Reuters/Dubai

Oman’s central bank took a strict approach to regulating Islamic banking in rules for the sector which it released yesterday, setting higher standards for the industry than many other countries.

The sultanate announced last year that it would introduce Islamic finance, becoming the last country in the six-nation Gulf Cooperation Council to do so. Business activity is expected to start early next year.

The central bank’s rules cover areas including banks’ liquidity management, the administration of boards of Shariah scholars who oversee Islamic financial institutions, and the operation of conventional banks’ Islamic windows - and in many cases, the rules appear considerably stricter and more detailed than regulations in other countries.

A major provision is tight restriction of the use of tawarruq as a money market instrument for banks. This is expected to limit banks’ flexibility in managing their funds overnight, and could thus raise their costs.

“Commodity murabaha or tawarruq, by whatever name called, is not allowed for the licensees in the Sultanate as a general rule,” the document states.

In tawarruq, one party buys an asset from a vendor with payment deferred, and sells it to a third party for cash. Organised tawarruq, where transactions occur in exchange for a financial obligation, has been criticised by some Islamic scholars because of its weak link to real economic activity.

In April 2009 the Jeddah-based International Islamic Fiqh Academy, an international body of scholars, issued a resolution criticising organised tawarruq as a “deception”, hurting its acceptability in the industry.

Omani banks had lobbied the central bank to permit tawarruq, at least temporarily while the new industry found its feet. But the rules do not appear to permit this, saying tawarruq can only be used in emergency situations on a one-off basis for a period of no more than three months.

Interbank transactions which are allowed include mudaraba, musharaka and wakala placements, all common Islamic finance structures.

The rules state that financial accounting standards from the Accounting and Auditing Organisation for Islamic Financial Institutions, a Bahrain-based industry body, will be followed.