Muscat - Oman's monetary and banking system remained largely insulated from the global economic turmoil witnessed during the months of September and October 2008, the Central Bank of Oman (CBO)Central Bank of Oman (CBO) said yesterday.

"The prevailing well functioning surveillance framework in conjunction with the sound regulatory structure of the CBOCBO and the appropriate banking practices have limited domestic commercial bank's exposure to distressed assets and prevented them from excessive risk taking in complex financial derivatives," the CBOCBO said.

Given the tightening of credit conditions in the international markets and with an effort to enhance confidence in the domestic financial markets, the CBOCBO initiated a US dollar reverse swap facility alongside a scheme of direct US dollar lending in October 2008 to ensure adequate access to US dollar liquidity to local banks with an intention of providing them the comfort of maintaining project financing operations. The CBOCBO also effectively reduced the cash reserve ratio and deferred the tightening of the lending ratio norm from 85 per cent to 82.5 per cent so that banks could continue to lend the meet genuine credit demand in the country.

"The performance of the banking sector up to October 2008 reflected the needs and ramifications of robust economic growth, driven primarily by sustained government spending levels and strong non-oil economic activities," the CBOCBO said.

On a year-on-year basis, total assets of the commercial banks increased by 47.6 per cent to reach RO13.5 billion as at the end of October 2008. The fast expansion in assets was driven by 52.7 per cent growth in credit. It is noteworthy to mention that during the month of October alone, total credit registered an increase of 2.5 per cent over the level of September end, signifying the absence of any credit squeeze by Oman. Investments in securities (both domestic and foreign), which accounted for 9.1 per cent of total assets, increased by 19.3 per cent to RO1.23 billion, primarily on account of higher absorption of surplus liquidity by the CBOCBO through issuance of CDs.

In particular, commercial banks' outstanding investment in CDs issued by CBOCBO increased from RO499.6 million as at the end of October 2007 to RO639.0 million at the end of October 2008. Commercial banks assets held in the form of cash and deposits with the CBOCBO declined by 3 per cent -- owing to the policy driven reduction in the statutory cash reserve ratio of the commercial banks -- from RO950.5 in September 2008 to RO922.5 million in October 2008.

On the liabilities side, aggregate deposits increased by 36.6 per cent to RO8,281.7 million at the end of October 2008. Government deposits in particular rose by 57.1 per cent to a level of RO1,531.9 million, representing 18.5 per cent of total deposits, whereas private sector deposits increased by 23.7 per cent to a level of RO6,034.7 million. Commercial bank's core capital and reserves surged by 64.8 per cent to RO1499.7 million, which was about 11.1 per cent of total assets.

Provisional figures for net profits (after provisions and taxes) indicate a 41.1 per cent increase, from RO161.3 million in the first ten months of 2007 to RO227.6 million in the corresponding period of 2008.

The overall monetary conditions continued to be characterised by high growth in money supply and falling interest rates. Broad Money Supply (M2) increased by 31.3 per cent, and among the key components of money supply, currency held by the public rose by 15.4 per cent, demand deposits by 27.5 per cent, and quasi money (comprising Rial Omani savings and time deposits, certificates of deposits issued by commercial banks, margin deposits and foreign currency designated deposits) by 34.7 per cent. Among the key sources of Money Supply, while domestic assets in the banking system surged by 77.2 per cent, net foreign assets of the banking system expanded by 9.4 per cent, primarily on account of higher central bank net foreign assets, which increase by 33.1 per cent on a year on year basis.

Reflecting the sharp decline in the US Fed Funds Target Rate from 4.50 per cent at the end of October 2007 to one per cent at the end of October 2008, and given the fixed peg of the Rial Omani to the US dollar, domestic interest rates in Oman also moderated significantly. While weighted average interest rates on CBOCBO CDs fell from 2.762 per cent in October 2007 to 0.815 per cent in October 2008, overnight Rial Omani domestic inter-bank lending rate also declined from 2.250 per cent to 1.464 per cent during the corresponding period suggesting no pressure on availability of Rial Omani liquidity in the system. The extent of moderation in average Rial Omani deposits and lending rates, however, remained more modest, from 2.030 per cent to 2.056 per cent (for deposits) and from 7.316 per cent to 6.772 per cent for loans.