first Islamic bank in the sultanate and the results it has achieved?
We have had challenges being the first sharia-compliant bank in the country, but we played an important role in generating awareness around the benefits that Islamic banking can bring to the people and to build up our reputation. The first step was to reach the retail clients and gain people’s acceptance for the system, providing personal finance, auto finance, house finance, etc. The second, more difficult step was targeting the corporate and semi-governmental institutions, because we were bringing in new types of contracts, within which there were new, additional risks that they did not know because they were not part of their “literature” before.
We put a lot of time and effort into presenting, explaining and highlighting what we wanted to do, but eventually it did bring value to our bank and to the sector in general. As of today, we are dealing with a vast array of sectors. The biggest 50 companies in Oman as well as the government’s pension funds and institutional investors are part of our customer base. Also, Bank Nizwa is currently having the lowest non-performing assets in the country because we set as our first priority asset equality and then asset liquidity, since profitability comes out from both. Beyond that, you have to be profitable in order to ensure sustainable growth for shareholders.

Can you give us an overview of the company’s assets and footprint, both locally and internationally?
When we started in 2013, Bank Nizwa’s total assets were around USD 380 million. By December 2022, we reached USD 3 billion. We currently have 19 branches (including the digital one) and by the beginning of Q2 2023 we plan to open three more.
Outside Oman, we already have our own portfolio, with strong relationships with banks in the UAE and Bahrain, and now we are looking with interest at the opportunities opening up in Saudi Arabia.
As part of our diversification plans, we want to further penetrate other markets and open new channels, establishing our footprint in the major hubs of Islamic banking, regionally and globally. In pursuing this, we want to think bigger and we will not only go for retail banking, but will concentrate on investment, inter-bank and corporate banking. By expanding our network, we also want to bring more opportunities to our clients, starting to offer a wider selection of products and services, covering consultancy and financial advisory, for example.

What is your involvement in the domestic energy industry and what opportunities do you see in the future for Bank Nizwa within this field?
Energy is an important segment of our strategy. We already have four clients operating in the waste management sector in Oman to whom we’ve provided financing, and we have been involved in funding the Sohar Refinery expansion plans.
Now, we have started targeting hydrogen and renewables, with three different locations in our portfolio at the corporate level beyond Muscat: Sohar, Salalah and Duqm. Because of the country’s geography, we need to invest in infrastructure that will greatly support oil and gas logistics and we are watching with interest what is happening, particularly in Duqm. We are financing one governmental entity, operating in logistics under Asyad’s umbrella, and, overall, directing around USD 130 million in support for different entities from SMEs to large corporations to authorities working across multiple sectors.
The potential in Duqm is enormous, especially with the upcoming commissioning of the OQ8 Refinery. The government wants to bring external investors, exploring possibilities for offshore banking. Duqm is an almost virgin ground where infrastructure is needed and banks have a very good opportunity to participate in the process, but given that the size of the developments might be beyond the capacity of the local banks, international options will be required and that is also why we already have a strong network of banks ready to participate with us.
For the future, we are looking into financing renewable energy initiatives across the country and providing sukuk issuance through green sukuk financing. The structure is already in place and we are waiting for the time to enter into more environmental-oriented projects through participation with the government.

What is the company’s approach to offering digitalisation and innovation to its customers?
After asset equality and liquidity, we added efficiency as a target and in 2019 we entered into the next phase of digitalisation, integrating our digital strategy with the corporate one: phase one was building the infrastructure of the brand, and we changed all the servers, the networks. Now we are in phase two, which is about upgrading the core banking system and bringing in new platforms.
The Islamic banking sector in Oman has grown to reach a 17% market share, the fastest ever growth witnessed in the history of Islamic banking in the region. We have been working to find solutions that can open channels and doors to our bank. Easier access will make financial inclusion faster and allow us to reach the market in a more efficient, secure and sustainable way. This is a pillar of our strategy and that is why we enhanced our e-channels, having as an internal objective to support people migrating to digital banking services and to become the digital bank of choice.
With this in mind, in December 2022 we inaugurated our digital-only branch in Mall of Oman, which represents a new experience for the country because we are the only bank in Oman providing a full digital onboarding, including AML [anti-money laundering] clearance. The ultimate scope is to offer remote access to clients not coming physically to the branches.
We strongly believe in an open banking concept. We are the only bank in Oman to have a committee at the board level dealing with information, technology and cyber security, and we are working in partnership with fintech companies to step up our platforms (for example, transactional banking corporate, trade finance) and bring them to the next level, adding value to our services.

In light of the increasing attention paid to ESG standards across different sectors, what is the relationship between them and sharia principles?
The United Nations Sustainable Development Goals have aims such as reducing poverty, protecting the planet and distributing wealth which align with most of the principles entailed within sharia. That is why we have a strong approach to ESG standards, which we have linked to our offer, matching our offer with our objectives.
Regarding the environment, we have green financing and waste management financing. In September 2022, we signed an MoU with Sustainable Development and Investment Company to offer sharia-compliant home finance solutions to customers aspiring to buy properties at The Sustainability City – Yiti. When it comes to socioeconomic concerns, we have signed agreements with the minister of labour to support Omanisation as well as education and health initiatives.

What is your strategy to ensure Bank Nizwa’s organic future growth?
Bank Nizwa’s 2021-2025 strategy – our third phase of development – is about going beyond the banking sector and embracing industry as a whole, aiming to support, enlarge and enrich the ecosystem of Islamic finance in Oman and to establish an Islamic economy which will bolster the Omani macroeconomy. To achieve this, we will need partners, from fintech to Takaful companies (to ensure that whenever we conduct a financing transaction, there will be insurance coverage), and then we will need the investments.
We are confident about what we can achieve: our strategy aligns with Oman Vision 2040 and in 2022, following what we did in the area of digital, we began integrating our sustainability strategy with our corporate one, delivering further value to the community globally.

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