Over the last 40 years, Oman has achieved a remarkable economic growth with major efforts to diversify its resources of income to reduce its dependency on hydrocarbons. The key objective for the government is to boost the role of the private sector and enhance its participation as a major player in the economy through explicit support of Small and Medium Enterprises. SME compromises 90% of the total number of companies in the country. With such large domination, the government had designed and implemented strategies in this direction which involve enhancing rules and regulation as well as institutional infrastructure. Also, the government, for the first time, in 2011 has adopted the practice of Islamic banking system in order to address Shariah compliant finance requirement for businesses and projects. This paper is largely based on academic research that will shed light on aspects related to development of SMEs and Islamic banks in Oman. The study is conceptual in nature and analytical method is used based on the secondary documentation related to the government policy / programs regarding to enhancing active participation of SMEs and Islamic Banks towards economic diversification in Oman. It can be concluded that the government is keen to make such cooperation with the private sector succeed because it will bring about future active participation and subsequently diversification of the national economy. (C) 2015 The Authors. Published by Elsevier B.V.