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The Laws and Regulations governing Islamic Finance in Oman

The following Q&A, originally published for Lexis Middle East, answers important questions regarding the laws and regulations governing Islamic Finance in Oman.

  1. What types of Islamic finance products are most commonly used in Oman and how extensive is the uptake?
The most used Islamic finance products, for provide financing by Islamic banks in Oman are Murabaha, Diminishing Musharaka and Wakala. It is expected that with the support of the government’s policies, the Islamic finance industry in Oman will continue to expand and grow in all aspects in the coming years, considering the development of Islamic finance is still in its early stages in Oman.
  1. Is there any specific legislation in Oman covering Islamic finance and/or Islamic funds?
The Islamic finance sector in Oman is controlled by the following laws and regulations:
  • The Banking Law (“BL”) promulgated by a Royal Decree no. (114/2000) and its amendments.
  • The Islamic Banking Law Regulatory Framework (“IBRF”) issued on the 18th of December 2012 by the Central Bank of Oman has provided licensing rules and guidance applicable to banks and Islamic Windows, regulated and supervised by the Central Bank of Oman (“CBO”) and Sharia governance framework, to ensure Sharia compliance in Islamic banking operations of Islamic banking institutions in Oman;
  • The circulars issued by the CBO Board of Governors;
  • Decision (3/2016) issued by the Capital Market Authority regarding the Executive Regulation of the issuance of sukuks.
  1. Does any of the more general legislation covering banking, finance, and insurance cover Islamic finance? If so which laws – and what are the main areas, they cover?
In addition to the laws mentioned above, Takaful Insurance Law promulgated by Royal Decree no. (11/2016) and its amendments regulates the takaful (Islamic insurance) activities in accordance with the provisions of Shari’a in Oman.

  1. Do any of the onshore financial regulators issue specific regulation covering Islamic finance and/or Islamic funds?
Yes, the CBO and Capital Markets Authority, Oman, issues circulars periodically to clarify the laws in order to guide and regulate the entities intending to provide Islamic finance or establish Islamic Funds.

  1. Are conventional banks, financial service, or insurance providers able to have Islamic finance divisions or provide Islamic finance products or can this only be done by specialist Islamic finance institutions? If they can, what additional steps are they required to take to gain authorisation?
The domestic conventional banks in Oman have established Islamic Banks windows/divisions based on approval provided by the CBO.

The conventional banks interested in establishing a branch of Islamic Banking within Oman are required to submit the following to the CBO:
  • A request for authorization of each branch in the form prescribed by the CBO.
  • A Plan of Operations in the form of a detailed feasibility report for at least five years, covering, but not being limited to, information concerning the types of geographical and commercial communities to be served by the applicant, the specific kind of banking business etc.
  • Any other information / document as may be requested by the CBO.
The approval of the CBO of domestic bank applications to open branches shall depend upon licensing policy and circumstances relevant at the time of the application.

  1. Which authorities are responsible for the oversight and regulation of those offering Islamic banking, Islamic insurance (takaful) or other types of Islamic finance services in Oman?
The CBO is responsible for regulating and guiding the banks, including the conventional and Islamic banks, and the Capital Market Authority is responsible for regulating the Takaful insurance providers in Oman.

  1. Is there a significant difference in the way Islamic finance is regulated and can operated onshore and offshore in Oman?
No, there is no difference in the way Islamic finance can be operated onshore and offshore in Oman.

  1. Is there any particularly important guidance or policy statements which are relevant to those providing Islamic finance services?
In Oman, there is no specific policy statement for the operations of Islamic Finance services other than the laws and regulations stated above.

  1. Is there anything particularly unusual about the way Islamic finance operates in Oman?
As stated above, the Islamic Finance institutions operate in line with the laws and regulations applicable in Oman and as such there is nothing unusual in the way Islamic finance operates in Oman.

