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Banking on trust

January 2006
AbdulRazak Ali Issa, Chief Executive, BankMuscat, forecasts 2006 as a watershed year for banking industry in the Sultanate, with the Basel II regulations set to be implemented by the banking sector.
The year 2006 promises to be an extremely exciting year for the banking sector in Oman. Over the past 35 years, the Sultanate has changed from a land blessed with plenty to a nation that is among the most forward looking of the Gulf States, thanks to the visionary leadership of His Majesty Sultan Qaboos bin Said and the progressive policies of His Majesty's government.

The banking sector, under the able guidance of the Central Bank of Oman (CBO), has worked hand in hand with the government to facilitate this change. With regional economies continuing to show unprecedented growth on the back of strong global energy prices and increased geopolitical stability, and GCC states moving closer toward the creation of a common economic block and the sharing of a common currency, the role of the sector as a catalyst of change is only expected to assume greater significance during 2006.

Watershed year
The coming year promises to be all the more exciting for three key developments that promise to impact the banking sector both directly and indirectly in the Sultanate: the year will act as a watershed year, with the WTO regulations coming into play at a national level and the Basel II regulations being implemented by the banking sector. It will also witness the signing of the FTA between Oman and the US.

While the Basel II regulations are essentially an issue that will impact the banking sector alone (and will be largely dictated by the guidance issued by the CBO), the WTO regulations and the FTA are another matter altogether. For one, they promise to help the country integrate much farther into the global economy in line with the vision of His Majesty, and two, they are also expected to result in the emergence of substantial opportunities for local industry to extend their competencies overseas.

Finally, they will also result in many more global organizations looking at the Sultanate and its dominating youth market as a potential destination on the global map.

Local market dynamics
The impending changes are all the more exciting in Oman where the performance of the banking sector has historically depended upon the health of the Omani economy, as the sector benefits directly from the increased economic activity in the country from government spending With the country's proven oil reserves expected to last for approximately 20 more years, the government is expected to continue to press forward with its Vision 2020 plan during the year ahead. The visionary policy of broadening the country's industrial base and promoting economic growth other than through petrochemical activities has at its core three key elements: diversification, privatisation and education.

The diversification programme is rooted in the creation and expansion of Oman's industrial base in a number of sectors. Accordingly, the programme features a number of large-scale projects, including expansion of the Oman Liquid Natural Gas plant at Qalhat, the Oman-India fertilizer project, the Oman Polypropylene Plant, the Oman Methanol company and the Sohar Aluminum smelter, as well as iron and steel projects.

Approximately US$ 7 bn in infrastructure projects are planned over the next two years. In addition, the government is focused on increasing tourism in Oman and has announced the construction of a new terminal at Muscat's Seeb International Airport. Over US$ 3.5 bn of tourism projects, such as new hotel and real estate development are also being planned across the country in the medium term.

The second key aspect of the government's plan comprises continued privatisation of publicly owned companies. In July 2003, the government sold a portion of its shareholding in Oman Flour Mills and Oman Cement. In April 2004, it sold the bulk of its 65 per cent shareholding in Al Maha Petroleum. In addition, in June 2005, Omantel, Oman's telecommunications operator, was partially (35 per cent) privatized in the largest initial public offering in Omani history.

The third key aspect of the government's plan consists of substantial investments in human capital and the Omani education system to meet the needs of the country's rapidly changing economy, with particular focus on vocational training and academic fields with practical applications.

Banking sector in a rapidly changing economy
We believe that Oman's banking sector is well positioned to respond to the shifting conditions in the Omani economy. While interest income continues to form the primary revenue source for the sector, there is an increasing realization that the future, perhaps, lies in also giving due importance to developing expertise in fee and commission based operations.

This is expected to result in the growing importance of a diverse range of banking products, services and business lines that are in the 'value-added' or 'knowledge space' and consequently have the potential to earn substantial fee and commission incomes on a recurring basis.

With the growing pace of economic, industrial and technological reform in the country, there will be a need to develop a full range of banking services for both the retail and corporate banking markets, many of which are yet to realize their full potential.

What is also expected is increasing levels of competition in the banking sector with more and more regional and international banks making their presence felt in the country and large Omani banks gearing up further to make their presence felt across the region. This can only augur well for the sector, which is already focused on providing greater value to the customer.

Heightened competition will ensure greater attempts at consolidation, value-creation and higher efficiency levels. The consumer in particular and the banking sector in general has only to gain from such a move.

© Oman Economic Review 2006