June 2010
The Central Bank of Oman (CBO) has assumed over time the predominant responsibility of preserving financial stability in the country in order to promote a high rate of growth through creating an investment supportive macroeconomic environment.
This is a broad overview of the banking system in Oman: its present status, major challenges, particularly in the context of the recent global financial and economic crisis, and our preparedness to convert these challenges into opportunities.
Oman's Banking System
The institutional framework of the financial system in Oman consists of CBO, commercial banks, non-banking finance and leasing companies and money exchange establishments, in addition to insurance companies, pension funds and the capital market. Oman's financial system is dominated by banks accounting for more than 90 per cent of the total assets and/or liabilities of the financial sector as a whole.
At the end of 2009, the Omani banking system consisted of 17 commercial banks, of which seven are locally incorporated and ten are branches of foreign banks.
In addition, there are two specialised banks operating in the country, one catering to development of projects and the other providing mortgage loans.
Oman's banking system operates in a deregulated and competitive environment. All banks are provided a level playing field. Oman provides an attractive foreign investment policy. Under the WTO commitment, foreign ownership in a locally incorporated business entity, including bank, is allowed up to 70 per cent almost on an automatic basis.
Moreover, local operation of foreign bank branches is also permitted. There are no restrictions on repatriation of profit or capital since Oman has an open capital account.
Tax holidays are initially available for up to five years, which can be extended for a period of another five years in certain cases.
The recent initiative of the government to tax uniformly both domestic and foreign companies would also benefit the banking sector. The banking system has evolved over the years with new dynamics brought about by globalisation, liberalisation and technological innovations.
In Oman, the banking industry has been witnessing significant growth in recent years, mainly due to sustained increase in oil prices, efforts to diversify the economy, implementation of large industrial, real estate and infrastructure projects and growing emphasis on the private sector.
Total assets of the commercial banks, which were RO4.9bn at the end of 2004, rose to RO14.2bn at the end of 2009, indicating an annual average growth of about 38 per cent during the last five years. Bank credit constituted the bulk of the banks' assets which remained by and large stable in the range of 65-70 per cent of the total assets.
Despite an increase in the size of balance sheets, there has been a steady decline in the gross non-performing loans as a percentage of the total assets from nearly ten per cent in 2004 to 2.1 per cent in 2008, before rising marginally in 2009 due to cyclical downturn of the economy.
System-wise capital adequacy ratio for commercial banks as a percentage of the total risk weighted assets remained at a satisfactory level of around 15 per cent as against the minimum regulatory requirement of 10 per cent.
Despite knock-on effects on the banking sector from the recent global financial crisis, Oman's banking system remained sound, resilient and profitable due to appropriate regulatory and supervisory policy adopted by CBO. The emphasis on financial stability by CBO has been reflected in the fine-tuning of the regulatory and supervisory norms for banks from time to time in line with the international codes and best practices.
In pursuance of its commitment to adopt global best practices in the banking regulation and supervision, CBO was in the forefront to mandate implementation of Basel II capital adequacy framework since January 2007.
In order to raise the capacity of banks to face global competition and expand business in a growing economy, the minimum capital requirement for new local banks was raised from RO50mn to RO100mn and for foreign banks from RO10mn to RO20mn.
CBO's prescription of general provisions of one per cent on the performing non-personal loans and two per cent on performing personal loans, introduced in 2004, proved to be extremely useful in providing the much needed cushion for our banks to meet the challenges of the global economic crisis.
Prompt Corrective Action (PCA) framework has been put in place for early resolution of bank weaknesses, particularly when capital and asset quality of individual banks are detected to deteriorate beyond certain thresholds.
On the payment and settlement front, systems have been modernised along with the implementation of the Real Time Gross Settlement (RTGS), Automated Clearing House (ACH), Cheque Imaging System (CIS) and the enhancement of the ATM switch.
In 2009, most of the banks and financial institutions, particularly those in the western countries, were busy repairing their balance sheets, infusing capital and recovering from the state of credit crunch.
Despite adverse international developments, Omani banks earned a profit of RO198.4mn (provisional) in 2009 as against RO234.1mn in the previous year.
