Islamic bank rules by month-end: CBO

MUSCAT: A new set of rules and regulations for Islamic banks will be ready by the end of this month, said a top-level official of the Central Bank of Oman (CBO) here on Sunday.

The banking regulator in September appointed an international audit firm, Ernst & Young, to advise the apex bank on formulating a separate set of rules for Islamic banking in the country.

“We are in the process of preparing a rule book for Islamic banks. This is expected to be completed by the end of this year,” Hamoud bin Sangour Al Zadjali, executive president of the Central Bank of Oman told Times of Oman on the sidelines of a seminar on accounting and auditing in the Gulf region.

Ernst & Young is looking into aspects like fixing of lending limits, single borrower limit, writing of rule books, procedures for reporting structure for Islamic banks and formation of Sharia board. “I don’t think there will be a national Sharia board.

However, we will be asking each institution intending to offer Islamic banking products to have its own Sharia board to ensure that the transactions of Islamic banks are in line with Sharia requirements,” the CBO chief added, when asked whether there will be a common nation-wide board to regulate Sharia compliant institutions.

Since Islamic banks do not offer interest, the consultant is also studying issues like how to compensate depositors, and how to ensure a clear demarcation between traditional banking and Islamic banking for those institutions that offer Sharia compliant products through window operation.

Sangour said the banking regulator will try to take the best aspects of Islamic banking rules followed by different countries across the world. The consultant is looking into the experiences and drawbacks of certain regulations in other countries. “We will ensure that the banks will follow Sharia rules in letter and spirit.”

Islamic banking windows

Responding to a question on the interest among commercial banks in starting window operations, the central bank chief said; “We expect that most of the banks will go for Islamic banking windows.”

He ruled out the possibility of allowing a third Islamic bank, which was reported by a section of the media. “We are not allowing more than two dedicated Islamic banks for the time being. We expect these banks to commence operation either by the first quarter or by mid-2012.”

The proposed two Islamic banks and conventional financial institutions that plan to offer Islamic products through window operation may capture 8 per cent to 10 per cent of the market share of the country’s $40-$42 billion banking assets in four to five years time.

Unlike traditional banking, Islamic banks provide the entrepreneur with funds for his business venture and get a return based on a pre-determined profit sharing ratio. In fact, Islamic finance in the Gulf region is thriving in recent years. PricewaterhouseCoopers, in a recent report, said the $1 trillion Islamic finance industry was expected to grow by between 15 to 20 per cent per year going forward.

Referring to the liquidity position within the financial system, he said banks are flush with funds and are waiting for feasible projects to extend lending.

Sangour also expects Omani banks to maintain its profit at last year’s level. “Banks may achieve a five per cent to 10 per cent growth in net profit this year.”