Omani lender Bank Nizwa, the sultanate's first full-fledged Islamic bank, plans a steady expansion of its retail network with a view to capturing a 5 percent share of the total banking market, according to its chief executive.

The country's two new Islamic banks, Bank Nizwa and Al Izz Islamic Bank, obtained operating licences late last year. They face competition from conventional lenders which plan to launch Islamic windows themselves.

"We believe that probably the Islamic industry will be 15 to 20 percent of the total banking sector. Our share of that, being a full-fledged Islamic bank, well-capitalised, well-staffed, I think it should be 30 to 50 percent," Jamil Al Jaroudi, chief executive of Bank Nizwa, told Reuters.

"We could end up having 5 percent of the total market."

Bank Nizwa launched operations in January with three branches, and plans to open an average of five every year, targeting a total of eight by the end of 2013, he said. "In five years that should give you a network of 20 to 25 branches."

Oman's commercial banking network had 461 branches registered at the beginning of 2012. Conventional lenders are now exploring whether to convert some existing branches into Islamic ones.

Under the country's Islamic banking rules, released in December, conventional banks can only offer sharia-compliant products through standalone branches.

According to Jaroudi, this could mean that after an initial phase of mostly organic growth, conventional banks' Islamic businesses might be spun off into separate subsidiaries and become acquisition targets.

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Jaroudi called on Omani regulators to increase the maximum amount of funds that can be placed overseas by local banks, which would help them manage their short-term funding needs.

Oman's Islamic banking regulations restrict the money market instruments which banks can use to manage funds, and some bankers believe this could hurt profitability.

The development of the Islamic banking sector could be delayed if such issues are not addressed by regulators, Jaroudi said.

"Two to three years is a normal time horizon but certain issues have to be addressed by the central bank."

Bank Nizwa will first offer retail products, with corporate products expected within the year, Jaroudi added.

"Corporate is in our agenda definitely. I am sure in the third or second quarter of this year we should have closed some of the corporate deals."

Omani companies are considering issues of sukuk, and a corporate issuer might conceivably tap the market ahead of Oman's first sovereign issuance, Jaroudi said.

The sovereign sukuk, when it comes, "will be a high-ticket item because definitely the government will use that for financing other ministries." But if the government issue takes some time and a good corporate issuer emerges, Bank Nizwa will not hesitate to handle the issue, Jaroudi added. – Reuters