26 July 2016
Prize money deposits may distort monetary policy transmission * Govt and PSEs jointly contribute over 33 pc share in total deposits

Muscat - Due to continued reliance on public sector deposits by Omani banks, the gap between customer loans and deposits remained high at about RO 6.9 billion. Customer funding gap as a percentage of loans comes out to be about 40 per cent.

"This high funding gap is suggestive of the banks' vulnerability emanating from their lopsided funding structure", points out a report by the Central Bank of Oman (CBO).

However, many major banks continued to mobilise more than a quarter of their private sector deposits through prize money schemes. For some banks, the proportion of prize money deposits exceeded 40 per cent of their private sector deposits.

"Such deposit schemes are not an immediate threat to financial stability, however, they have a potential to distort the effective costs on deposits thus clouding the economics of business", the apex bank cautions in its Financial Stability Report 2016.

Moreover, such schemes could desensitise the depositors to changes in interest rates and may therefore impede interest rate pass-through, warns the report.

Banks in Oman have traditionally low reliance on wholesale markets. Government deposits, however, remained an important source of funding for the banks.

Both the government and Public Sector Enterprises (PSEs) jointly contribute over 33 per cent share in the total deposits.

The government deposits increased during 2015, however, there were some signs of reversal of this trend as during the last quarter the government deposits decreased by RO 400 million.

"The high level of public sector deposits combined with the reduced cash flows of the government in the wake of dwindling oil revenues could pose a covert yet potent risk should the government make significant withdrawals from the banking sector', the report said as part of its stress for the banks in Oman.

Although at system level the liquid assets (excluding interbank assets) of banking sector almost cover the deposits made by the government and PSEs, certain individual banks exhibit varying degree of resilience in case of deposit withdrawal by the government, implying that such a withdrawal could put the banking sector under severe liquidity stress. According to the report, about 40 per cent of the banking sector deposits are Demand Deposits which are theoretically more susceptible to withdrawal during stressed times.

"The recent rating downgrade of Oman and the banks may affect their future funding costs. It is therefore important that the banks' funding base is diversified in terms of varied counter-parties and optimum mix of short and long term funding", the report cautioned.

© Oman Daily Observer 2016