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

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

How Islamic Banking Differs? www.bankmuscat.com

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

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

Asset Products Structures Asset Side Products Home Finance Dim Musharika Ijara Murabaha Istisna Car Finance Personal Finance Tawarruq Credit Card Bai ul Ina Ujra Short Term Fin Salam Long Term Fin Musharika Islamic products can be structured using different underlying contracts vis-à-vis risk implications, regulatory directions, market dynamics and sharia advisor. www.bankmuscat.com

Liabilities Products Structures Liabilities /Fee Products Business A/c Qarz Wadiah Saving A/c Modariba Wakala Tawarruq Fixed Deposits Bancatakaful Mutual Funds Sukuks Ijara Musharika Salam Istisna www.bankmuscat.com

Potential of Islamic Banking www.bankmuscat.com

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

Islamic banking Potential in Oman 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) Source : S& P report www.bankmuscat.com

Total portfolio is over RO 75 Mio 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

Drivers for Growth in Oman www.bankmuscat.com

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

Islamic banking Windows www.bankmuscat.com

Pros & Cons of Window Windows Operations 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

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

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

Way forward www.bankmuscat.com