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Development of the Islamic banking industry in Oman

Guiding Principle

This article focuses on the implementation of Islamic banking, finance and investment in the Sultanate of Oman, effected by the Royal Decree 69/2012 of December 6, 2012 Amending Some Provisions of the Banking Law promulgated by Royal Decree 114/2000, as well as the Central Bank of Oman’s Circular IB 1 of December 18, 2012, which adopted the relevant Islamic banking framework.

1. Islamic Banking in Oman

The Sultanate of Oman has established within the last two years the legal and regulatory framework which applies to Islamic banks and to the Islamic “windows” of conventional banks that are licensed to operate in the Sultanate. Oman was the last country in the six-nation Gulf Cooperation Council to introduce Islamic finance.

The Islamic banks began operating in the Sultanate after the Central Bank of Oman (CBO) had put the necessary legislation (Circular IB 1 of December 18, 2012) in place. Capital Market Authority (CMA) of Oman, has recently licensed business activity of Nizwa Bank and Izz International Bank, which are primarily focused on retail Islamic banking especially consumer finance, they may at a later stage under the provisions of their license offer asset management, investment funds, wealth management and Sukuk products. Swiss private bank, Bank Sarasin, and Alpen Capital LLC (Oman), an investment bank, through their joint venture Sarasin-Alpen LLC, Oman, have already received approval from the CMA to market Sukuk and other Islamic capital market products and services to clients in Oman. Central Bank of Oman operates in accordance with Islamic Shari’ah with a capital base of RO100 million, while Bank Muscat earmarked RO150 million as capital for Mithaq – its own Islamic banking outlet. Al Ahli Bank has announced the establishment of its Islamic banking outlet, to be known as Al Hilal.

2. Relevant Laws

I.  Islamic Banking Royal Decree 69/2012

The Islamic Banking Law amending the Banking Law of Oman comprises of six articles in one new chapter of the Banking Law (Chapter Six, entitled, “Islamic Banking”) and constitutes the foundation of the Islamic banking system, largely to be developed by the Central Bank of Oman regulatory frameworks. Islamic Banking addresses substantial structural matters (such as  transactional base of Islamic banking industry, relation to taxation, land law constraints and the provisions of other areas of substantive law, Shari’ah supervisory boards) and few procedural issues (obligation of the Board of Governors of the CBO to issue regulatory framework for Islamic banking, to license Islamic banks and Islamic windows at conventional banks) as well as interpretation rules dealing with the conflict of law situations.

The status of Islamic banking transactions with regard to taxation and land law issues is illustrated in above mentioned Art. 124 and following Art. 125 of the Islamic Banking Law. Art. 124 of the amended Banking Law mandates the transactional base of Islamic banking in Oman, stating that, without prejudice to the restrictions set by the Board of Governors, the banks licensed to practice Islamic banking shall in the context of such practice, conduct all transactions – without limitation – in due consistence with the provisions of Islamic Shari’ah Law, and in particular the following:

 a) Accepting deposits and management of joint or specific investment accounts with or without fees and profits.

b) Financing and investing in Mudaraba, Musharaka, Murabaha, ljara, Salam, Istisna or Qard Hassan and other Shari’ah formulas.

 c) Issuing instruments guaranteed by assets and projects, and the investment therein.

 d) Dealing in real estate and movable property through buying, selling, investment, letting and leasing, in exception to the restrictions set forth in the Banking Law and the relevant laws and Royal Decrees.

The Art.124 authorization is supplemented by Art.125, which states that “Banks licensed to practice Islamic banking shall be exempted from fees levied on transactions related to the appropriation of real estate and movable property, or the letting or leasing thereof; conducted for the purpose of conducting Islamic banking in accordance with the provisions of this Law”.

Discussed amendment to the Banking Law introduces as well new regulations of Shari’ah supervisory committee. First paragraph of Art.126 reads that, a bank licensed to practice Islamic banking shall have a Shari’ah supervisory committee; and the regulations shall determine its composition, competence and work procedure, along with the requisite qualifications of its members, whose appointment and remuneration shall be decided by a resolution of the General Assembly of the Bank. The form, prerogatives and functioning of this Shari’ah supervisory boards are governed by the Islamic Banking Framework.

Additionally, according to Art.126 para.2 the Board of Governors shall establish a High Authority for Shari’ah Supervision, and the establishing decision shall specify its composition, competence and the work procedure therein; along with the requisite qualifications of its members and their remuneration. Authority’s goal is to ensure the compatibility of Islamic banking and takaful products with Shari’ah principles.

The Board of Governors shall set the regulations, circulars and instructions relating to Islamic banking whether concerning licensing, regulation, management and Shari’ah supervision, capital, credit, investment and exposure limits, accounting, reporting, disclosure, risk management or otherwise. The Central Bank shall issue the license to conduct Islamic banking activities through Islamic banks or Islamic windows of conventional banks. As noted above, the CBO issued the Islamic Banking Framework on 18 December 2012 pursuant to Circular IB 1.

II. Islamic Banking Regulatory Framework Circular IB 1 of December 18, 2012

By virtue of Royal Decree 69/2012, published on December 6, 2012, amending the Banking Law of 2000, Central Bank of Oman (CBO) issued Islamic Banking Regulatory Framework (IBRF), regulating following areas:

  • Licensing requirements,
  • General Obligations and Governance,
  • Accounting Standards and Auditor Reports,
  • Supervision and Control,
  • Capital Adequacy,
  • Credit Risks,
  • Market Risks,
  • Operational Risks,
  • Liquidity Risks, and
  • Miscellaneous

Central Bank of Oman restricted that, licensees, authorized specifically for conduct of Islamic banking under the Banking Law, shall be fully fledged Islamic banks, Islamic banking windows, consisting of branch(es) of local conventional banks and Islamic banking branches, in Oman, of foreign banks so licensed. Above mentioned shall conduct only Shari’ah compliant transactions covered in the Framework.

Licenses shall in overall refer to the Banking Law in terms of which Central Bank of Oman is inclined to consider recommendations made by international banking and financial organizations. Accordingly, relevant norms, recommendations, standards suggested by Basel, FATF, IFSB, AAOIFI etc. shall be of appropriate guidance. Additionally, licenses refer to the CBO for any relative requirements, including clarifications if needed. Licensees shall also note, that business authorized under the Framework, will be subjected to general as well as specific approvals and restrictions. In specific, certain enabling provisions referring to Sukuk, securitization, subsidiary and similar, in built for possible roll out, do not accrue to licensees automatically and depend upon future policies, authorizations.

As a notable general position, the Islamic Banking Regulatory Framework makes reference to, and encourages adoption of and adherence to, various guidelines of the Islamic Financial Services Board (IFSB). The required Shari’ah governance structure is implemented by mandating each Licensee to provide, in its memorandum and articles of association, for the conduct of its business in accordance with Islamic Shari’ah principles, to establish and maintain systems and controls, to ensure Shari’ah compliance of its operations and business activities, to appoint a Shari’ah Supervisory Board and to oversee operations from a Shari’ah compliance perspective.

The next article will address a subset of further licensing requirements and authorized Islamic banking business matters, specifically certain matters pertaining related investment banking activities.

January, 2014 Catherine Jaskiewicz
Meyer-Reumann & Partners, Oman Office
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