Published in the June 2009 edition of the Business Today magazine in Oman.
Taimur Malik
In the present global economic environment, Oman remains an attractive market for foreign and local financial institutions. Recession is seen by many as the best time to consolidate and expand.
This article provides an overview of the main legal requirements for establishing a bank in Oman. Establishing a bank entails fulfilling numerous legal, regulatory and financial requirements and it is recommended that legal and financial advisers should be consulted from the very inception of the project.
A ‘Bank’ is defined in the Royal Decree 114/2000 (the “Banking Law”) as any entity licensed by the Central Bank of Oman (“CBO”) or authorized by the jurisdiction in which it is organized to carry on the banking business.
The Banking Law defines a ‘Licensed Bank’ as any domestic bank or foreign bank or any other financial institution licensed by the CBO to engage in banking business in the Sultanate.
Banking Business
Both definitions refer to the term ‘banking business’ and it is important to see what is covered by this term. The Banking Law provides a very detailed definition of what constitutes ‘banking business’ in Oman. According to the definition it includes, among other activities, the following: (a) the operation of receiving monies as demand or time or savings deposits; (b) the opening of current accounts and credits; (c) the unsecured loan of money or extension of credit; (d) the loan of money on personal, collateral or real property security; (e) operation of credit card business; (f) the issuance and negotiation of letters of guarantee and letters of credit; and (g) the payment and collection of checks, orders, payment vouchers and other negotiable instruments.
Banking business also includes the undertaking of investment and merchant banking and other financial activities such as corporate finance, project finance, investment brokerage and investment advisory services, investment management, the underwriting of securities and hire purchase financing.
According to the Banking Law, no entity can engage in banking business in the Sultanate as either a domestic or foreign bank, unless that entity has been granted a license by the CBO.
Exceptions
As an exception, financial institutions other than banks may engage in activities falling within the definition of banking business without a banking license, except receiving deposits, provided that those financial institutions are regulated pursuant to other laws of Oman by a recognized regulator. Similarly, persons who deal exclusively in the business of exchanging foreign and domestic currencies on a retail basis and persons engaged in the operation of retail business establishments and places of public accommodation who exchange foreign currencies only as a convenience to their customers shall not be deemed to be engaged in the banking business.
CBO Banking License
Therefore, the main requirement in order to be permitted to engage in any of the activities classified as ‘banking business’ in Oman, is the grant of a license by the CBO.
This requires the submission of an application to the CBO for a banking license in the form prescribed by regulations of the CBO. If the applicant is to be a domestic bank, a copy of the proposed articles of incorporation of the applicant in the form required by the law need to be submitted with the application.
If the applicant is a foreign bank, a copy of its constitutive contract or articles of incorporation and proof of its authorization to engage in the banking business in the jurisdiction in which it is organized or domiciled have to be provided to the CBO.
The application for a banking license also needs to be supported with a plan of operation in the form prescribed by the CBO. This plan should include information concerning the geographical and commercial communities to be served by the applicant and the specific kind of banking business in which the bank intends to engage.
Opening Additional Branches
Any licensed bank may, with the approval of the CBO, establish and operate branch offices within or outside the Sultanate. Any licensed bank seeking to establish a branch office within or outside the Sultanate is required to submit a request for authorization of each branch to the CBO with a plan of operations.
Capital Requirements
With respect to the capital requirements, licensed banks are required to maintain a paid-up capital of such amount as may be determined from time to time by the CBO. The Banking Law further requires banks to keep reserves for the protection of depositors. In addition to these requirements, a licensed bank is also required to make a capital deposit before commencing banking business.