Title Four of the Banking Law and together with the Regulations and Circulars framed under powers vested with the Board of Governors of the Central Bank under Articles 14 and 15 of the Banking Law and other provisions cover the regulatory framework.Regulatory requirements are reviewed and updated taking into consideration, among others, Article 14(u) of the Banking Law stating as under.
“To consider the banking and financial recommendations made by international agencies and supranational organizations, and adopt those which are consistent with public interest without conflicting with the provisions of applicable laws of the Sultanate”.
Accordingly, CBO has been following the international developments in regulation and supervision closely and adopts the best international practices at the earliest opportunity. Basel III norms, too, are being implemented progressively – as set.
Indicative regulatory principles/approaches/requirements are as under:
• Central Bank sets broad prudential limitations and emphasizes on internationally accepted norms and best practices – rather than micro level prescriptions.
• The stress is on prudence, moderation, protection of consumer and risk management with deregulation and delegation.
• Institution – specific requirements for banks include the following:
Shareholdings in a licensed bank by an individual, incorporated body and joint stock/holding company (together with related parties) are restricted to 15%, 25% and 35% of the capital of the bank respectively. No person, having 10% or more capital of capital of one bank can have more than 15% of capital of another bank. Any change of ownership of more than 10% (Article 57b of the Banking Law), any change of more than 25% ownership in a shareholder having more than 10% in a licensed bank (Article 57b) and merger/consolidation (Article 57c) require prior approval.
Minimum paid up capital requirement for local banks is RO 100 million and assigned capital requirement for foreign banks in Oman is RO 20 million.
Minimum capital adequacy requirement is 12% with minimum of 7% in common equity and 9% in Tier 1 Capital. Capital Conservation Buffer of 2.5% has been set, in addition. Counter-cyclical Buffer need is reviewed from time to time.
“Standardized approach” for credit and market risks and “basic indicator approach” for operational risk have been suggested, to start with.
Capital deposit requirement (to be maintained with Central Bank) is one-tenth of one percent of the global assets of a licensed bank (minimum of RO 50,000/- and maximum of RO 500,000/-).Lending Ratio ceiling (net credit to deposit-base, consisting of customer deposits, own funds and net of money due to and from banks abroad) is 87.5%.
Reserve Requirement is 5% of deposit liabilities. Currently, investments in Oman Government Treasury Bills, Government Development Bonds and Sukuk are eligible to be treated as reserves up to 2% (5% requirement).Single obligator exposure limitation is 15% of the bank’s net worth.Senior Management exposure limitations are 10% singly and 35% in aggregate of the bank’s net worth.Aggregate exposure to all connected and all related persons cannot exceed 600% of net worth.
Placements/deposits with Head Office, principal shareholders, own branches and affiliates are restricted to 60% of net worth (with sub limits).Lending to non-residents in Omani Rials prohibited.Lending to (non-bank) non-residents, individually is capped at 2.5% of net worth of the bank, and, in aggregate, to 20% of the bank’s net worth.
Aggregate Credit to non-resident borrowers and related parties restricted to 50% of net worth of the bank.Aggregate placements and credit exposures abroad to all related and non-related parties restricted to 50% of net worth.
Risk classification and provisioning requirements include 25% for substandard, 50% for doubtful and 100% for loss assets respectively – along with general provision of 1% on performing non-personal loans, 2% on performing personal loans and 15% on non-classified restructured loans.
Liquidity mismatches are restricted to 15% of cumulative liabilities in both RO and US$ for one year.
Liquidity Coverage Ratio Requirement is to be achieved fully by 2019 and standard for Net Stable Fund Ratio requirement will be effective from 1st January 2018.Foreign Exchange exposure is limited to 40% of Tier 1 capital.
Real estate exposure (by loan or security value, whichever lower) shall not exceed 60% of the bank’s net worth or all time and savings deposits (whichever is greater).Borrowings from banks abroad are restricted to 300% of net worth (with sub-limits for time-buckets).
Investment powers in shares are limited to 20% of net worth and in bonds, notes and other obligations to 10% (overseas investments are limited to 25% of the ceiling limitation).Underwriting obligations are to be restricted to 20% of the bank’s net worth.
Housing Loans of a bank are restricted to 15% of its total credit and other personal loans to 35% of total credit. Maximum tenors are 10 years and 25 years for non-housing personal loans and non-housing loans respectively. Debt Service Ratio cannot exceed 50% and 60%.Interest rate remains de-regulated but for personal loans (including housing loans).
Licensed banks need to adopt international standards as regards customer due diligence, internal audit, risk management, compliance, corporate governance etc though there are specific requirements too.IFRS 9 is to be adopted effective 1st January 2018.
Banks need to be in compliance with other laws of the Sultanate, as applicable. For instance, in addition to norms set by CBO, Code of Governance, set by Capital Market Authority, shall apply to licensed banks – which are joint stock companies.
Islamic Banking entities too will be governed by distant Islamic Banking Regulatory Framework. IBRF emphasizes on sound Sharia’ Supervisory Framework and Practices in reality and perception. There should be no co-mingling with conventional banks. While IBEs shall be guided and supervised by their respective Sharia’ Supervisory Boards on Sharia’ compliance, High Sharia’ Supervisory Authority set up by the Central Bank, provides guidance and opinion to the Central Bank on harmonization of market practices and matters referred to it by the Central Bank.
