Oman Central Bank Relaxes Rules for Islamic Banks

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The Central bank of Oman has relaxed rules on Islamic banks in Oman, which had stringent government regulations regarding the holding of foreign assets.
The Central bank of Oman has relaxed rules on Islamic banks in Oman, which had stringent government regulations regarding the holding of foreign assets. Photo-KrishnaKumar/Flickr

As Islamic banking gains a strong foothold in Oman, the central bank has given the Islamic financial institutions a one-year relaxation on stringent rules governing the holding of foreign assets.

The decision has been made to facilitate the domestic development of Islamic financial instruments. Last year, Bank Nizwa and Al Izz Islamic Bank began operating Oman’s first full-fledged Islamic banks. Under the former rules, foreign-currency-denominated assets were limited to no more than 40 percent of their net worth, by Oman’s central bank. The limit has now been raised to 75 percent for the first six months of the agreement — but will be reduced to 50 percent in the six months following.

The relaxation is likely to adversely impact the profitability of the two banks as Oman’s market is undeveloped in sukuk (Islamic bonds) and other Shariah-compliant instruments. According to the new rules, Islamic banks are allowed to hold a maximum of 30 percent of their net worth in sovereign sukuk. Therefore, the two banks are expected to struggle to manage their liquidity through other rial-denominated Islamic products. At the same time, Islamic banks in Oman are not allowed the use of commodity murabaha. In other Islamic banking hubs, the commodity is commonly used by these banks to invest surplus funds.

According to Reuters, Central bank chief Hamood Sangour al-Zadjali believes, “after that they can have local sukuk and they can be building local credits. It’s a definite period, it’s one year… until they set the client base.”

The sultanate is taking active measures to introduce Islamic finance in the market and benefit from growing number of Islamic banks in the region. In an initial public offering last year, the two banks were able to raise a combined total of 100 million rials (USD260 million). While Bank Nizwa had 150 million rials in paid-up capital, Al Izz had 100 million rials. Oman’s first sovereign sukuk issue is expected next year.

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