Total assets/liabilities of the banking system recorded a positive growth of 2.9 per cent in 2009 notwithstanding cyclical slowdown of the economy. Increase in gross NPL has been modest for which higher provisions have been made.
There is no immediate need for capital infusion for any bank in Oman. CBO pursued easy monetary policy since the last quarter of 2008 to keep enough liquidity in the banking system so that all genuine credit demands are met.
Despite the slowdown of both deposit and credit growth, Omani banks were in a better position to consolidate their business in 2009 compared to their counterparts in the region.
Major Challenges
The Omani banking system is yet to achieve sophistication similar to that of its western counterparts. However, we visualise that the financial landscape of Oman would become more complex in the future with the growth of debt and derivative markets.
Although it would remain bank-dominated, the nonbank segment is set to assume greater importance over time. As banks have to operate with a thin spread, they have to improve efficiency, upgrade technology, train their manpower, and above all, strengthen risk assessment as well as risk mitigation mechanisms.
The 21st century will be a knowledgedominated century. Traditional banking would give way to more and more electronic banking. The customer may like to purchase those services that meet his requirements in terms of privacy and secrecy.
While this provides tremendous business opportunities for the banking sector, it also raises new challenges for banks and regulators. In the age of e-commerce with increasing use of e-shop, estore and e-exchange, strengthening human capital will be the biggest challenge besides product related prudential regulations.
The Omani banking system was relatively less affected by the recent global financial crisis as there was no direct exposure to toxic assets such as complex derivative products. However, in an open economy framework, the banking system is inherently vulnerable to financial instability anywhere in the world.
Conventional risk management approach may not be sufficient as the tail risks dominate under conditions of financial stress.
Banks in Oman have to tighten their internal control and critically analyse results of stress testing under the worst case scenario. Financial markets are globally integrated. Although it provides enough opportunities to expand business, it also exposes the system to financial contagion, particularly for an open economy like Oman. As a safeguard against financial contagion, international support is building up for tighter regulatory regime, including dynamic provisioning, countercyclical capital buffer, leverage ratio, and provision of additional capital based on the size of the balance sheet and risks undertaken by banks and financial institutions.
In the light of lessons learnt from the recent financial crisis, the perimeter of regulations is being extended globally from financial institutions (banks included) to financial markets and innovative financial products.
Commercial banks have to understand the associated risks while dealing with exotic financial products and operating in the complex financial markets. Preparedness From the regulatory and supervisory angle we are prepared to meet all the challenges.
CBO has a comprehensive arrangement for on-site and off-site supervision of banks. Regulations are fine-tuned from time to time depending on circumstances. Microprudential regulations are enforced for individual banks. The system level aggregation of micro-prudential regulations is also being done to generate financial soundness indicators.
Macroeconomic indicators are prepared regularly on a monthly basis. As mentioned earlier, the Omani banking system adopted Basel II capital adequacy framework since January 2007.
As an important step towards improvementin risk management, risk-based supervision is being implemented in Oman. CBO has promptly agreed for an update and in fact, initiated work for a comprehensive review of the financial sector in Oman in 2010 under the Financial Sector Assessment Programme (FSAP) of the IMF and the World Bank. We are in the process of working out a suitable framework for macro-prudential regulations in Oman.
Setting up of Financial Stability Unit in CBO is actively under consideration to conduct macro-prudential surveillance of the banks/financial institutions and prepare the financial stability report from time to time.
On the whole, the banking system in Oman is sound, efficient and resilient to external shocks as it weathered the recent global financial crisis with least disruption in the intermediation process.
However, there is no room for complacency. Keeping in view the major challenges facing the banking system, commercial banks in Oman have to improve their efficiency, tighten their internal control and strengthen the risk management strategy.
The central bank, in its endeavour to ensure financial stability, has to revisit its regulatory and supervisory arrangements, particularly in the context of enhancement in the Basel II framework, integrate the findings of the risk-based supervision to off-site monitoring for early warning signals, and develop a set of macro-prudential tools on the lines suggested by the Financial Stability Board.
