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Legislative and regulatory framework

i Legislative and regulatory regime

Oman's Islamic finance industry, albeit recently developed, has rapidly become one of the most heavily regulated sectors in the country. This degree of regulation correlates with the rapid growth of the Islamic finance industry in Oman, which grew by an impressive 14 per cent in 2018 according to Moody's.

Islamic banking was formally introduced in Oman by Royal Decree (RD) No. 69/2012, which amended RD No. 114/2000 (the Banking Law) by adding a new chapter dedicated to Islamic banking. Subsequently, the Central Bank of Oman (CBO) issued circular IB 1/2012, promulgating the Islamic banking regulatory framework (IBRF), which is a sophisticated regulatory guideline setting out the requirements and conditions for the undertaking of shariah-compliant commercial and investment banking activities and the offering of shariah-compliant products in Oman.

The IBRF regulates the following areas: licensing requirements, general obligations and governance, accounting standards and auditor reports, supervision and control, capital adequacy, credit risks, market risks, operational risks, liquidity risks and miscellaneous matters. The IBRF provides for the right to set up fully fledged Islamic banks and Islamic windows of conventional banks and it sets out the process and requirements to be followed when applying to the CBO for an Islamic banking licence. In this respect, it is to be noted that domestic banks, foreign banks and Islamic windows are required to have paid-in capital of no less than 100 million Omani rial, 20 million rial and 10 million rial, respectively, which may be subject to higher capital requirements imposed by the CBO.

Additionally, the IBRF specifies the criteria, requirements, specifications and risks of each type of Islamic finance product (e.g., ijarah, murabahah and mudarabah). In this regard, the IBRF expressly prohibits tawarruq (i.e., commodity murabahah), which, although frowned upon by the majority of Islamic scholars, is allowed in several GCC countries, including Saudi Arabia. Therefore, Oman's position regarding tawarruq is much more stringent than that of other GCC countries.

Further, the IBRF is very comprehensive and focuses on the transactional and operational shariah compliance of all licensed Islamic financial institutions in more detail than most GCC countries. In this respect, the IBRF leaves the task of verification of shariah compliance of Islamic banking transactions to qualified shariah boards and shariah auditors within each licensed Islamic bank or Islamic window, and does not provide for a centralised authority for the auditing of Islamic banking transactions. The professional requirements, and perquisites, for the members of shariah boards are provided by the IBRF, and are not left to individual banks to regulate. It should be noted that a central shariah authority was established in 2013 by CBO Regulation No. BM/54/12/2013, inter alia, to advise the CBO in relation to shariah-compliant transactions and settle shariah-related disputes that may arise among the shariah auditing boards of financial institutions in Oman.

The shariah-compliant capital market sector has been formally expanded with the amendment of RD No. 80/1998 (the Capital Market Law) by RD No. 59/2014, which expressly recognised the ability of companies listed on the Muscat Securities Market (MSM) to issue sukuk. Subsequently, and on the basis of the amendment to the Capital Market Law, Decision No. 3/2016 Issuing Sukuk Regulation (the Sukuk Regulation) of the Capital Market Authority (CMA) specified the procedures and requirements relating to sukuk issuances in Oman. Sukuk, as provided by the Sukuk Regulation, can be issued either directly by the beneficiary or originator, or through a trustee or an agent. Notably, the Sukuk Regulation's treatment of the function of 'trustee' is unprecedented since no concrete definition of this function (even outside the context of finance) has been provided by Omani law in the past.

As regards Oman's takaful industry, RD No. 11/2016 (the Takaful Insurance Law) provides a robust and comprehensive framework covering all aspects of the takaful insurance sector and regulates all aspects of a takaful operator's activities (e.g., oversight and reporting requirements, product standards and liquidity levels) subject to the oversight of the CMA, which has been tasked with regulating and supervising takaful operators in the Sultanate. The Takaful Insurance Law requires takaful insurers to be publicly listed on the MSM and to have capital of no less than 10 million rial. Further, the Takaful Insurance Law requires takaful operators to form an internal specialised shariah committee for the purpose of auditing the takaful operator's shariah compliance. Other provisions of the Law govern the maintenance of solvency margins, fund setup and management, and the transfer of takaful business from one company to another. A draft takaful regulation is currently being prepared by the CMA.

There is no express legal or regulatory framework governing shariah-compliant investment funds. However, with regard to real estate investment funds or trusts (REITs), which are a sub-class of investment funds, CMA Decision No. KH/2/2018 (the REIT Regulation) makes several references to shariah-compliant REITs by providing, inter alia, for the necessity of establishing a shariah committee or using the services of a shariah board or third-party committee to ensure that the activities of the REIT are compatible with the principles of Islamic law. The REIT Regulation sets out the duties, characteristics, requirements and restrictions relating to the members of the shariah board to ensure their impartiality and objectivity when auditing the fund's shariah compliance. As with a conventional REIT, the licensing of a shariah-compliant REIT requires substantial minimum capital.

