What is the structure and the background of Bank Nizwa?
JAROUDI: Well, actually, Sheikh Saud and 92 other individuals are the founders of Bank Nizwa. The bank’s license was initially granted under the name of Sheikh Saud bin Ali Al Khalili, a very prominent Omani personality. He was the Minister of Education at some stage and then Ambassador. He is extremely committed to his country and Islamic banking was one of his dreams. When he obtained the license, he did not go out like many people do, by starting with a very minimal number of funders, which is usually below 10. In most of the Omani companies and also in the Gulf, if you notice, the founding shareholders can be counted in one or two hands only. Whereas, he went around and spread the news to the whole Omani community as much as he could to gain full participation and he reached 92 prominent people, from all different regions and major villages of Oman. As you know, the Central bank insists that you have to open by listing a minimum of 40% of the company in the IPO. So, the founding partners, who are locked up for the first 2 years and have to stay in as supporters of this concept, accepted to go to the minimum as their aspiration was to take the whole 100%. This IPO attracted 37,000 subscribers, which was an 11.3 times over-subscription financially. Today, after several months of trading of the shares, we still have on our books about 25,000 shareholders in spite of the fact that we did not open our doors yet. This tells you how much people are committed to this industry. So now we are a company with approximately 25,000 shareholders.
How pleased are you overall with the success of Bank Nizwa's IPO?
JAROUDI: I am very pleased. To have an 11.3 times over-subscription is overwhelming. On one hand, it enlarges the responsibility you are going to embark on, as you will have to meet people’s expectations. But on the other hand, it tells me how much that market was really thirsty for Islamic products. It also shows that most of this money which could not be invested in the bank will come back to us. This will be done in one or two forms, that is, either as a deposit, which hopefully we will manage on behalf of the owners while trying to achieve the most optimal return, or in the form of investments, where we will have products to promote to our potential investors by showing that these will come back with a return.
What are some of the benefits from developing a green field bank considering the recent financial crises in the western markets?
JAROUDI: I think that you cannot apply this in every country, as every country has its own specific profile. Also, the industry itself, that is Islamic finance, is relatively immune from the toxic derivatives or toxic products. Of course, some of the Islamic banks were impacted and some of their assets went down, but initially they were not involved in the debt crises, so one should not be concerned about the financial crises when building a new Islamic bank. On the contrary, you should concentrate on the way you create awareness in your audience or with your potential clients, as you will be promoting the aspect that you are an asset-based organization and thus you will not really be working in a virtual environment. However, benefits from developing a green field project is that you start fresh and learn from previous experience and avoid others mistakes.
With regards to Islamic finance, what are the reasons for Oman to enter the banking sector only recently? Looking forward, how hungry do you see the market for Islamic finance products?
JAROUDI: Oman was a late comer into this market, I think, because the country was first of all involved in setting up a continuous growth for itself. So, probably the regulators or the authorities felt that if we introduce a new product, this might confuse the market or it might create some instability. They have continuously been in the growth path. Even when the world was facing its own crises, Oman kept growing and was not affected by these problems. Thus, maybe they wanted to, first of all, learn from the experience of other Gulf States or other countries, which introduced Islamic banking, and then enter the market by avoiding the trials from the beginning. People are hungry for Islamic finance products. This is demonstrated, firstly, by our over-subscription, and secondly, from the way we are perceived by the media and the way the audience is receiving us. Lastly, we know from statistics and reports, that of the total existing Omani deposits in the local banks, almost equivalent to 50% of that is invested in Islamic banks outside of Oman. This tells you that the country was actually under banked or that the banking penetration, if you want, is not as high as the Gulf States. People are in fact waiting for a solution, which they find in Islamic finance banking. We expect that a lot of money will come back into the country and this will probably help in the stimulation of the economy. Of course this will come in phases. People are smart, and they will want to see how successful you are first. However, this will definitely arrive. Why would anybody go outside to deposit their money if they can do it at home?
Some analysts counter that Oman is actually over-banked. Where does this analysis come from?
JAROUDI: Well, over-banked, really, I do not know, but I think it is because they see how some of the banks were struggling to maintain their market share or at least to grow it. However, if you take that measurement I mentioned earlier, Oman has a 14% market penetration compared to an average 22% in the rest of the Gulf States, or compared to 30%, 40% and 70% in the Western countries. Therefore, Oman is definitely under-banked. Why is it under-banked? I think it is because people are relatively conservative and they probably want to perform their economic life by complying with the Sharia perspective.
