1

Growth and Development of Islamic Banking in

Oman Financial Markets

Assessors:

 DR. Abeer Al Yaqoobi

Students name:
 AL Shaima Al Hashmi – ST11236
 Rahaf Al Adhali – ST11677
 Manar Al Wadhahi – ST11639
 Yumna Al Sabahi – ST11732
 Lubna Al Rawahi – ST12157
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Table of Contents
Abstract.......................................................................................................................................................3
Introduction.................................................................................................................................................3
Thesis Statement.....................................................................................................................................3
Literature Review........................................................................................................................................3
Overview of Islamic Banking..................................................................................................................3
Historical Development of Islamic Banking............................................................................................4
Theoretical framework................................................................................................................................4
Financial Management Theory................................................................................................................4
Pillars of Islamic Banking.......................................................................................................................4
Key Findings...........................................................................................................................................4
Gap in study............................................................................................................................................5
Methodology...............................................................................................................................................5
Data Presentation and Analysis...................................................................................................................5
Historical growth.....................................................................................................................................5
Current State of Oman's Financial Market...............................................................................................6
Financial Products...................................................................................................................................6
Challenges...............................................................................................................................................6
Unawareness within People.................................................................................................................6
Reluctance by Non-Muslims...............................................................................................................6
COVID-19 Outbreak...........................................................................................................................7
Liquidity Management........................................................................................................................7
Conclusion...................................................................................................................................................7
References...................................................................................................................................................7
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Growth and Development of Islamic Banking in Oman Financial Markets

Abstract
Oman is predominantly inhabited by Muslims and is an Arab country. The country is the last
among all the countries in the Middle East to open an Islamic bank. The Islamic banking system
in Oman has faced many challenges during the past years such as Liquidity issues, reluctance
and lack of education among people, and COVID-19-related issues are also ranked as significant
challenges. This study has majorly covered the emergence of Islamic banking in Oman along
with its growth and development. The study has been carried out by mixed methods of research
design (qualitative and quantitative). As the challenges are identified, it also shows strategies that
would be effective in developing the Islamic banking system within Oman in the future.

Introduction
One group of people who can directly contribute to a nation's economic development is banks.
An interest-free banking system based on Shariah laws is known as Islamic banking, or Shariah-
compliant finance. This kind of bank operates in an ethical and sustainable manner, prioritizes
equity, and encourages inclusivity. Rather than being limited to Muslim nations, Islamic banking
appears to be a part of financial services offered everywhere. The examination of Islamic
banking's expansion and advancement within Oman's financial markets is the main goal of this
essay. The banking industry dominates most of Oman, with Islamic finance emerging as a
significant subsector. In 2012, the Central Bank of Oman introduced Islamic banking with the
aim of boosting the nation's economy and broadening the range of financial services offered
across the nation (Ahamed, 2023). In the sections that follow, evidence-based information about
Oman's financial markets will be discussed. Additionally, the growth dynamics of Islamic
banking will be examined, along with its effects and contribution to the nation's economy,
challenges, and opportunities.
Thesis Statement
The financial market of Oman is not very enormous, but it carried out fast-paced growth while
facing great challenges within the market and proved that it holds great potential to contribute
towards the economic growth of the country.

Literature Review
Alam and Al-amri (2020) conducted a study to assess customer satisfaction with the service
quality offered by Islamic banks in Oman. Their research aimed to pinpoint which factors of
service quality had the biggest influence on customer satisfaction.Astandard questionnaire was
provided to all one hundred customers of the Islamic bank. Customer satisfaction was found to
be strongly and positively correlated with safety, responsibility, and reliability in service quality.
Research on regression analysis further confirmed the importance of these factors in predicting
client satisfaction with Islamic banking services.
Overview of Islamic Banking
Islamic banking system follows different policies as compared to traditional banking systems. It
follows Shariah laws focuses on creating sustainability and social prosperity and makes financial
decisions in such a way that motivates development and growth. Also, this system abolishes any
kind of gambling, interest, and complex derivatives (Hassan & Aliyu, 2018). Riba, which means
interest is not allowed in Islamic banking. Riba is not just removing the factor of Riba/interest
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from the banking system, but it is also the elimination of credit-based monetary (Siddique,
2022). As Riba is not allowed, the financial transactions are based on risk sharing. Moreover,
under Shariah law, the collection of any type of monetary reward is also banned.
However, there are many opposing opinions on the practices of Islamic banking. It has been
obvious from the position of Islamic banks that their ethical standards are better than any other
banking system. However, critics believe that the prioritization of ethics over profit
maximization is something that would not allow the growth of Islamic banking in the global
market (Musa, Sukor, Ismail, & Elias, 2020).
Historical Development of Islamic Banking
Egypt was the first country where an Islamic bank was established, and its reason was to practice
the policies of Islam within the economic life of people. The prevalence of Islamic banking at the
end of the 19th century created interest-free lending societies (Islahi, 2018). While the initiation
of Islamic Banking started a lot earlier it was based on a small scale at first and was not very
much appreciated, over the years its growth was accelerated. The real uplifting and development
of Islamic banking started in the late 20th century. The prevalence of the Islamic banking system
has increased pace since 2008 when the growth rate became 12.5% on an annual basis (Ikra,
Rahman, Wanke, & Azad, 2021).
Oman is a country of Arab traditions and that is why the need for Islamic banking was also felt
there. The foundation of Islamic banking in Oman was laid in 1970 (Babicci & Wongsurawat,
2020). In today's era, the government has almost incorporated Islamic Banking into all economic
aspects of the country. That means Islamic banking has dominated the country.

