The Sultanate of Oman has issued Royal Decree No. 2/2025 Issuing the Banking Law (the “Banking Law”), which fully repeals and replaces the previous Banking Law (Royal Decree No. 114/2000) (the “Old Banking Law”). The Banking Law introduces a comprehensive and modernised legal framework for Islamic banking; most notably requiring conventional banks to convert their Islamic banking windows into standalone Islamic banks operating as subsidiaries rather than maintaining them as internal divisions.
This article provides an overview of the key provisions governing Islamic banks under the Banking Law, with particular focus on the transformation of Islamic windows into subsidiaries.
Background
Islamic banking was formally introduced in Oman in 2012 through Royal Decree No. 69/2012, which amended the Old Banking Law by adding a new Title Six - Islamic Banking. Under that regime, Islamic banking activities could be undertaken through full-fledged Islamic banks or through Islamic banking windows of domestic conventional banks. The Central Bank of Oman (“CBO”) subsequently issued the Islamic Banking Regulatory Framework on 18 December 2012, establishing the licensing, governance, and supervisory requirements for Islamic banking in Oman.
Under the Banking Law, the governance, licensing, permissible activities, and Sharia compliance framework for Islamic banks are now primarily codified under Part Five of the Banking Law, which supersedes the earlier framework.
Scope and Legal Definition
Under Article 1(6) of the Banking Law, Islamic banking works are defined as:
“Banking works that are consistent with the provisions of Islamic Sharia as detailed by the regulations issued by the central bank.”
Article 125 provides that the CBO holds the competence to “licence the practice of Islamic banking works through Islamic banks or windows affiliated with conventional banks”. Under Article 126, the general provisions and regulations of the Banking Law apply to Islamic banks “in a manner that does not contradict with the nature of Islamic banking works”.
Conversion of Islamic Windows into Subsidiaries
One of the most significant changes introduced by the Banking Law is the statutory mechanism for the transformation of Islamic banking windows.
Under the Old Banking Law, there was no express statutory provision addressing the conversion of Islamic windows into independent Islamic banks. Conventional banks were permitted to operate Islamic banking windows indefinitely as internal divisions.
Article 129 of the Banking Law now explicitly provides that the CBO may “allow conventional banks to convert Islamic windows into local Islamic banks through subsidiaries in accordance with the circumstances, conditions, and requirements determined by the board”.
This represents a clear shift in regulatory policy: the direction of travel is away from the legacy “window” model and toward a market composed of fully fledged, independently constituted Islamic banks.
To implement this statutory mandate, the CBO issued Circular IB 13, Islamic Banking Windows Conversion and Transformation Framework (dated 7 July 2026), which establishes a phased regulatory roadmap for conventional banks to transform their Islamic banking windows into standalone, fully fledged Islamic banks by 31 December 2030 with the requirement for a board-approved window transformation roadmap submitted to CBO by 31 December 2026.
Permitted Islamic Banking Transactions
Article 130 of the Banking Law sets out the core transactions that banks licensed to practice Islamic banking works may carry out, including:
- accepting deposits and managing restricted and unrestricted investment accounts;
- financing and investing through Sharia-compliant modes, including mudaraba, musharaka, murabaha, ijara, salam, istisna, qurood al-hasana, and other forms consistent with Islamic Sharia;
- issuing and investing in sukuk;
- dealing with real and movable property by sale, purchase, investment, lease, and rental; and
- establishing and acquiring Special Purpose Vehicles (SPVs).
The Old Banking Law did not explicitly list the establishment or acquisition of SPVs among the statutory powers of Islamic banks - this express codification is new.
Fee Exemptions for Property Transactions
The Banking Law introduces a dual exemption regime:
- Bank Exemption (Article 131): Licensed Islamic banks are “exempt from the fees imposed on transactions relating to the acquisition, lease, or rental of real and movable property that they conduct for the purpose of practicing their works in the application of the provisions of this law”; and
- Client Exemption (Article 132): The client of an Islamic bank is “exempt from the fees imposed on real and movable property upon restoration of ownership to the client who has previously transferred its ownership to the bank in accordance with the forms of transactions and financing consistent with the provisions of Islamic Sharia”.
Under the Old Banking Law, only banks were exempted from fees on property transactions conducted in the course of Islamic banking. The extension of this exemption to clients under Article 132 is a significant addition that removes a barrier to Islamic financing structures involving the transfer and re-transfer of property.
Two-Tier Sharia Governance Structure
The Banking Law institutionalises a dual-tier Sharia supervisory structure, retaining the core framework first introduced in 2012:
- Bank-Level Sharia Supervisory Committee (Article 133): A “Sharia supervisory committee must be established in each bank licensed to practice Islamic banking works”. Its members are appointed and their remuneration determined by a decision of the bank’s general assembly.
- Central Bank High Sharia Supervisory Authority (Article 134): The Board of Directors of the CBO must establish a “high Sharia supervisory authority in the central bank” specifying its composition, competences, working systems, and membership conditions.
Central Bank Sharia-Compliant Monetary and Liquidity Tools
Article 128 of the Banking Law explicitly establishes the CBO’s authority over Islamic monetary instruments. The CBO Board is mandated to establish rules for “liquidity management, the powers of deposit, investment, and credit, and issuing and trading in sukuk and securities consistent with the provisions of Islamic Sharia, within the framework of Islamic banking works or at the request of the government”.
Sharia-Compliant Non-Bank Financial Activities
Under Article 136 of the Banking Law, non-bank financial activities regulated by the CBO, including leasing, money exchange, remittance, fintech, and loan-based crowdfunding, are expressly permitted to operate in accordance with the provisions of Islamic Sharia under controls established by the CBO Board. The Old Banking Law did not contain a dedicated statutory framework enabling Sharia-compliant non-bank activities.
Capital Requirements
Article 75 of the Banking Law raised the minimum baseline paid-up capital for local banks from OMR 20,000,000 (as previously set under Article 60 of the Old Banking Law) to OMR 100,000,000 (one hundred million Rial Omani), or any other amount specified by the CBO Board. This capital requirement applies to an Islamic bank which is a subsidiary of a conventional bank unless the CBO Board has specified a different amount.
Conclusion
The Banking Law represents a transformative development for Islamic finance in Oman. By codifying the statutory mechanism for converting Islamic banking windows into standalone subsidiaries, the legislature has signalled a clear intent to move away from the internal window model toward a market of fully independent Islamic banks. This shift, supported by CBO Circular IB 13, will require conventional banks currently operating Islamic windows to restructure their Islamic banking operations into separately constituted and capitalised subsidiaries.
Stakeholders are advised to review the provisions of the Banking Law and CBO Circular IB 13 carefully, and to engage early with the regulatory framework to ensure a smooth transition.