The Central Bank of Oman (CBO) has assumed over time the predominant responsibility of preserving financial stability in the country in order to promote a high rate of growth through creating an investment supportive macroeconomic environment.
This is a broad overview of the banking system in Oman: its present status, major challenges, particularly in the context of the recent global financial and economic crisis, and our preparedness to convert these challenges into opportunities.
Oman's Banking System
The institutional framework of the financial system in Oman consists of CBO, commercial banks, non-banking finance and leasing companies and money exchange establishments, in addition to insurance companies, pension funds and the capital market. Oman's financial system is dominated by banks accounting for more than 90 per cent of the total assets and/or liabilities of the financial sector as a whole.
At the end of 2009, the Omani banking system consisted of 17 commercial banks, of which seven are locally incorporated and ten are branches of foreign banks.
In addition, there are two specialised banks operating in the country, one catering to development of projects and the other providing mortgage loans.
Oman's banking system operates in a deregulated and competitive environment. All banks are provided a level playing field. Oman provides an attractive foreign investment policy. Under the WTO commitment, foreign ownership in a locally incorporated business entity, including bank, is allowed up to 70 per cent almost on an automatic basis.
Moreover, local operation of foreign bank branches is also permitted. There are no restrictions on repatriation of profit or capital since Oman has an open capital account.
Tax holidays are initially available for up to five years, which can be extended for a period of another five years in certain cases.
The recent initiative of the government to tax uniformly both domestic and foreign companies would also benefit the banking sector. The banking system has evolved over the years with new dynamics brought about by globalisation, liberalisation and technological innovations.
In Oman, the banking industry has been witnessing significant growth in recent years, mainly due to sustained increase in oil prices, efforts to diversify the economy, implementation of large industrial, real estate and infrastructure projects and growing emphasis on the private sector.
Total assets of the commercial banks, which were RO4.9bn at the end of 2004, rose to RO14.2bn at the end of 2009, indicating an annual average growth of about 38 per cent during the last five years. Bank credit constituted the bulk of the banks' assets which remained by and large stable in the range of 65-70 per cent of the total assets.
Despite an increase in the size of balance sheets, there has been a steady decline in the gross non-performing loans as a percentage of the total assets from nearly ten per cent in 2004 to 2.1 per cent in 2008, before rising marginally in 2009 due to cyclical downturn of the economy.
System-wise capital adequacy ratio for commercial banks as a percentage of the total risk weighted assets remained at a satisfactory level of around 15 per cent as against the minimum regulatory requirement of 10 per cent.
Despite knock-on effects on the banking sector from the recent global financial crisis, Oman's banking system remained sound, resilient and profitable due to appropriate regulatory and supervisory policy adopted by CBO. The emphasis on financial stability by CBO has been reflected in the fine-tuning of the regulatory and supervisory norms for banks from time to time in line with the international codes and best practices.
In pursuance of its commitment to adopt global best practices in the banking regulation and supervision, CBO was in the forefront to mandate implementation of Basel II capital adequacy framework since January 2007.
In order to raise the capacity of banks to face global competition and expand business in a growing economy, the minimum capital requirement for new local banks was raised from RO50mn to RO100mn and for foreign banks from RO10mn to RO20mn.
CBO's prescription of general provisions of one per cent on the performing non-personal loans and two per cent on performing personal loans, introduced in 2004, proved to be extremely useful in providing the much needed cushion for our banks to meet the challenges of the global economic crisis.
Prompt Corrective Action (PCA) framework has been put in place for early resolution of bank weaknesses, particularly when capital and asset quality of individual banks are detected to deteriorate beyond certain thresholds.
On the payment and settlement front, systems have been modernised along with the implementation of the Real Time Gross Settlement (RTGS), Automated Clearing House (ACH), Cheque Imaging System (CIS) and the enhancement of the ATM switch.
In 2009, most of the banks and financial institutions, particularly those in the western countries, were busy repairing their balance sheets, infusing capital and recovering from the state of credit crunch.
Despite adverse international developments, Omani banks earned a profit of RO198.4mn (provisional) in 2009 as against RO234.1mn in the previous year.
