17 March 2010
MUSCAT -- The Central Bank of Oman (CBO) is weighing plans to set up a special unit tasked with monitoring the stability of banks and financial institutions in the Sultanate, the apex bank's Executive President announced here yesterday.
Speaking on the first day of the Oman Global Investment Forum, at Shangri La's Barr Al Jissah Resort & Spa, Hamood bin Sangour al Zadjaly (pictured) said the proposed Financial Stability Unit is part of a series of measures initiated by the CBO with the aim of the strengthening banking sector supervision.
"We are in the process of working out a suitable framework for macro-prudential regulations in Oman.
The setting up of a Financial Stability Unit in the CBO is actively under consideration to conduct macro-prudential surveillance of the banks/financial institutions and prepare a Financial Stability Report from time to time," Al Zadjaly said.
Furthermore, in line with its obligations under the Basel II capital adequacy framework, which the Omani banking system adopted in January 2007, the CBO is also moving to enhance risk-based supervision in the Sultanate.
Towards this end, the Central Bank has agreed for an update and already initiated work on 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, he stated.
Listing other measures already in place, Al Zadjaly said the 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.
Micro-prudential 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 also prepared regularly on a monthly basis."
Earlier, the Executive President noted that the apex bank's prudent policies helped the Omani banking sector weather the global financial crisis to a substantial degree. "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 the CBO.
The emphasis on financial stability by the CBO has been reflected in fine tuning of regulatory and supervisory norms for banks from time to time in line with the international codes and best practices."
These measures were reflected in the relatively healthy performance of Omani banks last year, at a time when many international banks were hit hard by the crisis, he said.
Local banks earned profits of RO 198.4 million (provisional) in 2009 as against RO 234.1 million in the previous year.
Total assets/liabilities of the banking system recorded positive growth of 2.9 per cent in 2009 notwithstanding the cyclical slowdown of the economy.
Non performing loans (NPL), on the other hand, recorded a modest rise, for which higher provisions have been made. "There is no immediate need for capital infusion in case of any bank in Oman. The CBO pursued easy monetary policy since the last quarter of 2008 to keep enough liquidity in the banking system so that all genuine credit demand is 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," the Executive President said.
Nevertheless, Al Zadjaly urged local banks to tighten internal controls, given especially the inherent vulnerability of any banking system to financial instability elsewhere around the world.
"The Omani banking system was relatively less affected by the recent global financial crisis as there was no direct exposure to the 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."
In particular, he urged commercial banks to understand the associated risks while dealing with exotic financial products and operating in the complex financial markets. As a safeguard against financial contagion, international support, he said, is building up for tighter regulatory regime, including dynamic provisioning, countercyclical capital buffer, leverage ratio, and provision of additional capital based on size of the balance sheet and risks undertaken by banks and financial institutions which are systemically important. 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.
In his address, Al Zadjaly also underlined the need for the banking sector to achieve a level of "sophistication" comparable with that of Western banking institutions. In this regard, he predicted that the financial landscape of Oman would become more complex in the future, particularly with the growth of debt and derivative markets.
"Although it would remain bank-dominated, non-bank segment is set to assume greater importance over time. As banks have to operate with thin spreads, they have to improve their efficiency further, upgrade technology, train their manpower, and above all, strengthen risk assessment as well as risk mitigation mechanism," he said.
The trend towards electronic banking will also pose a new set of challenges that banks must be fully geared for, the Executive President noted. "The 21st century will be a 'knowledge-dominated 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 term of privacy and secrecy. While this provides tremendous business opportunities for the banking sector, it also raises new challenges for the banks and regulators. In the age of e-commerce with increasing use of e-shop, e-store, and e-exchange, strengthening human capital will be the biggest challenge besides product related prudential regulations."
In concluding, Al Zadjaly warned banks against "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 CBO, 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 the off-site monitoring for early warning signals, and develop a set of macro-prudential tools on the lines suggested by the Financial Stability Board," he stated.
