The latest approval is the go-ahead given in late August to the promoters of Al-Izz International Bank to set up an Islamic bank instead of a conventional bank, for which approval was originally given by the Central Bank of Oman (CBO) in September last year.
In May this year, the CBO had approved a license to local promoters to launch Nizwa Bank, which will be capitalized at OR150 million (about $390 million) and which is expected to open its doors for business in the first half of 2012. The timeframe will depend on the proposed 40 percent flotation by the bank to the Omani public through an initial public offering (IPO), which is expected to be heavily over-subscribed. Al Izz International Bank also plans an IPO later this year with a view to start operations some time in 2012.
Similarly, multilaterals such as the Islamic Corporation for the Development of the Private Sector (ICD), the private sector financing arm of the Islamic Development Bank (IDB) Group, are also interested in supporting the establishment of Islamic banks in member countries through equity investments perhaps with the cooperation of the International Finance Corporation (IFC), the private sector funding arm of the World Bank Group.
The IFC has been increasing its participation in the Islamic finance sector through the issuance of sukuk and also in equity positions in Islamic financial institutions. In fact, the ICD and IFC, last month signed an agreement in Washington DC whereby the ICD has adopted the IFC’s master cooperation agreement which makes it easier for both institutions to collaborate on private sector investments in the Middle East and North Africa and in emerging markets worldwide on a Shariah-compliant investment basis.
These developments follow the royal decree issued in early May by Oman’s absolute 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 to all licensed banks operating in Oman 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 Oman through exclusive Islamic banks and windows of existing licensed banks.”
Considering the process of evolution and stage of Islamic banking in many jurisdictions, consistent with the broad approach generally adopted by the CBO in regulation and supervision and in order to be compliant and at the same time provide reasonable operational flexibility for the development of this new line of business, 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.”
The Omani approach to Islamic banking authorization is implicit and similar to Saudi Arabia, where the country’s four Islamic banks – Al-Rajhi Bank, Bank Albilad, Alinma Bank and Bank AlJazira - are licensed under the existing general banking law subject to the banks also fulfilling Shariah compliance requirements.
This opposed to the introduction of a stand alone dedicated Islamic banking law to authorize such banks which is the norm in most countries where Islamic banking is practiced including Malaysia, Kuwait, Bahrain, Qatar and the UAE.
The advantage of the Omani approach is that it helps to fast track the authorization of Islamic banks without having to wait for new primary legislation to be enacted, which can be a frustratingly drawn-out process in most countries. This is evident in the licensing of Nizwa Bank and Al-Izz International Bank.
The disadvantages however are that the existing general conventional legislation may not take into consideration the specificities of Islamic banking and finance, especially where the relationship between the depositor/investor and the bank is fundamentally different to that in a conventional banking arrangement. These include, for instance, the treatment of capital adequacy requirements including in the current Basel 11 and the proposed new Basel 111 concordats especially in relation to products such as Profit Sharing Investment Accounts (PSIAs) which are specific to the Islamic finance industry.
The guidelines of the Islamic Financial Services Board (IFSB), the prudential and supervisory standard setting body for the global Islamic finance industry, similarly urges the authorization of Islamic banks under dedicated Islamic banking legislation which recognize the very special characteristics of the system.
Another disadvantage of the lack of a stand alone Islamic banking law is the propensity for and the potential of co-mingling of funds in banks, especially those conventional banks with Islamic banking windows (IBWs), to which the CBO circular also refers.
In fact, earlier this year the Central Bank of Qatar issued a ruling requiring all IBWs to stop accepting new deposits close down their operations by the end of 2011. Some of the reasons for this were the reported co-mingling of funds and the legal complexities involving the ownership of Islamic banking assets owned by a conventional banking parent.
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.
Both India, with a Muslim population in excess of 200 million, and East African countries such as Kenya have a head start on Oman in facilitating Islamic financial products. Reliance, Tata and Ambit, for instance, have all launched Islamic equity funds in India and for NRIs (non-resident Indians) abroad.
Kenya has two Islamic banks - Gulf African Bank, in which BankMuscat, the largest bank in Oman, has a 21.33 percent equity stake through its associate Bahrain-incorporated BankMuscat International (BMI) Bank BSC, and First Community Bank.
