Islamic financing and investment structures in Oman | Lexology

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Common structures

i Deposit products

The great majority of Islamic banks and Islamic windows in Oman are domestic. There are currently two fully fledged Islamic banks, Bank Nizwa and Alizz Islamic Bank. Additionally, at the time of writing, there were six Islamic banking windows of conventional banks in Oman: Meethaq Islamic Banking (Bank Muscat), Muzn (National Bank of Oman), Maisarah Islamic Banking (Bank Dhofar), Sohar Islamic (Sohar International), AI Yusr Islamic Banking (Oman Arab Bank) and Ahli Islamic Banking (Ahli Bank).

Deposit accounts offered by Islamic banks and Islamic banking windows to customers in Oman generally comprise the following.

Islamic current account

This is essentially a qardh hassan-structured product (i.e., an interest-free loan structure), whereby the customer provides the bank with financing for the bank’s shariah-compliant investment purposes. The principal financing amount is returned to the customer on demand without the addition of any profit or deduction of any losses.

Islamic savings account

This is an unrestricted mudarabah-based savings account (i.e., investment management-based) to which funds are transferred as capital by the customer, in its capacity as investor, to the bank as investment manager for the bank’s shariah-compliant investment purposes. Should the bank achieve profit, this will be divided between the bank and the customer according to the pre-agreed rates. If, however, losses are incurred, these will be borne by the customer alone unless it can prove the bank’s negligence, fraud or misconduct. There are many variants of this account (e.g., salary savings account, prize-draw savings account, term deposit account).

Wakala account

This is a wakala-structured account (i.e., an investment agency-structured account) whereby the customer, in its capacity as investor, transfers funds to the account maintained by the bank for the bank to invest on behalf of the customer in shariah-compliant investments. The bank performs its functions as investment agent for a predetermined fee. Should the profit achieved exceed the agreed profit rate, the bank becomes entitled to a portion of the profit as an incentive.

ii Consumer finance

The most popular form of shariah-compliant consumer financing in Oman is auto financing, commonly structured on the basis of murabahah. The customer requests that the bank acquire and sell the customer a specified car. The bank purchases the requested asset from a third-party supplier identified by the customer and resells it to the customer for a profit. Both the cost and profit margin (markup) are made known and agreed by all parties involved. The purchase price can be paid either on a deferred lump-sum basis or on an instalment basis. The bank typically appoints the customer as its agent for the purpose of dealing with the supplier and taking receipt of the car.

iii Home finance

Home financing is offered to customers in Oman through the ijarah muntahiya bittamleek structure. The bank purchases a property identified by the customer from a third-party seller, then leases it to the customer in exchange for payment by the customer of periodical rental instalments inclusive of profit component. The customer issues a binding undertaking to purchase back the leased asset from the bank at the end of the transaction. Upon final maturity, the bank exercises its right under the agreement to have the customer purchase the property.

In addition, home finance is also offered through the diminishing musharakah product, under which the customer and bank jointly acquire the asset on the basis that the customer will gradually buy out the bank’s share of the asset.

iv Insurance

Takaful is shariah-compliant insurance whereby each participant (i.e., insured) contributes a specific monetary sum into a collective pool system (i.e., a takaful fund) for the collection of contributions from all takaful participants to protect and guarantee the other participants against loss. Each takaful participant’s contribution is based on and determined according to the type of coverage sought (e.g., life, healthcare, property) and the participant’s personal circumstances. The basis of takaful is mutual guarantee, cooperation, indemnity and protection of all participants covered by the takaful scheme. Thus, the objective of takaful is to diversify and distribute the risk of loss or damage among the participants.

Takaful companies in Oman are required by law to have the legal form of a public joint-stock company. The Takaful Insurance Law remains silent on the ability of foreign takaful companies to set up branches within Oman. Takaful companies offer the same types of products offered by their conventional counterparts. These include: family takaful, health takaful, creditor takaful, motor takaful, property all-risk takaful, fidelity guarantee, contractor’s plant and equipment takaful, contractor’s all-risk takaful, personal accident takaful, workmen’s compensation takaful, marine cargo takaful, travel takaful, and fire and perils takaful, among others.

v Investment funds

Investment funds can either be incorporated in the form of a joint-stock company or be an unincorporated entity with legal personality. In the latter case, they are required to be formed by a commercial bank or an investment company whose capital should be no lower than 5 million rial. An investment fund can be either open-ended (i.e., its capital is subject to changes and variation because of issuance and redemption of new units) or closed-ended (i.e., the fund issues a fixed number of units, redeemable only upon expiry of the fund’s term, but the fund retains the right to issue new units). The fully paid-up capital of the investment fund should be no less than 2 million rial and the share of its sponsors should not be less than 5 per cent of its capital. Units held by the sponsors are subject to a lock-in period of three years.

