Islamic banking is poised to become a key fixture of Oman’s financial sector, following the recent announcement that His Majesty Sultan Qaboos bin Said has approved the formation of Oman’s first Islamic bank. Last month’s Client Alert provided an introduction to the religious, philosophical and economic principles that underpin Islamic finance. This month, we present an overview of some of the classic Islamic banking structures that are commonly used in jurisdictions where Islamic finance is already well established.
Mudaraba (capital provision)
This is an arrangement between an Islamic bank and an entrepreneur in which the bank contributes the capital to fund an entrepreneur’s company, in exchange for a share of the company’s profits. The two most notable features of a mudaraba are that (i) the bank contributes all of the company’s capital, and the entrepreneur contributes his ideas, technical expertise and management skills but no capital, and (ii) the bank and the entrepreneur share the profits of the company according to a pre-agreed scale, while the company’s losses would be absorbed entirely by the bank. A mudaraba structure is well suited to up-and-coming entrepreneurs who possess exceptional business ideas or talents, but lack the financial resources to get their company off the ground.
Musharaka (joint venture)
Under a musharaka, both the Islamic bank and the entrepreneur contribute capital to the entrepreneur’s company. The company’s profits are shared according to a formula that the parties pre-agree, and losses are apportioned pro rata to the parties’ respective capital contributions. Although management of the company may be however the parties agree, it is common for both the entrepreneur and representatives of the bank to be actively involved. A musharaka structure is well suited for an Islamic bank’s proprietary investment activities.
Ijara (lease)
An ijara is a lease structure in which the Islamic bank will buy a specified asset, and lease it to the banking customer at a specified rental price for a specified length of time. It is important for the terms of the lease to be Sharia (Islamic religious law) compliant – for example, not to charge interest or penalties that would be considered usurious and therefore haram (prohibited). Frequently, an ijara will include the option for the customer to purchase the asset at a specified price at the end of the lease period.
Sukuk (Islamic bonds)
Sukuk, or Islamic bonds, are securities representing an ownership interest in an asset or pool of assets. The assets underlying the sukuk will themselves be structured as Sharia-compliant vehicles – such as mudaraba or musharaka. The payments that sukuk bondholders receive are not designated as interest payments, but rather as returns derived from the profits of the business underlying the bonds.
Thursday, July 14, 2011
Islamic Banking in Oman- Part II
Tuesday, January 4, 2011
Legal Developments in Oman - January 3, 2011
Iran Sanctions and Iran-Oman Trade – Part I Oman is a close neighbor and a significant trading partner of the Islamic Republic of Iran, which is located just across the Strait of Hormuz from the Sultanate. Iran accounts for approximately 4% of Oman’s exports. As reported in the Omani press, Oman and Iran recently held the 13th round of the Omani-Iranian Joint Committee to discuss ways to strengthen their trade relationship in areas such as investment, transportation, banking, tourism, mining, oil and gas, petrochemicals, shipping and telecommunications. However, numerous aspects of Omani-Iranian trade are likely to come under stress as a result of the sanctions that have been imposed against Iran in recent months by the international community. Nuclear Program Prompts Sanctions In response to Iran’s nuclear development program, which many suspect of pursuing nuclear weapons, the United Nations (“U.N.”) Security Council, the United States of America, and the European Union have all imposed sanctions relating to trade with Iran. All of these sanctions have the potential to affect Omani companies that do business, directly or indirectly, with Iran. This month we discuss the U.N. Security Council resolution against Iran, Resolution 1929. In next month’s Client Alert, Part II of this article will discuss the sanctions that the United States and the European Union have imposed against Iran. U.N. Security Council Resolution 1929 In recent years, the United States, many European nations, and other countries have grown increasingly alarmed at the prospect of Iran developing nuclear weapons, and have urged the larger international community to take measures to rein in Iran’s nuclear program. On June 9, 2010, the U.N. Security Council passed Resolution 1929, holding Iran in violation of its non-proliferation obligations under international law and instituting a fourth round of sanctions. Resolution 1929 was passed by the Security Council with twelve votes in favor, one abstaining, and two against. Under Chapter VII of the U.N. Charter, Security Council resolutions finding a threat to the peace, such as Resolution 1929, are binding upon member states and require implementation of their provisions via national law. Accordingly, all U.N. member states, including Oman, are obligated to implement and enforce Resolution 1929. Resolution 1929 institutes a number of measures targeting Iranian military and nuclear capabilities, as well as entities that provide financial or transportation services related to Iran’s military or nuclear activities. Among other measures, the resolution seeks to ban the sale of weapons and military equipment to Iran. Furthermore, all U.N. member states are prohibited from allowing Iranian investment in uranium mines, enrichment facilities and other nuclear technology. Finally, Resolution 1929 calls on U.N. member states to ban travel by, and freeze the assets of, specifically named Iranian officials and entities tied to the Iranian government, in particular those connected to the Islamic Revolutionary Guard Corps.
