Fitch issues caution over Islamic banks

What's Down: The euphoria surrounding Islamic banking had to wear off at some point, Fitch Ratings says.

Smaller Sharia-compliant banks in Oman such as Bank Nizwa may face a hard time establishing Islamic finance operations. Jeff Topping / The National

The euphoria surrounding Islamic banking had to wear off at some point.

Banks in Oman that deal in Islamic finance have been one of the hottest investment stories of the past few months. While the party was in full swing, banks including BankMuscat and Bank Nizwa have been able to attract huge sums of capital from investors.

Now jubilation has been replaced by a little more weary navel-gazing, with Fitch Ratings warning that not all Sharia-compliant banks are created equal. Minnows such as Bank Nizwa and alizz islamic bank, currently establishing operations, may face a hard time as BankMuscat and HSBC Oman are poised to carve up the Islamic market.

"New Islamic banks set up in Oman will struggle initially to compete with established conventional banks offering Sharia-compliant services when the country opens up its banking market," the ratings agency said. "We believe the combination of a well-known brand, an established network, service quality and cost-efficiency savings will give the incumbents a significant advantage."

The new banks' cost of funds will also be higher than well-capitalised established rivals, Fitch points out. HSBC, it is worth noting, is among the world's most highly rated financial firms, which gives its Islamic operation, HSBC Amanah, a certain competitive edge.

Oman is currently licensing its first Islamic banks, having become the last of the Arabian Gulf states to liberalise its approach to Sharia finance last year in the aftermath of the Arab Spring.

Fitch Ratings points to the fact that the Islamic "windows" of conventional banks grew much faster than their pure-breed rivals in Qatar. Whether that trend was sustainable is unclear, because the Qatar central bank eventually introduced laws to split Islamic and conventional banks.