Banking Risks: Between global challenges and local resilience

The banking sector forms a cornerstone of the Omani economy. It plays a vital role in financing economic activity, supporting financial stability, and fostering sustainable development — in line with the objectives of Oman Vision 2040, which emphasises economic diversification and the establishment of a strong and resilient financial sector capable of keeping pace with global developments.

However, banks in the sultanate – like their counterparts worldwide – face a wide range of risks that require proactive management, advanced supervisory tools, and strict compliance with international standards and local regulations issued by the Central Bank of Oman (CBO).

Risk management today is no longer a supportive function activated after losses occur; it has become a strategic leadership responsibility that defines risk appetite, directs capital allocation, and protects institutional reputation. Within this framework, the CBO plays a central role in guiding the banking sector toward building sustainable resilience consistent with local, regional, and global transformations.

Key types of banking risks in Oman

1. Credit Risk

Credit risk remains the most prominent among banking risks, as it is directly linked to the ability of borrowers to fulfill their obligations. These risks are influenced by fluctuations in oil prices, labor-market dynamics, and structural challenges — particularly those facing small and medium-sized enterprises (SMEs) and, more broadly, corporate entities.

The CBO has issued detailed instructions governing personal lending and corporate financing to reduce credit concentrations and minimize defaults. These measures not only safeguard banks but also enhance market discipline and support sustainable economic growth.

2. Market Risk

Market risk arises from volatility in interest rates, exchange rates, and capital market performance. Given Oman’s reliance on oil revenues, any fluctuation in oil prices or shifts in global interest rates can affect banks’ investment portfolios and profitability.

To mitigate these risks, the CBO has issued detailed guidance on interest rate risk and liquidity management, granting banks greater flexibility in managing their positions while requiring robust hedging strategies and periodic stress testing.

3. Liquidity and Funding Risk

Liquidity is the backbone of any banking system. Global financial crises have shown that liquidity management cannot be delayed or left to reactive measures.

Omani banks comply with Basel III requirements such as the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). In addition, the CBO places strong emphasis on preparing contingency funding plans and issuing regular reports on liquidity gaps and mismatches. These measures ensure the sector’s readiness to withstand sudden pressures and maintain depositor and investor confidence.

4. Operational Risk

Operational risks range from human error and system breakdowns to fraud and cybercrime. With the accelerating pace of digital transformation in banking services, cybersecurity has become increasingly critical.

The CBO has implemented mandatory regulations to protect digital systems and ensure business continuity, reflecting a proactive understanding of modern risks in an increasingly technology-dependent financial environment.

5. Legal and Compliance Risk

With the new Banking Law now in force, financial institutions bear greater responsibility in areas such as governance, transparency, and combating money laundering and terrorist financing.

The CBO has strengthened this framework by issuing comprehensive consumer protection guidelines and establishing regulations for banking products and services. These measures reduce both legal and reputational risks and reinforce trust between banks and their customers.

6. Environmental and Social (ESG) Risk

Banks can no longer overlook non-financial risks such as climate change, environmental impact, and social governance. In line with global trends, several Omani banks have begun introducing green financing instruments and sustainability-linked bonds, consistent with the CBO’s efforts to promote the integration of sustainability principles into banking strategies.

This direction positions Omani banks at the forefront of addressing long-term risks while enhancing their regional and international reputation as responsible and forward-looking financial institutions.

Conclusion

The banking landscape in Oman faces multifaceted challenges — spanning credit, market, liquidity, operational, compliance, and ESG-related risks. Yet, the strength of the sector lies in the supervisory and strategic role of the Central Bank of Oman, which goes beyond setting regulations to fostering a forward-looking risk culture across the industry.

Amid an increasingly interconnected global environment, the Omani banking sector possesses the regulatory tools, institutional capacity, and strategic vision necessary to turn risks into opportunities, reinforcing its position as a stable, transparent, and resilient pillar of sustainable economic development in the Sultanate, in line with the aspirations of Oman Vision 2040.

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