  1. Do Islamic finance institutions set up their own supervisory boards and what are the required qualifications for taking up a post on such a board?
Yes, the Islamic institutions in Oman form their own Shari’a Supervisory Boards (“SSB”) for supervising the activities of the relevant Islamic Bank. The fit and proper criteria/qualifications for taking the post and positions in the SSB are listed in the IBRF as follows:
  • Owners of the Islamic institution shall establish their own SSB, however, small institutions may seek the exception and approval from the CBO to use an outsourced SSB.
  • The Supervisory Board shall consist of Islamic Commercial Jurisprudence (Fiqh Al Mu’amalat). However, the SSB may include one or more non-voting members who have expertise in Islamic banking but not specialised in Fiqh Al Mu’amalat. The SSB shall have the duty of directing, reviewing and supervising the activities of the institution in order to ensure that they are in compliance with Shari’a principles, as the Fatawa and rulings issued by the SSB shall be binding on the Islamic institution.
  • The SSB shall comprise of a minimum of three Shari’a scholars and all rulings shall be approved by the majority of them.
  • Foreign banks licensed to undertake Islamic banking in Oman should demonstrate acceptability of their SSBs, with the standards and norms set in the IBRF.
  • Islamic anks are encouraged to develop Omani expertise in Shari’a scholarship as well as in Islamic banking related finance, economics, accounting, law etc., so as to facilitate progressive increase in membership of Omanis in SSBs.
  • The general assembly of the bank shall take the decision on appointing members of SSB and fixing their remuneration. Such remuneration shall be disclosed for each SSB member in the annual report.
  • The appointment of SSB members shall be formally documented in the shape of a formal offer letter signed by the authorized representative of the Board. The letter of appointment of SSB should include reference to the compliance of the Islamic Bank with Shari’a principles.
  1. Is there a central body responsible for ensuring transactions are shariah compliant?
No, there is no Central Sharia Supervisory Board for oversight over the Islamic Bank in Oman however auditors / examiners from the CBO visit and audit the books and activities of the Islamic Bank / windows each year to ensure that the Islamic Banks and windows are working in compliance with the provisions of Shari’a and as per the policies and guidelines issued by the CBO.

  1. What are the penalties for advertising financial products which claim to be Sharia compliant but are found not to be?
Any products being introduced by Islamic finance institutions in Oman are required to be approved by the CBO and as such cannot be advertised unless the CBO is satisfied that the products are in line with Sharia requirements and the guidelines issued by the CBO for such products.

Further, in case any licensee fails to comply with policies of the CBO or violates any of the provisions of the Banking Law or rules, regulations and instructions issued, the CBO may impose any one or more of the following sanctions:
  • The withdrawal of the banking license of a licensee and/or any or all of its branches within Oman.
  • The suspension of operations of licensee and/or any or all of its branches within or outside the Sultanate.
  • The imposition of a fee by way of a penalty of not more than the annual license fee (for the licensee or branch as the case may be) to be assessed and charged for each business day during any period where an occurrence has been determined to exist by the CBO.
  • Denial of access to credit facilities of the CBO.
The CBO may notify the offending licensee and provide an opportunity to remedy its failure, breach, or violation before imposing any of the penalties. Shari’a non-compliance risks arising from failure to comply with Shari’a rules principles and requirements, as set by the respective Shari’a Supervisory Board of the licensee or any other body nominated for the same purpose. In view of the importance of the matter, the CBO shall view such Shari’a violations/ non-compliance more strictly, looking for adherence in the spirit and imposing appropriate penalties otherwise.

  1. Are there any particular requirements or qualifications for owning an Islamic bank or finance institution, managing such an institution or acting as its auditor?
There are no specific requirements for owning an Islamic finance bank or institution and as such any interested party can own / manage and audit Islamic finance institutions in accordance with the applicable laws in Oman.

  1. Is it possible for a foreign Islamic bank or Islamic finance institution to set up a branch in Oman?
The foreign Islamic banks in Oman are allowed to set up a branch of Islamic banking within Oman with the approval of the CBO.

  1. Which courts or tribunals generally hear Islamic finance disputes?
The Commercial Circuit courts in Oman generally hear all finance / banking related disputes.

  1. How would sukuk holders be viewed in the event of an insolvency in Oman?
In the event of insolvency of a sukuk issuer, the sukuk holders would be treated as secured creditors, as the investment agent would be holding a security for and on behalf of the sukuk holders, which would be enforced, and the sale proceeds (if any) would need to be distributed amongst the sukuk holders.

  1. Are there any legal or regulatory restrictions in Oman which prevent or restrict the provision of specific types of Islamic finance products, takaful products or Islamic funds?
The use of Commodity Murabaha, which is commonly used in other jurisdictions like UAE to provide working capital to borrowers is prohibited by the regulator under the IBRF.

  1. What is the governing law most commonly used for Islamic finance contracts in Oman? Are there any particular issues those drafting an Islamic finance contract in Oman should be aware of?
The most common governing law used in Oman for Islamic Finance contracts is Omani Law. In addition to the governing Shari’a principles, anyone drafting Islamic finance contracts in Oman should consider the implications of the Omani Commercial Law (“OCL”) promulgated by Royal Decree no. (55/1990) and its amendments, and the Omani Civil Transaction (“OCTL”) Law promulgated by Royal Decree no. (7/2018).

This Q&A was originally published for BSA inLexis Middle Eastand can be downloaded here:Lexis Nexis: Islamic Finance 2021


Arsalan Tariq Partner, Oman

Reem Al Habsi Associate, Oman

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