Theoretical framework
Financial Management Theory
There are certain financial management theories that align with the Islamic principles in terms of
banking and that is why these theories are crucial to mention. The principles of Shariah
emphasize the transparency of transactions and business which also describes the risk
management theory of finances. As a risk management tool, Islamic banking uses Sukuk which
turned out to be a cutting-edge phenomenon and allowed governments and organization to raise
their capital without incorporating interest in their practices (Malik & Sharif, 2021).
However, critics also have created opposing viewpoints on this. The major opposition comes
from the factor of 'no interest'. The critics believe when the banks do not charge any interest, it
becomes difficult for them to operate properly and the economic balance is disrupted and
consequently, the growth is restricted.
Pillars of Islamic Banking
Islamic finance principles are different than Western traditional banking, there are majorly five
pillars that differentiate Islamic banking from the Western banking system.
1. Charges on Financial Transactions: Islamic banking does not allow any charges on
financial transactions because according to it, money carries no intrinsic value and does not
produce returns on its own.
2. Uncertainty: The investment system should not contain any hidden charges or taxes, risk
taking is only allowed when all parties are aware of risks and understand the terms.
ANALYTICAL ESSAY 5

3. Gambling, Pork: The investment of money is not allowed in Unislamic businesses such as
alcohol production or pork business.
4. Risk Sharing: The parties involved in a business must equally share risks and rewards with
each other.
5. Asset-backing: All of the financial transactions have to contain certain underlying assets
(Babicci & Wongsurawat, 2020).
Key Findings
Global Significance of Islamic Banking
Since the prevalence of Islamic banking in the world, it has been working ethically and
eventually increasing its growth. However, the global perspective on Islamic banking contains
contradictory views about the factors of zero interest and risk sharing.
Global Challenges
Despite having ethical standards, Islamic banking has faced challenges regarding compliance
with government laws on an international basis. Because banks all over the world function on the
concept of profit maximization while Islamic banking prioritizes ethics, its growth turned out to
be a great challenge.
Oman Specific Research
Oman is an Arab country, where people strictly follow Islamic principles and practice them in all
aspects of life. Islamic banking has significantly developed in Oman since the first bank came
into existence in 1970. Oman is the latest country in the Middle East that launch Islamic banking
within its system, which is why the country is considered to be in its infancy stage in terms of
Islamic banking. However, despite being the latest country, Oman's Islamic banking system is
much more promising as compared to other countries. The Islamic banking system in Oman has
been managed by strong and experienced finance players in the global market for the last eight
years (Mihajat, 2021). This system has been maintained by the Central Bank of Oman. Thus,
Islamic financing is growing on a global level and Oman is one of the contributors in this case as
the financial ratios of Islamic banks in Oman have increased over the past years.
Opportunities
Islamic banking holds great opportunity regarding its growth within the global market. There are
still limited people who properly know about Islamic financial services. That means the
opportunity for market expansion is huge.
ANALYTICAL ESSAY 6

Figure 1: some financial rations within Oman's Islamic Banks (Mihajat, 2021)
Gap in study
The Literature review provided deep insight into Islamic banking and its emergence in Oman.
However, there are gaps in this study which is the nature of data. This study is majorly based on
theoretical data. However, empirical data is present, but it is negligible. Even though the data had
been backed up by sufficient evidence, the presence of more empirical data would be a plus
point. Moreover, the study has provided knowledge about Islamic banking within Oman
specifically. There is a lack of critical comparison between Oman and other countries. A
comparison would help the audience to understand the global trends of Islamic banking.

Methodology
The data collected for collecting the Literature has utilized a mixed method approach. The
research design is a combination of qualitative and quantitative data. The data has been collected
by surveys and interviews conducted on individuals along with numerical data. The quantitative
data mostly has been obtained from sources from financial institutions in Oman. The sources
used for collecting data are authentic and only taken from scholarly articles and authentic
websites.
Sample Size
For having a comprehensive analysis of Islamic banking, the data from 5 different banks within
Oman along with a bank from different countries have been taken to carry out a comparison. The
collected data is within the time period of the last 5 years. To maximize its credibility, very old
data has been avoided for use in research
Data Analysis Techniques
For the analysis of qualitative data, thematic analysis has been utilized because it helps to
understand the theme and underlying meaning of the obtained information (Vaismoradi &
Snelgrove, 2019). While descriptive analysis has been used for analyzing quantitative data, on
the other hand. The mixed data collection method has been utilized because it increases the
credibility of the research and gives a variety of qualitative and quantitative data.
Unreliable data such as blogs and random websites has been potentially avoided. The analysis
presented on the data is critical and thematic which is easier for the audience to connect. The
methods used in collecting the data regarding the financial markets of Oman in terms of Islamic
banking have been a potential approach for providing understanding on this topic. Through this
method, it has been possible to analyze the market trends, the development done in this sector,
and the growth of the Islamic banking sector in Oman.
ANALYTICAL ESSAY 7