What lines, services, and products will Bank Nizwa be focusing on? Where do you see the biggest short-term growth potential?
JAROUDI: Being a retail bank, we have to accommodate the retail and the consumers from the beginning. However, there are regulations established by the Central Bank of Oman that control the relationship between how much you can lend to the consumer in relation to corporations. So, we immediately have to go in parallel to be able to maintain that ratio. Of course, we cannot maintain it from day 1. Assume that when we open our door and tomorrow a healthy client comes in and he wants to buy a car. If I sell him a car, then I will start with the consumer financing. However, this means that you are already in default vis-à-vis the ratio because corporation usually take more time since you need to start analyzing their balance sheet and look at it in depth to finally be able to propose to them a certain product. It could take a couple of months before you can lend or extend funds or facilities to any corporation. So, I think that the Central Bank is aware of that and we drew their attention to this issue, trying to tell them that at least for a period of 6 months, or in the first year, that ratio should not be maintained. That is why we have to go in parallel both in retail and corporations.
If you look at the lending total portfolio in Oman today, it is actually split into 3 categories. 50% is between construction and consumer finance, where consumer finance is 40%, and construction is about 10%. The rest of the economic sectors, all of them, are 50%, which tells you that there are so many areas in the other economic sectors which are not well served.
Looking at the international regulatory perspective and the macro economic situation with banks in Oman, do you see any challenges to meet international regulations such as Basel III?
JAROUDI: I think the banks in Oman are relatively well capitalized and the regulators are aware of the plan from now to Basel III. However, as an Islamic bank, I would like to bring up a point which I have been talking about with many national bodies. That is, the Basel Committee should look at Islamic banks in a different way than the conventional international banks. This is because the balance sheet structure in Islamic banks is technically different than the conventional banks. We do not mind being regulated by the world order, internationally. I am not saying that there should not be regulations. I am saying that the regulations should be designed and devised to accommodate the concept of Islamic finance and understand exactly what Islamic banks are. Today, we are very much asset based. To buy an asset these days, or a house and re-lease it to the ultimate buyer under a certain instrument, which is Ijara wa iqtina', that is a lease with an option to buy, this is an entry in your balance sheet for an Islamic bank. If they want to apply the capital ratio adequacy here, this will penalize you. So, I think there should be better regulations designed for Islamic banks in general in order for them to be part of the overall financial system in the world. I mean, definitely, Islamic banks have a mixed bag of products, such as fixed assets and soft assets, thus there should be a more dichotomous regulation for every type of product. Also, you should know exactly what the objectives are for each product. I mean, we have precedents in some countries where if you go as an Islamic bank and play the role of the trader, that is, you buy and sell, you are considered like any shop in the country or any trading entity and thus you are required to pay the value added tax (VAT). However, that is not the objective of the organization. We had to negotiate with the Minister of Finance in that country and it was agreed that as long as it stated “instrument of financing”, then you were not required to pay the VAT. I do not know what the ultimate solution should be, but my suggestion is that we should look at each specific and special instrument to measure the capital adequacy of Islamic banks.
What do you see as the major challenges facing the banking sector and Bank Nizwa going forward?
JAROUDI: As far as Bank Nizwa is concerned, our challenges are to implement our vision and our mission. Our vision is to eventually become an international and world-class bank. Of course, we have to walk before we run. So, we stage and then start looking internationally. More so, our mission is to create value and give professional and competitive products to our stakeholders. By stakeholders, I mean, the shareholders, our investors and depositors, and of course our employees, because all of those people are, in my opinion, the basic owners of Bank Nizwa.
What type of products do you want to emphasize in the future?
JAROUDI: I would like to say that if you look at the lending total portfolio in Oman today, it is actually split into 3 categories. 50% is between construction and consumer finance, where consumer finance is 40%, and construction is about 10%. The rest of the economic sectors, all of them, are 50%, which tells you that there are so many areas in the other economic sectors which are not well served. Under this perspective, I think that Bank Nizwa would like to start looking at these other extra sectors and encouraging investment. We would like to look more into something that helps with continuing the development of the economy and we would like to look at SMEs, encourage investment in equity if possible, and make sure that the money stays in the country for the wealth of the people of Oman.