II. Finance and Leasing Companies
Finance and Leasing Companies (FLCs) are licensed and, regulated, broadly applying the approach of the Banking Law. Master Circular FM 19 dated 11th February 2006 covers the requirements.FLCs need to have a minimum capital of RO 25 million and limit outside liabilities to five times their net worth.There were 6 FLCs operating with 43 branches as of 31st December 2016.
III. Money Exchange Establishments
Rules, as regards Money Exchange Establishments, are set in Regulation BM/REG/43/11/97 and ME series Circulars. There are two categories, one involved in money changing only and the other conducting both money changing activities and issuing of drafts (remittances). Establishments, authorized to do both money changing and issue of drafts, are subjected to more rigours –than money changers doing money changing only. The former are required to have minimum capital of RO 500,000/- (as against RO 15,000 for money changers) and are subjected to submission of periodical returns and annual examination. As of December 2016, there were 36 money exchangers and 16 exchange establishments with 317 branches.
IV. Financial Stability
While robust regulations and supervision were in place to address surveillance requirements of individual institutions and at macro level, CBO went ahead to set up a dedicated Financial Stability Unit to have focused and specialized attention on financial stability. Close and regular reviews of all relevant factors relating to continued stability, scope for volatility, systemic risks etc are being done with wide-ranging tools including analysis of current and prospective market developments (domestic, regional and global), vulnerability assessment, sensitivity analysis and stress testing. Fine tuning takes place on on-going basis through such efforts like identification of Domestic Systemically Important Bank and attendant prescriptions like additional capital requirement and close monitoring and interactions, Recovery and Resolution Planning, broad based Dialogues and interactions, Central Financial Stability Committee at national level etc.
V. Some Important Adds-on
Central Bank pays attention to important agenda, beyond what some may perceive to be regulation and supervision but quite relevant to them and larger objectives. They include financial inclusion, consumer protection, and optimum utilization of human and other resources. Accordingly, banks have been encouraged to reach far and wide, enhance SME finance and other assistance, and ensure fairness, reasonableness and disclosure in customer relationships and transactions, raise employment of Omanis etc.
VI. Supervision and Review
CBO has set up robust off-site surveillance regime with regular on-site examination reviews – a risk based approach.The regulatory and supervisory regime of Central Bank of Oman was subjected to Financial Sector Assessment Program (FSAP) conducted IMF/World Bank. The FSAP Mission observed that the regulatory regime largely complies with the assessed international standards. The Mission identified certain areas where further progress could be achieved. Central Bank of Oman seized the opportunity to examine all such proposals in a systematic manner by appointing a high level committee to identify the action points and to follow up with the implementation of the same. In the past few years, significant progress has been made in this regard and the regulatory regime has been upgraded further substantially. Explicit authority was bestowed upon Central Bank of Oman by suitable amendment to the Banking Law to adopt best international practices that could benefit the country in financial stability and economic progress.
VII. Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT)
Oman endeavours to be in compliance with AML/CFT requirements norms in conformity with international standards and standards, including those set by FATF. Law, regulation and instructions are being updated in pursuance thereof.Sultanate of Oman is committed to international initiatives in combating money laundering and financing of terrorism. Besides being early Party to UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, 1988 and UN Convention against Transnational Organization Crime, 2000 and member in FATF through GCC forum, it is updating itself in legal, institutional and procedural requirements over the period.Sultanate is a founding member of Middle East and North Africa Financial Action Task Force (MENA FATF).
While customer due diligence requirements had been a pre-requisite with banks in Oman from the beginning, Circular BM 610 dated 5th June 1991and BM 880 dated 29th December 1999 stressed on the enhancement of the role of the financial system in combating money laundering – referring specifically to FATF’s Forty recommendations. Among others, they required customer identification and record keeping and special attention to large, unusual and suspect transactions, development of policies, programs, training and audit and compliance functions.
There has been constant improvement in coverage and intensity by adopting recommendations for CFT (BM 923 dated 25th December 2001), setting up additional requirements like regular reporting of suspicious transactions, follow up, review, information-sharing etc.
There is no Informal Funds Transfer System in Oman.There are bilateral and multilateral treaties for cooperation and interactions. Oman was subjected to FATF and MENA FATF Mutual Evaluation, resulting in identification scope for improvement. It is worked upon diligently.
Follow-up actions on relevant UN Resolutions (Blocking of accounts and the like) are made.There is a separate AML/CFT Unit, functioning in Banking Development Department of the Central Bank, for focused attention and interactions on the subject.
Licensed institutions are monitored/supervised through periodical reports and also on-site examinations. While annual examinations cover the licensees, special appraisal/investigation visits are undertaken too.
Law on Combating Money Laundering and Terrorism Financing
Anti-Money Laundering Law (Royal Decree 30 of 2016) mandates extensive requirements and enable wide-ranging actions with National Committee for Combating Money Laundering and Terrorism Financing, constituted with high-level representatives from concerned Ministries, Regulators and Law Enforcement Authorities, spear-heading AML/CFT regime in the Sultanate.
The Law is comprehensive – setting obligations for applicable financial and non-financial entities, roles and responsibilities of supervisory authorities, coordination within and international cooperation etc.