CBO announces tight Islamic banking law



Muscat: The Central Bank of Oman (CBO) has announced the final regulation for Islamic banks and window operations of conventional banks, paving the way for local banks to launch their much-awaited Sharia-compliant products.

There are only a couple of changes in the final document when compared with the Islamic Banking Draft Framework (IBRF), which was circulated among banks in February this year, top-level officials of leading banks told Times of Oman.

The highlights of the Islamic banking regulation, which was given to banks this week, include AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) standard for accounting, a five-member Sharia board, no permission for Commodity Murabaha or Tawarruq, separate branches for window operation, 12 per cent capital adequacy with a minimum capital of RO10 million for window operation and a clear-cut segregation of funds, accounting, information technology, compliance and marketing between Islamic and non-Islamic lines of business. 
'Strict and proper criteria'

"There are strict and proper criteria for Sharia board members. Of the five members, three should be Sharia scholars and two should be technical members who have expertise in accountancy or law or economics. The board members cannot have bad loans and they should have high educational qualifications," Sulaiman al Harthy, Group General Manager, Islamic Banking, Bank Muscat, told Times of Oman.

The Sharia board will have a three-year term, and a member can be nominated to the board for the second time, after a break of one year. However, a Sharia scholar cannot serve in two competing Islamic financial institution within the country.

Al Harthy said the general stipulation for governance for banks include appointment of separate officials for risk and compliance purposes. Unlike other countries, Commodity Murabaha or Tawarruq is not allowed for Islamic banks in the Sultanate.

Commodity Murabaha is a product designed to facilitate cash advances to a customer who need cash to pay for various needs. In this transaction, banks sell the customer commodities on deferred payment basis. Subsequently the customer sells these commodities on spot basis to receive cash.

"In other countries, Commodity Murabaha and Tawarruq are available. However, some Sharia scholars have questioned the Sharia validity of Tawarruq," noted Khalid Yousaf, director, Islamic Finance Advisory Services at KPMG Oman.

It was reportedly said that the common inter-bank transactions like Mudaraba, Musharaka and Wakala placements are allowed in the new regulation for the Islamic institutions in the country.

Two major differences
Referring to two major differences between the draft and the final regulation, Al Harthy said the treasury department of Islamic banking line of business has to be independent and has to report to the Islamic window, contrary to the suggestion in the earlier draft regulation for reporting it to the parent bank.

Obligatory limit
Also, the single obligatory limit is based on the bank's overall capital and not to the capital base of the window operation suggested in the draft regulation.

It is reliably learnt that Bank Muscat, National Bank of Oman, ahlibank, Bank Sohar, Bank Dhofar, Oman Arab Bank and National Bank of Abu Dhabi are planning to start window operations.

However, a couple of banks are yet to submit their formal application for window operation with the Central Bank of Oman.

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