Friday, September 11, 2009
Labor Law Alert: Omanisation
Earlier Omanisation policy aimed at reducing the reliance on foreign workers prescribes sector-wise Omanisation targets for the private-sector employers to achieve with a target of 90% for the revenue-rich sectors of oil and gas, banking and travel and tourism and 100% for marketing. The policy makes it mandatory for employers to employ Omani nationals for certain administrative posts such as receptionist and security officer. In addition, certain jobs have also been Omanised area-wise, limiting expatriate employment to certain regions.
The employers in the private sector are required to file their Omanisation plans annually with the Ministry of Manpower.
The implementation of the policy is two-pronged: (i) incentivising companies exceeding the prescribed target; and (ii) restricting foreign labour clearances for employers failing to meet the target. Private- sector companies exceeding their Omanisation targets and meeting other labour-related criteria are entitled to a ‘green card’ which guarantees preferential treatment in some Ministries and other government agencies.
Thursday, July 30, 2009
Loan Agreement Market Disruption Clauses
Doing Business in Oman
We understand that the market disruption clause has recently been invoked by more than one Omani bank in relation to loans to at least one Omani company following the turmoil in the banking sector at the end of last year. Previously this clause had seldom been relied upon by lenders and therefore had not been highly negotiated by borrowers. Lenders have been reluctant to rely on this clause for reputational and competitive reasons - they are nervous about revealing they have to pay more in the interbank market than the LIBOR (London Interbank Offer Rate) and their actual funding costs. The market disruption clause in the Loan Market Association (“LMA”) style loan agreement can be triggered if the cost of obtaining matching funds in the market to fund a loan for lenders with the required percentage of participation (typically varies between 25% and 50%) is in excess of LIBOR. If this clause is triggered, then the interest rate on each lender’s share of the loan for that interest period will be calculated using the actual cost to that lender of funding its share of the loan from whatever source it may reasonably select. This clause will need to be re-triggered for each interest period. When this clause is triggered, the borrower may request that the agent enter into negotiations for up to 30 days with a view to agreeing a substitute basis for determining the interest rate. In reality, this may not assist the borrower, as any substitute basis for determining the interest rate will require all lenders’ consent. Issues of concern for the borrower where this clause has been triggered include:- An increase in the borrower’s funding costs - the actual cost of funds will be payable to all of the lenders;
- The potential breach of certain financial covenants – such as the interest cover ratio – in the loan agreement; and
- If there is any interest rate hedging, this hedging is no longer likely to match the interest rate payable - there are typically no market disruption provisions relating to LIBOR in such hedging arrangements.
- Requesting that the additional interest costs should be ignored in calculating the financial covenants;
- Prepaying the lenders with the highest funding rates - this is likely to require all lenders’ consent and may encourage lenders to quote higher funding rates;
- Selecting shorter interest periods – there tends to be greater liquidity available in the market for shorter interest periods and it would also shorten the period during which this clause would apply; and
- Agreeing a higher interest rate payable under the loan agreement - this is only likely to require consent of a majority of the lenders but all lenders’ consent would be required to effectively bind the lenders from subsequently triggering this clause.
Tuesday, April 21, 2009
FAQ: What is a credit bureau?
Many recent news articles have reported on the opening of the first private credit bureau in Oman. These reports raise the questions of what exactly credit bureaus do and what does the opening mean for Oman?
Credit bureaus collect information about consumers and companies from various sources and sell it to other entities, such as financial institutions, that use it to assess risk and credit worthiness. For example, a credit bureau may collect information about a consumer’s payment history, total liabilities, and criminal background, compile this information into a report, and sell it to a bank. The bank will use the report to determine the level of risk involved with giving a loan or other credit to this consumer. Based on the risk level, the bank will determine what terms to offer the consumer on the loan.
Credit bureaus in Oman will enable banks to make more informed decisions in lending to consumers. Consumers with good credit should be able to obtain better loan terms and interest rates because the bank can be confident the risk is low and the loan will be repaid. Consumers with poor credit histories may receive less favorable terms because the risk to the bank that the consumer will default on the loan is higher.
Currently in Oman, information about a consumer’s credit history is not readily available and it is difficult for banks to gauge risk levels and customize the terms of the loan. Thus consumers with good credit share the risk of consumers with bad credit because banks simply do not have the information to make informed decisions about individuals and tailor loans accordingly.
Some consumers have raised concerns about the security of their information and potential confidentiality breaches. Credit bureaus in other parts of the world typically employ very high security standards with respect to the information they obtain in order to avoid the serious problems associated with such breaches, though breaches have occurred.
In addition, consumers have raised issues about how it is possible for a credit bureau to obtain the information for the credit report in the first place. Typically banks or other financial institutions provide information about consumer bank accounts, loans, liabilities, income, and payment history to the credit bureau. Publicly available court records may also be a source of information. The terms of individual agreements between consumers and banks or financial institutions determine what banks and financial institutions are permitted to do with the consumers’ information.
While these concerns are commonly raised in connection with credit bureaus, it is expected that the introduction of credit reporting to Oman will provide distinct advantages to both consumers and financial instructions.
