The last of the GCC states to introduce an Islamic banking framework, Oman has seen its industry grow rapidly and is in pole position to become a regional hub. However, SALMAN AHMED, NIALL MCMORROW and RIZA ISMAIL identify some regulatory issues that may restrict its growth.
In June 2012, the Sultanate of Oman became the sixth and final member of the GCC countries to permit Islamic finance institutions to operate within its domestic regulatory framework when Bank Nizwa listed its shares. Such was the market anticipation for this listing that the initial public offering for the fledgling bank was 11 times oversubscribed. It quickly became one of the largest initial public offerings for any financial institution in Oman.
The decision to reverse the traditional Omani approach in resisting the Islamic finance industry was due to the fact that the country could ill afford to pass up on the opportunity to enter the market place of this rapidly growing industry, particularly when the global conventional finance markets have suffered in recent years. A number of major international financial institutions have spent the last decade making efforts to expand into Islamic finance (such as Standard Chartered Saadiq) and the fact that Oman has now formally opened its doors to this kind of foreign investment is a partial vindication of these policies. In July 2011, almost a year before the listing of Bank Nizwa, Ernst & Young predicted that the Islamic finance industry could be worth approximately US$6-10 billion within just a few years of its conception and consequently, gain up to 10% market share within that time period.
It is clear that, with the development of the Islamic commercial banking system, combined with Oman’s growing consumer appetite for Shariah compliant financial products, given time, Islamic finance should make up a significant portion of the Omani financial sector.
In December 2012, the Central Bank of Oman (CBO) showed its support for the Islamic finance industry by issuing the Islamic Banking Regulatory Framework. This new set of regulations provided extensive guidelines for Shariah scholars including ‘fit and proper’ criteria and specific restrictions in relation to Shariah supervisory boards. It is hoped that these restrictions will ensure that Shariah boards are held to a greater degree of accountability in their role of ensuring that banking products and activities are compliant with Islamic principles.
Despite Oman’s delay in coming to the Islamic finance table, the country is still one of a minority of jurisdictions that have released such codified principles and this effort to provide the industry with a degree of consistency and uniformity from the outset could make it the most attractive Islamic finance hub in the Gulf region. Traditional centers of Islamic finance have in the past been accused of lacking adequate regulation. Oman’s approach so far appears to put it in pole position to exploit this gap in the market.
However, there is concern that the new regulations, which restrict the use of certain Islamic products such as the commodity Murabahah and Tawarruq, may actually hamstring Oman’s potential to capitalize its expected market share of the money market. The Tawarruq, where one party buys an asset from a vendor in exchange for deferred payment and then sells that asset to a third party for upfront cash, has in the past been a divisive issue for Islamic scholars. It has been criticized by some as not providing any real value to the economy and therefore harming the reputation of the entire Islamic finance industry. On the flip side it is argued by some Omani bankers that Tawarruq is the only economically efficient way to compete in the money markets in a Shariah compliant way.
Omani banks have attempted to lobby the CBO, arguing that they should be allowed to use Tawarruq on a temporary basis in order to give the industry time to find a reasonable alternative structure. However, the CBO has stood firmly behind its regulations, only permitting exceptions in emergency situations and for periods not exceeding three months.
Despite protestations by Omani banks that the Tawarruq is the only effective means for them to penetrate the Islamic money markets, there are other methods to extract value. Islamic banks can also use Wakalah or agency agreements to entrust treasury funds to other institutions to manage or this might indirectly force the hand of the Omani government to develop the short-term Sukuk market within the country. The Investment Dar v. Blom case raised some issues regarding the use of Wakalah structure in deposit-like arrangements. The International Islamic Financial Market (IIFM) is currently working on developing standardized agreements for Wakalah-based money market transactions.
In late 2012 the Capital Market Authority (CMA) in Oman sought feedback from the financial services industry on its draft Sukuk regulations. The most interesting aspect of the draft regulations relates to financial trusts. Pursuant to Article (36), an English law-type trust can be created in order to enable Sukuk issuances in Oman. At present Oman does not have a trust law and this article is clearly aimed at addressing that gap to facilitate the issuance of Sukuk in Oman. In a typical Sukuk transaction the SPV (as trustee) will declare an English law trust over the proceeds, the assets acquired using the proceeds and all distribution amounts owed to the Sukukholders. Although primarily aimed at enabling domestic Sukuk issuances, the Sukuk regulations also grant the CMA discretion to grant permission for the creation of financial trust in other circumstances.
The huge potential of the Islamic finance market in Oman is not in debate. However, with the first Islamic bank less than a year old, there are clearly some issues which are more significant than predictable teething problems. These issues will need to be addressed and resolved before Oman can truly be regarded as a sophisticated center of Islamic finance.
Salman Ahmed is the head of Islamic finance (Middle East), Niall McMorrow is a senior Islamic finance associate while Riza Ismail is a senior associate based in Oman at Trowers & Hamlins. They can be contacted at