Muhammad Nadeem Aslam*
Tue Jun 14 2011 07:40:13 GMT+0400 (Arabian Standard Time) Oman Time
The most relevant laws, regulations and decrees in the field of banking, finance and related areas in the UAE are the Central Bank of Oman Banking Law, Commercial Companies Law promulgated by Royal Decree 55/90 and Money Laundering Law promulgated by Royal Decree 34/2002.
CBO Banking Law
The establishment of the Central Bank of Oman in the beginning of 1974 (which was amended vide Royal Decree No. 114/2000) was a natural outcome of the steady evolution of the monetary system in the Sultanate. The establishment of the central bank was to bring greater control and discipline to the banking sector in Oman.
Although there is no explicit provision available in CBO Law for permissibility of Islamic banking business, Article 5 of CBO Banking Law describes permissible businesses for commercial banks which provide reasonable provisions for Islamic banking products.
It includes lease, hire purchase, agency, wealth management and investment businesses. Furthermore, Article 65, 118 and 120 have sufficient provisions for Islamic banking products and services.
Regulatory and legal issues
Most Sharia compliant financing structures (like real estate finance) require title deed of the property to be in the Islamic financial institution either completely (in case of an Ijarah) or partially (in case of a Musharaka).
This may cause an issue in a legal environment that can be described in two aspects, the first aspect relates to the ability of an Islamic financial institution to hold title in real property and second aspect relates to the nature of title transfer, i.e, can the title transfer be contractual (i.e. beneficial ownership) rather than a transfer of legal title (i.e., registered title) in favour of the Islamic financial institution.
Commercial banks in Oman are not permitted to own real estate, except for their own use or where the property has been obtained as a result of default by the bank’s customer (Article 66 of Omani Banking Law). However, it is quite possible that upcoming Islamic banks may be given an exception in interpretation of this article as it has happened in most countries that have regulated Islamic banking industry proficiently.
However, contractual/beneficial ownership can be used as an alternative tool to avoid constraints of Article 66 of Omani Banking Law. Beneficial ownership is a much established concept in Islamic fiqa that is being practiced since the inception of Islam. Islamic institution of waqf was one of the foremost legal innovations introduced by the Islamic fiqa that was adopted by English common law later on as a concept of trust.
As far as local laws and practices are concerned, Muscat Clearing and Depository Company (established by Royal Decree 82/98) holds securities as legal owner on behalf of investors who are beneficial owner of securities. Moreover, trade and commercial agencies law promulgated by Royal Decree 77/26 (and subsequent amendments) has flourished the beneficial ownership concept.
Last but not least, Article 5 of commercial codes provides priorities to terms and conditions agreed between both parties, rules of customs and practices along with provision of Sharia Law.
Post-Royal Order era
Post Royal Order dated May 2, 2011 era has granted explicit provision to Islamic banking businesses in Oman. However, there is need of further explanation about Islamic banking products and services in CBO Banking Law, especially in Article 5 about definitions of banking products and services and Article 65 about general credit and investment powers. Further, there is also need to clarify in Article 66 about holding of title or ownership of real estate properties by Islamic banks for financing purpose (like Ijara, musharika), which is not tantamount to holding properties other than business conducting purpose.
Last but not least, CBO should establish a legal framework for full fledged Islamic banks (IBs) and stand alone Islamic banking branches (IBBs). The way central banks have regulated Islamic banking industry vary from country to country but, by and large, regulators’ core framework is consist of
Sharia Compliance Assurance – Some regulators have allowed IBs and IBBs to appoint their own Sharia advisor or Sharia board while others have opted for more regulated industry by creating centralised Sharia supervisory board at central bank level.
Further, Sharia advisor/board is used to issue annual Sharia audit report to shareholders and deposit holders ensuring Sharia compliance of operations, products, utilisation of charity funds and profit distribution mechanism.
In case of IBBs, it is required by almost all central banks to ensure separations funds from conventional counterpart. It is also required to have separate books of accounts within banks’ existing books in terms of assets, liabilities, income and expenditures.
Further, to ensure the transparency and to enhance public trust, it is also required to mark the cheque books, registers, forms, documents, agreements and advertisement material with Islamic banking logo.
In case of IBBs, all regulators have asked for set up of Islamic banking department at head office to manage the IBBs operations, liaison with Sharia advisor and regulator, development of products and service, management of pooled funds and profit distribution, arrangement of staff training and fulfilment of other statutory requirements.
IBs and IBBs are required to have Sharia complaint consumer, corporate and investment products approved by either centralised Sharia board or appointed Sharia advisor of the bank.
In order to create level playing field between IBs and IBBs, regulators have asked Islamic banking windows to maintain minimum capital as per basal accord called Islamic banking fund, statutory liquidity and cash reserve requirement, dedicated Islamic treasury functions, separate financial reporting and disclosure requirements, etc.
Finally, the judges in Oman come from an Islamic background familiar with Islamic concepts and contracts, which enhance the enforceability of Islamic banking products in the commercial courts. This fact will eventually lead to the speedy conclusion of matters as cases will not be required to be referred to experts frequently.
Accordingly, judgments will become more predictable leading to more certainty in Islamic banking transactions. Further, we can conclude that provisions of Omani basic law and commercial codes have high similarities with other gulf civil laws and there is reasonable likelihood that Omani courts will adjudicate Islamic banking matter as being judged by rest of the Gulf courts.
Since Islam is the religion of the Sultanate as stated in the basic law, Oman will be ideally placed to play a leading role in Islamic finance. In addition, the commercial code has a very strong Sharia foundation in the form of Article 2, 4 and 5 of Royal Decree 55/1990, which directs modes operandi to the courts while deciding the disputes.
In a nut shell, Omani commercial codes are completely supportive to Islamic banking structure without any conflict. However, based upon Royal Order dated May 2, 2011, CBO should incorporate Islamic banking legislations into the banking law in order to provide better clarity and transparency to the public as well as legal courts. The purpose can be addressed by creating legal framework for Islamic banks and Islamic banking branches in line with the best international practices established at various countries. (Concluded)
* Muhammad is an Islamic banking veteran having vast experience of Islamic finance. Currently, he is the head of Islamic banking department at BankMuscat. He is author of first ever Islamic banking home finance product in Oman.
Published in Times of Oman