Total assets/liabilities of the banking system recorded a positive growth of 2.9 per cent in 2009 notwithstanding cyclical slowdown of the economy. Increase in gross NPL has been modest for which higher provisions have been made.
There is no immediate need for capital infusion for any bank in Oman. CBO pursued easy monetary policy since the last quarter of 2008 to keep enough liquidity in the banking system so that all genuine credit demands are met.
Despite the slowdown of both deposit and credit growth, Omani banks were in a better position to consolidate their business in 2009 compared to their counterparts in the region.
Major Challenges
The Omani banking system is yet to achieve sophistication similar to that of its western counterparts. However, we visualise that the financial landscape of Oman would become more complex in the future with the growth of debt and derivative markets.
Although it would remain bank-dominated, the nonbank segment is set to assume greater importance over time. As banks have to operate with a thin spread, they have to improve efficiency, upgrade technology, train their manpower, and above all, strengthen risk assessment as well as risk mitigation mechanisms.
The 21st century will be a knowledgedominated century. Traditional banking would give way to more and more electronic banking. The customer may like to purchase those services that meet his requirements in terms of privacy and secrecy.
While this provides tremendous business opportunities for the banking sector, it also raises new challenges for banks and regulators. In the age of e-commerce with increasing use of e-shop, estore and e-exchange, strengthening human capital will be the biggest challenge besides product related prudential regulations.
The Omani banking system was relatively less affected by the recent global financial crisis as there was no direct exposure to toxic assets such as complex derivative products. However, in an open economy framework, the banking system is inherently vulnerable to financial instability anywhere in the world.
Conventional risk management approach may not be sufficient as the tail risks dominate under conditions of financial stress.
Banks in Oman have to tighten their internal control and critically analyse results of stress testing under the worst case scenario. Financial markets are globally integrated. Although it provides enough opportunities to expand business, it also exposes the system to financial contagion, particularly for an open economy like Oman. As a safeguard against financial contagion, international support is building up for tighter regulatory regime, including dynamic provisioning, countercyclical capital buffer, leverage ratio, and provision of additional capital based on the size of the balance sheet and risks undertaken by banks and financial institutions.
In the light of lessons learnt from the recent financial crisis, the perimeter of regulations is being extended globally from financial institutions (banks included) to financial markets and innovative financial products.
Commercial banks have to understand the associated risks while dealing with exotic financial products and operating in the complex financial markets. Preparedness From the regulatory and supervisory angle we are prepared to meet all the challenges.
CBO has a comprehensive arrangement for on-site and off-site supervision of banks. Regulations are fine-tuned from time to time depending on circumstances. Microprudential regulations are enforced for individual banks. The system level aggregation of micro-prudential regulations is also being done to generate financial soundness indicators.
Macroeconomic indicators are prepared regularly on a monthly basis. As mentioned earlier, the Omani banking system adopted Basel II capital adequacy framework since January 2007.
As an important step towards improvementin risk management, risk-based supervision is being implemented in Oman. CBO has promptly agreed for an update and in fact, initiated work for a comprehensive review of the financial sector in Oman in 2010 under the Financial Sector Assessment Programme (FSAP) of the IMF and the World Bank. We are in the process of working out a suitable framework for macro-prudential regulations in Oman.
Setting up of Financial Stability Unit in CBO is actively under consideration to conduct macro-prudential surveillance of the banks/financial institutions and prepare the financial stability report from time to time.
On the whole, the banking system in Oman is sound, efficient and resilient to external shocks as it weathered the recent global financial crisis with least disruption in the intermediation process.
However, there is no room for complacency. Keeping in view the major challenges facing the banking system, commercial banks in Oman have to improve their efficiency, tighten their internal control and strengthen the risk management strategy.
The central bank, in its endeavour to ensure financial stability, has to revisit its regulatory and supervisory arrangements, particularly in the context of enhancement in the Basel II framework, integrate the findings of the risk-based supervision to off-site monitoring for early warning signals, and develop a set of macro-prudential tools on the lines suggested by the Financial Stability Board.
© businesstoday 2010