With the introduction of RD No. 18/2019, the new Commercial Companies Law (CCL), replacing RD No. 4/1974, the former CCL, new regulations and requirements have been introduced with regard to the issuance of both bonds and sukuk in a separate chapter. In addition, the CCL imposes a general requirement on commercial companies undertaking shariah-compliant activities to have their transactions comply with the principles of Islamic law, and it has tasked the CMA and the Ministry of Commerce and Industry (MOCI) to issue specific regulations on the shariah-auditing mechanisms to be implemented within such companies.

ii Regulatory and supervisory authorities

Regulators of the Islamic finance sector in Oman enjoy broad authority in terms of licensing and investigation and penalising of breaches of law. The primary regulators of the Islamic finance industry in Oman are the CBO and the CMA.

The CBO is the main regulator of Islamic banks and Islamic windows operating in Oman, and in this respect the scope of its supervisory and regulatory authority is set out in the Banking Law and the IBRF. The IBRF acknowledges that the Islamic banking business increases an Islamic bank's liabilities as it 'bestows greater burden of responsibility on Licensees so far as Shari'a compliance is concerned', and the CBO has affirmed that it will take serious note of and sanction appropriately any breaches of shariah principles by a licensed Islamic financial institution.

Pursuant to the Banking Law, the CBO has the authority (1) to license Islamic banks and windows, (2) to establish licensing regulations, procedures and conditions, (3) to inspect and audit the audited financial statements of Islamic banks and windows in Oman and to request clarifications in respect of these, (4) to investigate and audit the activities of Islamic banks and windows in Oman and, in this respect, to ask for and obtain any documents, information or clarification required by it, and (5) to issue guidance, mandatory instructions and warnings to licensed banks in relation to their activities. The CBO regularly issues publicly available circulars containing its instructions, recommendations and guidance to Islamic banks in Oman.

Among the more significant regulatory powers vested in the CBO, the latter is empowered to suspend the activities of a licensed bank either partially or wholly, to confiscate its assets and place them under its control, and upon the occurrence of certain events to impose fines or deny the licensee access to the credit facilities offered by the CBO, including if the licensed bank has breached, or there is proof that it intends to breach, the provisions of the Banking Law, the IBRF or the circulars issued by the CBO, or if the licensed bank becomes incapable of following the instructions and guidance of the CBO, or if the licensed Islamic bank has breached shariah rules and principles. The CBO also has the right to place a bank under its curatorship, which may result in the licensed bank's liquidation. Before imposing any penalty, the CBO may notify the defaulting licensee and grant it an opportunity to cure its breach.

The CMA is the regulator for takaful companies, shariah-compliant REITs and, more generally, public joint-stock companies carrying out shariah-related activities. With respect to takaful companies, the Takaful Insurance Law sets out the scope of the regulatory authority of the CMA. The CMA has the authority to receive, accept and reject licensing applications and to determine the process and requirements for the licensing of takaful insurance and related professions (e.g., takaful brokerage and agency).

The CMA also has the authority to inspect and investigate the activities of licensed companies to ensure compliance with the provisions of the takaful law and the CMA's instructions; in this respect, it has the power to (1) task an actuary at the expense of the licensed company to evaluate the company's assets, liabilities and overall financial situation and prepare a report for the CMA; (2) appoint a member on the board of directors of the licensee who will have the right to attend and observe the board meetings and express an opinion on resolutions, without being entitled to vote; (3) dissolve the licensee's board of directors and appoint a temporary administration committee for the purpose of managing the licensee; (4) suspend or cancel (either wholly or partially) the licence of the licensee; (5) issue warnings and impose penalties on the licensee; and (6) dismiss members of the board or the executive committee. The Takaful Insurance Law expressly provides that the CMA's officers and employees shall have judicial enforcement powers in the context of ensuring compliance by licensees with the provisions of the law.

With regard to the regulation of REITs (both Islamic and conventional) and public joint-stock companies (whether or not their activities are shariah-compliant), the CMA's supervisory responsibilities are largely the same, as both are based on the provisions of the Capital Market Law and Executive Regulation of the Capital Market Law No. 1/2009, issued by the CMA. The CMA is responsible for licensing REITs and public joint-stock companies and for setting out, to an extent, the licensing process and prerequisites. The CMA has the authority to investigate licensed entities and take disciplinary action against them by way of issuance of reminders and warnings, and by imposition of fines, suspension of dealings on the MSM for a period not exceeding three months and, finally, delisting such entities from the market. The CMA has the right to send observers to ensure compliance of unitholders' or shareholders' meetings with the procedures prescribed by law.

The CMA is also responsible for regulating issuances of sukuk in Oman and for the licensing of corporate entities seeking to issue sukuk in the country.