The new banking law has increased the supervisory powers of CBO enabling it to cover more activities than earlier
Charles Schofield

Oman’s banking industry has flourished over the last few years, with strong profits and a healthy reduction in non-performing loans. A part of the strength of the current banking scene in Oman can be attributed to the careful regulatory oversight of the banks. This article considers the legal framework within which our banks here in Oman operate.

Regulatory background
The original banking law was promulgated in 1974. It established the Central Bank of Oman CBO with a mandate to issue currency and supervise all aspects of banking business, which included advising the government of the sultanate on international and domestic fiscal policies. CBO was entrusted with the promotion of free market expansion through the establishment of appropriate banking institutions and contribution to the fiscal and monetary development of the sultanate through active participation in the international monetary community and membership to international monetary organisations, such as IMF.

Royal Decree 114/2000 promulgated the new Banking Law 2000 (BL 2000). Primarily consolidating legislation, the new law continued the trend of much of the recent legislation, which has sought to strengthen and expand Oman’s free market economy and promote financial stability.

The banking law of 1974 was expressly repealed by Article 2 BL 2000. That article also provides that all regulations, decisions, orders and circulars issued in implementation of the old banking law remain effective until they are repealed or amended. Most of the 1974 law was reproduced in the new law providing a large measure of continuity.

Current banking law
The new banking law increased the supervi-sory powers of CBO (eg. key bank positions are now ratified by CBO and directors have to satisfy a ‘fit and proper’ test). CBO’s scope now covers more activities than previously (eg. codes of conduct with regard to investment powers, confidentiality of transactions and duties of officers and employees).

The new law also raised the minimum capital of Omani banks from RO10mn to RO20mn, and that of a branch of a foreign bank to RO3mn. Further, CBO’s role in advising the government on matters of domestic and international affairs was also enhanced.

CBO is independent from the apparatus of the state. As a result, it operates with greater freedom than government ministries. The powers that it derives from BL 2000 give CBO almost unfettered control over the banking sector within Oman.

The management of CBO is entrusted to a board of governors. The board has full authority to perform all acts required for the management and operation of CBO and the supervision of banking business in the sultanate. The board consists of seven governors, each of whom is appointed by His Majesty, Sultan Qaboos bin Said. The management powers of the board of governors are very broad. These include the following:

• Examining account books, records and other affairs of any licensed bank;
• Delegating investigation of banking activity and operation to a third party;
• Reviewing reports prepared by licensed banks which are required by CBO from time to time to monitor banking practice;
• Allowing licensed banks to establish branches;
• Taking all such actions as required to supervise properly and regulate banking in the sultanate;
• Regulating and supervising all matters relating to the currency of the sultanate, including printing and issuing notes, licensing and suspending the licences of any licensed banks, or imposing sanctions on banks which fail to comply with the directives and policies issued by CBO;
• Promulgating regulations of CBO related to all aspects of banking business in the sultanate.

CBO has power to appoint an administrator to take over a bank’s operations in certain circumstances, including a CBO perceived risk of bank failure, non payment, and violation of the banking law or regulations. CBO also has power to suspend banking licences.

Establishing banks
Any bank wishing to set up in Oman must obtain a licence from CBO (Art. 52 BL 2000). The licence will specify the banking activities which individual banks may undertake.
The prescribed corporate form for a bank is that of a joint stock company (Art. 55(b) BL 2000). This may be a closed joint stock company (SAOC), which does not offer its shares for public subscription, or an open joint stock company (SAOG), which does. Most banks in Oman were established as SAOCs but many of them have converted to the latter to take advantage of the additional funds which public subscription generates.

Foreign banks may, with CBO approval, establish in Oman (Art. 52 BL 2000). CBO maintains the same regulatory functions over foreign banks as it does over domestic banks. This includes, but is not limited to, imposing lending ratios and capital adequacy requi-rements on these banks.

A foreign bank wishing to set up in Oman must submit a copy of its constitutional documents and proof that it has the authority to engage in banking business within its own jurisdiction (Art. 53(3) BL 2000). It should provide details of the proposed banking business it will undertake in Oman and any other information required in connection with its application requested by CBO which reviews this application. The bank must submit all other documents required by other legislation in force in Oman and by other government departments (Art. 53 (6) BL 2000).

Recent developments
More recent developments in banking laws in Oman have focused on finetuning the regulatory framework. New banking related Royal Decrees and other banking laws have been promulgated on lending ratios, regulation of bank auditors and the classification of risks.

Oman banking regulators will continue to be presented with challenges arising from the increasingly international and outward looking nature of the Oman banking industry. New international banking standards are being introduced through Basel II, the second of the Basel accords.

Basel II consists of recommendations by bank supervisors and central bankers from the 12 countries making up the Basel Committee on Banking Supervision. The recommendations relate primarily to international standards for measuring the adequacy of a bank’s capital. They are intended to promote greater consistency in the way banks and banking regulators approach risk management across national borders. The impact of those changes are being felt by banks and banking regulators around the world. The next few years will, therefore, provide an excellent opportunity to further cement and strengthen the banking regulatory framework in Oman.