MUSCAT -- The Central Bank of Oman (CBO) is weighing plans to set up a special unit tasked with monitoring the stability of banks and financial institutions in the Sultanate, the apex bank's Executive President announced here yesterday.
Speaking on the first day of the Oman Global Investment Forum, at Shangri La's Barr Al Jissah Resort & Spa, Hamood bin Sangour al Zadjaly (pictured) said the proposed Financial Stability Unit is part of a series of measures initiated by the CBO with the aim of the strengthening banking sector supervision.
"We are in the process of working out a suitable framework for macro-prudential regulations in Oman.
The setting up of a Financial Stability Unit in the CBO is actively under consideration to conduct macro-prudential surveillance of the banks/financial institutions and prepare a Financial Stability Report from time to time," Al Zadjaly said.
Furthermore, in line with its obligations under the Basel II capital adequacy framework, which the Omani banking system adopted in January 2007, the CBO is also moving to enhance risk-based supervision in the Sultanate.
Towards this end, the Central Bank has agreed for an update and already initiated work on 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, he stated.
Listing other measures already in place, Al Zadjaly said the 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.
Micro-prudential 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 also prepared regularly on a monthly basis."
Earlier, the Executive President noted that the apex bank's prudent policies helped the Omani banking sector weather the global financial crisis to a substantial degree. "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 the CBO.
The emphasis on financial stability by the CBO has been reflected in fine tuning of regulatory and supervisory norms for banks from time to time in line with the international codes and best practices."
These measures were reflected in the relatively healthy performance of Omani banks last year, at a time when many international banks were hit hard by the crisis, he said.
Local banks earned profits of RO 198.4 million (provisional) in 2009 as against RO 234.1 million in the previous year.
Total assets/liabilities of the banking system recorded positive growth of 2.9 per cent in 2009 notwithstanding the cyclical slowdown of the economy.
Non performing loans (NPL), on the other hand, recorded a modest rise, for which higher provisions have been made. "There is no immediate need for capital infusion in case of any bank in Oman. The CBO pursued easy monetary policy since the last quarter of 2008 to keep enough liquidity in the banking system so that all genuine credit demand is 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," the Executive President said.
Nevertheless, Al Zadjaly urged local banks to tighten internal controls, given especially the inherent vulnerability of any banking system to financial instability elsewhere around the world.
"The Omani banking system was relatively less affected by the recent global financial crisis as there was no direct exposure to the 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."
In particular, he urged commercial banks to understand the associated risks while dealing with exotic financial products and operating in the complex financial markets. As a safeguard against financial contagion, international support, he said, is building up for tighter regulatory regime, including dynamic provisioning, countercyclical capital buffer, leverage ratio, and provision of additional capital based on size of the balance sheet and risks undertaken by banks and financial institutions which are systemically important. 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.
In his address, Al Zadjaly also underlined the need for the banking sector to achieve a level of "sophistication" comparable with that of Western banking institutions. In this regard, he predicted that the financial landscape of Oman would become more complex in the future, particularly with the growth of debt and derivative markets.
"Although it would remain bank-dominated, non-bank segment is set to assume greater importance over time. As banks have to operate with thin spreads, they have to improve their efficiency further, upgrade technology, train their manpower, and above all, strengthen risk assessment as well as risk mitigation mechanism," he said.
The trend towards electronic banking will also pose a new set of challenges that banks must be fully geared for, the Executive President noted. "The 21st century will be a 'knowledge-dominated 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 term of privacy and secrecy. While this provides tremendous business opportunities for the banking sector, it also raises new challenges for the banks and regulators. In the age of e-commerce with increasing use of e-shop, e-store, and e-exchange, strengthening human capital will be the biggest challenge besides product related prudential regulations."
In concluding, Al Zadjaly warned banks against "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 CBO, 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 the off-site monitoring for early warning signals, and develop a set of macro-prudential tools on the lines suggested by the Financial Stability Board," he stated.
By Conrad Prabhu
© Oman Daily Observer 2010
