Islamic banking in Oman has continued to grow steadily, accounting for approximately 19 percent of the country’s total banking assets in 2025, according to a recent report by S&P Global Ratings. The sector’s assets reached $25 billion, marking a gain of about 200 basis points in market share over the past two years, underlining its expanding role in the Omani financial system.

S&P Global Ratings projects that Islamic banking will maintain a pace of growth that outstrips conventional banking, although this expansion may moderate as the industry matures. The segment’s share of deposits and credit was slightly higher, standing at 22 percent, reflecting smaller securities portfolios compared to conventional banks.

The Islamic banking sector in Oman is composed of two fully operational Islamic banks—Bank Nizwa and Alizz Islamic Bank—and five Islamic windows run by conventional lenders. Together, these institutions represent over one-third of the Islamic banking assets in the country. Notably, Bank Nizwa recently submitted a non-binding proposal to acquire Alizz Islamic Bank, pending regulatory and shareholder approval. If this merger proceeds, it could establish a larger national Islamic banking champion with improved profitability prospects, despite the combined entity remaining a relatively modest player, controlling less than 7 percent of Oman’s overall banking market. At the end of March, Bank Nizwa’s assets totaled $5.3 billion, while Alizz Islamic Bank’s assets stood at $3.9 billion.

Corporate financing has been the primary driver of growth within Oman’s Islamic banking sector, constituting 63 percent of gross Islamic financing in 2025. This segment has expanded at a compound annual growth rate of 12 percent between 2020 and 2025, outpacing retail financing, which grew at 8 percent, buoyed by developments in Oman’s non-oil economy.

However, S&P raised some caution regarding asset quality, noting a rise in the non-performing financing (NPF) ratio to 4.2 percent at the end of March 2026, up from 3.6 percent a year earlier and 2.3 percent in 2020. The agency expects the NPF ratio to approach the level seen in conventional banking, which stood at 4.6 percent in the first quarter of 2026 as portfolios mature. Real estate and construction sectors account for about 12 percent of Islamic banks’ exposure.

Profitability in the Islamic banking segment has improved but remains below that of conventional banks. Return on average assets was reported at 0.9 percent, compared with 1.2 percent for conventional peers. This disparity partly reflects a higher cost-to-income ratio of roughly 50 percent for Islamic banks versus 44 percent for traditional banks.

Strong capitalisation underpins the resilience of the Islamic banking sector, with an average Tier 1 capital ratio of 15.1 percent and a funding base composed of 98 percent customer deposits, one of the highest ratios in the region. Non-performing financing is fully covered, further supporting sector stability.

Looking ahead, recent regulatory developments such as Oman’s Banking Law of 2025 and the Central Bank of Oman’s introduction of Islamic liquidity management tools in late 2025 are expected to bolster the sector’s growth trajectory. Nonetheless, the report also noted potential challenges from ongoing regional conflicts, which could impact real estate, construction, and hospitality sectors, though Oman’s exposure is anticipated to be less severe compared to other countries in the region.