Data Presentation and Analysis

Historical growth
Islamic Banking in Oman started on a small scale and Oman has been classified as the latest
Middle Eastern country who open an Islamic bank. The system of Islamic banking has been
potentially appreciated by the residents of Oman as they are mostly Muslims and proudly
embrace Islamic banking and this is also a reason for the growth of this sector in Oman.
Current State of Oman's Financial Market
In Arab countries such as Oman, the Islamic finance industry has been dominated by the banking
sector. Islamic banking has increased significantly over the past years and has created huge
market growth.

Figure 2: Structure of Islamic finance sector (Lukonga, 2020)

Financial Products
While complying with Shariah laws, Islamic banking presents a wide range of financial products.
It starts from the basic accounts such as current or saving accounts and then also includes
Mudarabah Accounts, which are described as profit-sharing accounts. These accounts work as a
silent partnership between the labor and the capital (Rahman, 2018) More products are risk
management products such as Sukuk and Islamic mutual funds. The credit cards issued do not
carry any interest or additional charges. Moreover, the transactions carried out through Islamic
banking do not charge any fee for transactions as it is not allowed.
Challenges
During its development, the Islamic system of banking has faced many challenges within Oman,
some of the major current and historical challenges faced by the Islamic banking system are the
following:
Unawareness within People
A major challenge that has been faced by Islamic banking within Oman is the lack of knowledge
of Islamic banking by the people of Oman. Although, people are Muslims they respect the
religious laws and that is why they always wanted to have a Shariah policy. However, these
people have shown a lack of insight into Islamic banking and presented very weak knowledge
about it (Mohammed, Bilal, & Khan, 2022).
ANALYTICAL ESSAY 8

Reluctance by non-Muslims
Moreover, the non-Muslims have shown reluctance and resistance to adopting Islamic banking.
A qualitative study done on South Korean Citizens revealed that Non-Muslim people first of all
have a limited understanding of Islamic banking and this becomes a reason for them to show
reluctance in engaging with Islamic banking and utilizing its services (Wan Ahmad, Hisham
Hanifa, & Hyo, 2019). However, when these people were educated on the Islamic banking
system, they showed interest and described their interest in getting to know it better.
COVID-19 Outbreak
The situation of COVID-19 posed a serious economic backlash on the economy of Oman.
During the developmental journey of Islamic banking in Oman, it has faced many challenges and
COVID-19 is one of the major challenges it had to face. During the COVID-19 era, the banking
system slowed down and caused major losses for the banks (Mihajat, 2021). During the backlash
the Islamic banks merely experienced just single-digit growth which was a concerning issue. The
banking system had to adapt to the environment and change its strategies to deal with the
backlash caused by the COVID-19 outbreak.
Liquidity Management
Another challenge that has been faced by the Islamic banks within Oman is Liquidity
Management. As it is the conversion of assets into cash flow, Oman's banking system lacks this
has caused them. Moreover, the dependence of Islamic banks on deposits is high and this in turn
also results in difficulty regarding liquidity management.

Conclusion
The emergence of Islamic banking in Oman is not vet primitive. Since Islamic banking was
introduced in Oman, it has developed significantly and almost dominated the country's economic
sector. The Islamic banking system in Oman has been shown to potentially contribute to the
country's economy. Despite being a strong system, the Islamic banking system in Oman has
faced many challenges during the past years such as Liquidity issues, reluctance to lack
education among people, and COVID-19-related issues are also ranked as significant challenges.
Islamic banking will continue to contribute to the economy of Oman in the future.
Proposal for the Longer term:
1. Instruction and Mindfulness:
Actualize comprehensive teachers programs to create strides open understanding and
confirmation of Islamic keeping cash rules.
2. Imaginative Things:
Make Shariah-compliant budgetary things custom-fitted to Muslim and non-Muslim clients to
extend show-up off entrance.
3. Liquidity Organization:
Stimulate liquidity organization procedures through redesigned cash-related organizing and
progressed headways, with back from the Central Bank of Oman.
ANALYTICAL ESSAY 9

References
Ahamed, F. (2023). Evolution of Oman’s Islamic Banks. Indian Journal of Science and
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Babicci, K., & Wongsurawat, W. (2020). Islamic banking in Oman: Laying the foundations.
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Wongsurawat/publication/
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Hassan, M. K., & Aliyu, S. (2018). A contemporary survey of Islamic banking literature. Journal
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Ikra, S. S., Rahman, M. A., Wanke, P., & Azad, M. A. (2021). Islamic banking efficiency
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