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, said an international rating agency in a statement. While there is demand for Islamic banking, and its growth across the Gulf region is likely to outpace that of conventional banking, recent experience from Qatar suggests that customers in Oman will opt to get these services from established banks, said Fitch Ratings.
"Newly created Islamic banks  in Oman will face competition from incumbents such as bank muscat and HSBC Bank Oman, which are setting up Islamic banking arms in preparation for the upcoming rule changes. 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," said the statement.
"While the established banks will need to keep their existing and Islamic operations separate at the point of contact with the customer, there will be plenty of opportunities for cost savings at the operational level." Evidence from Qatar shows the advantage that established banks have.
When rule changes barred conventional banks from offering Islamic financial services, Islamic banks had expected an influx of customers as people with Sharia-compliant accounts switched banks. In practice, the impact was small and many customers decided to switch back to conventional accounts with their existing banks instead.
Where established banks in Oman are allowed to offer both Sharia-compliant and conventional products and services, the rating agency expects most customers to retain their primary banking relationship, assuming there are no significant differences in the terms on offer.
"We nevertheless recognise that substantial government spending and stimulus will create opportunities for the Islamic banks to expand, primarily in retail banking, where conventional banks are close to regulatory caps, and in real estate and construction related business - their traditional asset-backed business lines." Furthermore, the new Islamic banks are likely to have funding cost advantages due to low-cost deposits.