12 July 2016
Muscat - Omani banks' large exposure to the real-estate sector, according to the Central Bank of Oman (CBO), could leave them vulnerable to a weakening property market.

In its Financial Stability Report, the central bank said banks have substantial direct and indirect exposure to the real-estate sector and this is a potential source of vulnerability.

Real estate accounts for over 30 per cent of the banking sector's total lending portfolio, which, the CBO said, is considered large.

Banks' direct exposure includes financing of residential or commercial real estate, whereas, indirect exposure includes other financing secured against real estate.

"In Oman, construction activity is largely uncoordinated, which may result in an oversupply and higher vacancy rates of rental space. A weakening real-estate market could, therefore, expose the banking sector to considerable risks," the CBO added.

It said early signs of weakness in some GCC countries and declining rents in Oman suggest a need for banks to work out a strategy to suitably diversify their portfolios to protect themselves from asset price shocks in the real-estate market.

Moreover, the CBO said, high exposure of Islamic banks to the real-estate sector

warrants a review of lending policies and practices of Sharia'a-compliant finance institutions.

© Muscat Daily 2016