The majority of investment funds in Oman are established as open-ended unincorporated funds. Shariah-compliant investment funds remain limited in number compared to conventional investment funds. Examples of shariah-compliant investment funds in Oman include Al Kawthar Fund (established by Tanmia, which is a state-owned investment company) and Al Hilal Mena Fund (established by Ahli Bank).

vi Real estate investments

Real estate investment is conducted either through real estate investment companies, which typically take the form of a joint-stock company or REIT. The CCL constitutes the main legislation governing joint-stock companies in Oman. The CCL is complemented by the Capital Market Law and the CMA rules and regulations and code of corporate governance with respect to public joint-stock companies. The minimum capital requirement for a public joint-stock company is 2 million rial and 500,000 rial for a closed joint-stock company. The CCL provides that shariah-compliant commercial companies (including those carrying out real estate investment activities) must comply with the principles of shariah. The CCL further requires the CMA (the regulator of public joint-stock companies) and the MOCI (the regulator of closed joint-stock companies and other types of commercial companies) to issue a regulation on the shariah auditing mechanisms to be implemented within such companies.

Real estate investment companies are the dominant participants in the field of real estate investment. The other type of real estate investment vehicle recently recognised in Oman is the REIT. REITs, similarly to conventional investment funds, can be established either in the form of a joint-stock company, or as an unincorporated entity enjoying legal personality. All REITs are required to be closed-ended. The issued capital requirement is much greater than that for other investment funds, as REITs are required to have capital of no less than 10 million rial (or its equivalent in another currency). If the REIT is intended to be shariah-compliant, the investment manager is required to form a shariah committee or to engage the services of a third-party shariah committee. The qualifications and character required of the members of the committee are set out in the REIT Regulation. The REIT is also required to be managed by professional managers who are licensed by the CMA and have their main duties set out in the REIT Regulation.

vii Sukuk-based financing

Ijara muntahiya bittamleek is the most prevalent form of sukuk in Oman and has been employed repeatedly by the government in the context of sovereign debt capital market issuances. Ijara muntahiya bittamleek sukuk certificates are issued by the issuer and each certificate represents a portion of ownership in the underlying ijara assets as well as a right to the periodic distribution amount and dissolution amount generated by these assets. The subscription monies are collected by the issuer, in its capacity as trustee, and are used to purchase underlying ijara assets from the originator. The ijara assets are added to the trust portfolio and are subsequently leased back to the originator, who issues a promise to purchase back (for the benefit of the trustee and the sukuk holders) the ijara assets upon final maturity or upon the occurrence of an event of default. The originator, in its capacity as lessee, makes periodic rental payments, which are distributed to the sukuk holders by the trustee as profit payments. Upon final maturity or the occurrence of an event of default, the trustee exercises its rights under the promise to purchase, and the originator purchases back the ijara assets and pays the agreed purchase price.

In Oman, the ijara muntahiya bittamleek sukuk usually adopts an asset-based structure (i.e., the originator would issue a binding promise to purchase the leased asset, which the sukuk holders can use as recourse against the originator in the event that it breaches its obligations), rather than an asset-backed structure (i.e., the sukuk holders would only have recourse against the leased asset).


The main legislation relating to taxation in Oman is RD No. 28/2009 (the Income Tax Law), which governs both Islamic and conventional businesses. The Secretariat General for Taxation (SGT) at the Ministry of Finance is the body responsible for enforcement of the Income Tax Law and for ensuring compliance.

There is no special or separate law governing the taxation of Islamic financial institutions, but the Income Tax Law contains a chapter specific to the income generated from Islamic financial transactions. The aforementioned chapter was recently introduced by RD No. 9/2017, which amended the Income Tax Law for the purpose of, inter alia, clarifying the tax position of Islamic banks as part of an overall tax reform. In this regard, the Income Tax Law currently provides for the taxability of any amounts generated from an Islamic finance transaction obtained by a taxpayer in lieu of interest, which effectively makes virtually all Islamic financial transactions profits taxable on a par with their conventional counterparts.

The Income Tax Law further provides that if the purpose of the transaction is to purely achieve a shariah-compliant objective without the transaction including any financial aspect, such as the leasing of real estate or a movable asset, or establishing usufruct thereon, the transaction will not be taxable. Hence, income generated from such a transaction (excluding any interest-like payments) will not be deemed taxable in accordance with Article 76 bis (3) of the Income Tax Law. The chapter relating to taxation of income generated from Islamic finance transactions also provides special rules concerning deduction of donation amounts paid by the borrower, the impact of credit losses on the calculation of the taxable income, and the submission by the taxpayer of evidence regarding specific matters when submitting its fiscal declaration or during the course of SGT decision-making regarding any petition filed by the taxpayer.

In addition to the Income Tax Law, other laws contain special provisions granting Islamic finance businesses certain privileges and benefits with regard to payment of governmental fees. In this respect, the Banking Law exempts banks licensed to carry out Islamic banking from payment of the governmental fees imposed on transactions involving ownership and leasing of real estate and movable assets conducted by such banks in the context of Islamic finance transactions. Further, the Capital Market Law grants special purpose vehicles formed by originators for the purpose of issuing sukuk exemption from payment of taxes and fees imposed by all Oman government bodies; hence, they are exempt from payment of, inter alia, income and withholding taxes.

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