(MENAFN - Arab News) Oman's new regulatory and legal framework for Islamic banking and finance should be completed by the end of this year. "We are building a legal and regulatory framework in consultation with the banking community. This is headed by a Special Committee who has been working on this with a top international consultancy firm for the last six months to come up with the appropriate framewrok," explained Hilal Ali Saud Al-Barwani, vice president, Banking Control and Legal Department, Central Bank of Oman, in an interview.
He confirmed that Oman will not have a standalone dedicated Islamic Banking Law and the new Islamic banking legal and regulatory framework will be incorporated into the existing Banking Law through specialized additional articles.
Earlier this year, the Central Bank of Oman licensed two Islamic banks - Nizwa Bank and Al-Izz International Bank - which are under establishment but which according to Al-Barwani will start operations as soon as the legal and regulatory framework for Islamic banks is finalized. Both banks are expected to start operations sometime in 2012, but the timeframe will depend on the proposed 40 percent flotations by both banks to the Omani public through an initial public offering (IPO), which is expected to be heavily over-subscribed.
The Central Bank of Oman is unlikely to give any new Islamic banking licenses for the time being although unofficially the ceiling for Islamic banks has been set at 3 institutions. In fact, according to one foreign banking source, the Central Bank of Oman has indeed given approval in principle for a third Islamic bank to be promoted by local Omani and foreign investors.
Al-Barwani could not confirm this and stressed that it is possible a third license may be awarded in the future. "There could be one more Islamic banking license, but I am just giving the status of where we are now," he added.
However, banks in Oman may be allowed to open Islamic banking windows and at least two banks have already submitted applications to the Central Bank of Oman to open such bank windows. He expects the first two Islamic Banking Windows to be operational by first quarter 2012.
These developments follow the Royal Decree issued in early May by Oman's ruler, Sultan Qaboos, paving the way for the authorization of the country's first standalone Islamic bank and for other interested banks to set up dedicated Islamic banking windows; and the subsequent landmark Circular BM 1081 issued by the Central Bank of Oman on June 15, 2011 to all licensed banks operating in the Sultanate regarding Islamic banking and signed by CBO executive president, Hamood Sangour Al-Zadjali.
"As licensed banks are aware," says the circular, "it has been decided to license conduct of Islamic banking in the Sultanate through exclusive Islamic banks and windows of existing licensed banks." The circular further outlines the regulator's approach to Islamic banking under the country's banking law.
"The central bank," says the Circular, "deems Islamic banking as one way of doing banking business under the Banking Law, subject, of course, to the overwhelming requirement of Shariah compliance. It will follow therefore that the provisions, as stated, respectively, in Articles 50 and 52 of the Banking Law on the use of word of "bank" or "banking" and licensing required from the central bank for doing "banking business" as enumerated in Article 5, shall remain applicable except that Islamic banks and Islamic banking windows, so authorized, shall be Shariah-compliant and shall conform to other applicable requirements under the Banking Law and other laws."
Nevertheless, Oman's entry to Islamic banking has important implications for the Omani banking sector, the region and beyond. Omani banks that eventually become involved in Islamic banking could be an important bridge between the GCC and countries such as India and East Africa, two regions with which Oman has traditionally had close political, trading and kith and kin links.
For the moment, maintained Al-Barwani, the emphasis is on getting the legal and regulatory framework completed and adopted.
The Islamic banking marketing Oman is relatively small as compared to some of the other Gulf Cooperation Council (GCC) markets. "I assume Islamic banking will acquire a market share of 10 percent to 20 percent of the total banking market. And it will grow quite substantially within the next five to 10 years," projected Al-Barwani.
The demand drivers for Islamic banking in Oman are manifold including increased activity, fund raising and investment from corporates and from the Sultanate's young population.
Despite the fact that Oman is such a latecomer to Islamic banking and finance, the industry has a potential to grow rapidly and to make a meaningful contribution to the country's economy and savings mobilization strategy.
There are reports that there are in excess of 10 billion worth of deposits waiting to be mobilized by a nascent Islamic banking industry in Oman, especially by young savers and investors. "I keep hearing about these figures. Let us wait and see what transpires in practical terms and what this means. The aim is look ahead for the development of the industry in Oman," explained Al-Barwani.
While Nizwa Bank and Izz International Bank 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 Capital Market Authority (CMA) of Oman to market sukuk and other Islamic capital market products and services to clients in Oman.
At the same time, Alpen Capital LLC itself has also received an Islamic advisory license from Oman's CMA to provide advisory services in Islamic structures including in mergers and acquisitions (M&As), debt market instruments, equity products and capital market products including sukuk.
Alpen Capital confirmed that it has successfully closed several Islamic advisory mandates in the region and has arranged Musharaka/Murabaha agreements and advised on the placement of sukuk as well as restructured Islamic syndicated facilities for large conglomerates in the GCC.
The CMA has also given a Takaful license in principle to Al-Madina Gulf Insurance, provided the company converts into a publicly-listed company. Al-Madina according to its promoters plans to become a full-fledged Takaful operator providing general and family Takaful products.
Al-Barwani is particularly excited about the prospects for sukuk in and out of Oman.
"Indeed, Oman could play an important role in the sukuk market," he explained. "Sukuk is an important tool in absorbing liquidity and providing liquidity management. Most probably sukuk is fundamental to Islamic banking. The legal and regulatory framework we are working on will include provisions for tax neutrality for Islamic financial products including facilitation of sukuk. This is part and parcel of our framework."
He dismisses any speculation about a Oman sovereign sukuk stressing that it is far too premature to talk about such an issuance. But he strongly believes that Islamic finance can contribute meaningfully to the Omani economy and something which is needed.
Al-Barwani, following a visit to Kuala Lumpur last week to attend the meeting of the central banks & Monetary Authorities of the OIC Member Countries which was hosted by Bank Negara Malaysia, the central bank, was pleasantly surprised at the advanced level of the Malaysian Islamic banking system.
In fact earlier he had led a fact finding delegation to Malaysia to find out more about the country's Islamic financial system, which is the most developed and comprehensive in the world. "We came to see how they did their framework I am surprised to see that the Malaysian Islamic banking system is so well developed. We can learn from their experience from the very best in the market. I think Malaysia is a model to emulate and from what we have seen so far, it is a good model," observed Al-Barwani.
Asked whether he would like to see the GCC countries to cooperate and come up with a coordinated regional framework for Islamic finance, say like the south east Asian countries are doing, Al-Barwani suggested that since Oman "is now embarking on facilitating Islamic finance and we are part of the GCC, this may be something to consider for the future. We do talk and consult on matters pertaining to the mainstream conventional banking sector, so I do not see why we can't talk about Islamic banking as part and parcel of that process."