The availability of Islamic finance in the form of Mudarabah, Musharakah, Ijarah and Istinah as a means for funding real estate development, providing working capital to companies and financing SME projects has been a key factor in Oman’s economic growth and diversification efforts over recent years for the encouragement of foreign investment. This growth has been further accelerated by the continuing overview and amendments to the Islamic finance regulatory framework by the Central Bank of Oman and the Capital Market Authority (CMA), among others.
By the end of June 2021, Oman’s Islamic banking sector constituted 15% of the total banking market share in Oman, and this percentage is expected to rise to 20% by the end of 2025. According to Moody’s Investors Service, Islamic financing has been growing globally at an average rate of 39% between 2013 and 2020.
Review of 2021
As a result of the encouragement provided by the regulators, Islamic finance has continued to expand in 2021 and has been performing its role in the economic development of Oman despite the impact of the COVID-19 pandemic on the economy of Oman generally.
In continuation of Oman’s efforts to reform and strengthen the regulatory framework for the Islamic finance sector, in view of the growing healthcare needs of consumers in Oman particularly in light of the COVID-19 pandemic, Royal Decree No 45/2021 amending the Takaful Law was issued.
Royal Decree No 45/2021, inter alia, with the aim of regulating healthcare Takaful, separates it from other Takaful activities (Family Takaful and General Takaful). This regulatory fleshing-out of the health Takaful sector is indicative of the CMA’s awareness of the growth potential of the overall Takaful market and for it to be adapted to correspond to the ongoing economic changes, healthcare challenges and the needs of prospective customers in the Omani market.
Further, in August 2021, the CMA proposed draft regulations for crowdfunding platforms for public feedback. This move comes as part of the Omani government’s efforts to modernize and digitally transform the national economy, including the financial services sector.
The draft regulations capitalize on the increasingly expanding role of crowdfunding in the global economy by establishing a robust crowdfunding framework. The draft regulations recognize and regulate Islamic crowdfunding in the form of Islamic investment notes that constitute securitized joint ownership in Shariah compliant assets and investment projects offered through the platform.
Other proposed legislation includes a draft of the new Sukuk and Bond Regulations circulated by the CMA for public feedback. The draft new regulations further improve and standardize the rules for the issuance of Sukuk and bonds to enhance the efficiency and ease with which such debt instruments may be issued in Oman.
Preview of 2022
2022 will likely witness the finalization and issuance of the various draft regulations floated for consideration in 2021 with a view to further bolster the Islamic finance regulatory framework in Oman.
Islamic finance is well suited for asset and project financing given its asset-oriented structures (the majority of which in Oman constitute infrastructure projects). Islamic banks may need to consider increasing their competitiveness by developing new investment products, lowering the cost of their products and customizing products that specifically cater to the various developments in the Omani industrial/project sector.
Products such as Ijarah, Musharakah and Istisnah have often been used in developed Islamic economies to successfully fund public–private partnership projects, infrastructure and large-scale industrial and tourism projects. The government may consider the issuance of further Sukuk to fund its economic development programs.
Further, once the necessary regulatory framework is in place, Shariah compliant crowdfunding financing will enable SMEs to access financing at a low cost, and without the need to provide security, feasibility studies or other requirements typically associated with traditional bank financing. Mainstreaming access to finance for SMEs in Oman is likely to substantially boost the development of SMEs and, consequently, job creation and economic growth.
Another important social impact product that is likely to be covered by the upcoming Sukuk and Bond Regulations to be issued by the CMA is Waqf Sukuk, whose structure can be used to benefit the general public. This is something that the regulators may consider when legislating for Sukuk, especially following the crisis caused by the Shaheen hurricane. One could see welfare-specific Sukuk being used to repair the damage caused by similar natural events in Oman.
To maintain momentum for continuing growth in Islamic finance, the adoption of further reforms may need to be considered in the field, eg regulation of fintech, the setting-up of a separate market for Islamic finance products, development of a stand-alone regulatory framework for the establishment of Islamic funds and other such measures. A sophisticated and an investor-friendly regulatory environment is the key to a flourishing industry.