TIMELY OFFERING

Oman 2016 | FINANCE | FOCUS: SUKUK

The first issuance of a sovereign sukuk has afforded Oman some valuable liquidity while also facilitating an important advancement in the country's Islamic financial sector.

Although Oman does not yet have the financial experience or infrastructure to match the UAE, Qatar, or Saudi Arabia, 2015 was a year of great significance for the sector. Not only did the banking sector have a highly successful year with many banks passing its profit targets, but the first sovereign sukuk was also issued, a strong statement of intent regarding the financial sector's growing ambitions.

The Sultanate of Oman has been slow to embrace the concept of Islamic finance, which, despite suffering some growing pains, has become universally accepted on a global scale. It was only in 2013 that Islamic banks were officially created in Oman, with Alizz Islamic Bank and Bank Nizwa being the first to enter the market. There was simultaneously a mandate that every bank operating in Oman would create its own separate Islamic banking windows, with the National Bank of Oman the first to do so, creating Muzn Islamic Banking.

To add to the evolution of the Islamic financial sector, the debut issuance of sovereign sukuk worth $519.41 million was announced in 2015. Tahir Salim al-Amry, the Director-General of Treasury & Accounts at the Ministry of Finance as well as head of the committee arranging the issue, told the Times of Oman in May that it would be “marketed primarily to Islamic financial institutions, and sophisticated investors with a minimum subscription amount of 500,000 rials." While many of the details were not released at the time, its approval in July by Meethaq, the Islamic banking segment of Bank Muscat, paved an initial path to a successful debut offering.

Despite the inexperience in Oman's Islamic banking industry, the issuance has not surprised many. Considering the low oil price, countries like Oman, which have relied primarily on hydrocarbons, have had their revenues slashed. With a budget deficit estimated at $9.35 billion by the IMF, Oman does not necessarily have the same freedom it had when the oil prices were higher. This is, therefore, a timely decision by the government of Oman, and while it will open up further opportunities for future Islamic financial products in the medium term, the short term liquidity will also provide valuable backing to the country's megaprojects that are taking place in the transport and infrastructure sectors.

With five countries debuting in the sovereign sukuk market in 2014, Oman should take some encouragement from the growing confidence of the international market. Having said that, 2015 has been a difficult year for the market, primarily due to the fact that the Central Bank of Malaysia, one of the biggest issuers worldwide, decided to stop issuing sukuk earlier in the year. Although their exit from the market is due more to the fact that their investor base was not satisfactory, rather than to do with under-subscription, its impact has been felt globally. Africa has also slowed its sukuk offerings due to the fact that many countries in the continent have had troubles implementing the necessary legislation, something that was particularly brought to light by the two debut issuances from Senegal and South Africa in 2014. However, a slow down in international sukuk issuance may actually boost Oman's debut. As investors become limited in their options due to a dearth in the international market, debutants such as Oman may provide an attractive alternative.

The novelty of sukuk in Oman is demonstrated by the Central Bank's rejection of a corporate offering in July. Renowned as the largest lender in Oman's banking sector, Bank Muscat planned to launch a $1.29 million offering later in 2015, but the plan was vetoed due to concerns that the use of sukuk would be used to boost personal lending. The structuring and legislation are inherently complex, and for a country with limited experience in Islamic finance, this is a prime example that several improvements are to be made.
With that being said, Bank Muscat's conviction was not hampered by the rejection. The bank declared that its sukuk plans had been merely delayed and stated that it would restructure the proposal and file for approval again. It is symptomatic that, although Oman may not be completely ready to enter the sukuk market, the necessary efforts are being made to ensure that potential offerings are attractive. Considering that the sovereign sukuk issuance is the first international bond offering since 1997, its success will be carefully monitored.