Dubai: There is likely to be restriction on the money market instruments which can suffocate the banks’ ability to manage funds in the market as the Sultanate of Oman is planning to introduce Islamic finance in the country.
Oman is likely to release Islamic banking rules by the year-end which would make the sultanate the last country in the six-nation Gulf Cooperation Council (GCC) to accommodate shariah-compliant banks.
But the draft rules, seen by bankers before their publication, exclude an instrument which is widely used in some other countries: commodity murabaha or tawarruq, several banking sources in Oman informed.
“The central bank was careful to ensure Islamic finance is of high standards,” said Mohammad Haris, Head of Islamic banking at Bank Sohar.
“Certain areas, we believe, are too stringent such as liquidity management,” he added without elaborating.
Omani bankers argue that in the initial stage, Oman’s Islamic money market will be too shallow and undeveloped for them to access it conveniently with tools other than tawarruq.
So banks have been lobbying regulators, asking that tawarruq be made temporarily permissible until the market can develop other solutions, bankers said.
One Omani banker said that such a provision could be similar to one given to Pakistani banks in that country’s initial stage of building up Islamic banking.
Oman’s central bank said that the Islamic banking law is still being drafted and it will not comment on tawarruq, adding that an announcement will be made by the end of this year.
In tawarruq, one party buys an asset from a vendor with payment deferred, and sells it to a third party for cash. The arrangement allows banks to manage their overnight funds.
But organized tawarruq, where transactions occur in exchange for a financial obligation, has been criticized by some Islamic scholars because of its weak link to real economic activity; Islamic finance bans pure monetary speculation.
In April 2009 the Jeddah-based International Islamic Fiqh Academy, an international body of scholars, issued a resolution criticizing organized tawarruq as a “deception.”
Tawarruq, of the organized type and other types, is widely used in most countries which practice Islamic finance. There are no reliable measures of transaction volumes, but it forms the basis for many Islamic credit card transactions in the Gulf, while Malaysia’s stock exchange has a trading platform based on commodity murabaha.
At least 350 million rials ($909 million) will enter Oman’s Islamic money market when the country’s two new Islamic banks and the Islamic windows of conventional banks start operating, Haris estimated.
The figure could climb as high as 550 million rials as other firms enter the market, said Shaher Abbas, Oman-based Director at Islamic Finance Advisory & Assurance Services (IFAAS).
Haris said that if banks lack ways to manage the funds in the market, “this money will be parked until it is deployed. Banks would be forced to place funds with the central bank at zero – this will put huge pressure on asset yields.”
In the absence of tawarruq, some banks aim to use wakala (agency) agreements under which they would entrust their money to other institutions to manage. But the small number of Islamic counterparties would limit this option’s appeal, bankers said.