High household indebtedness in Oman warrants close monitoring

FINANCIAL STABILITY: In the Sultanate, household debt averages about 22 months of an individual’s net salary when it comes to personal loans, rising to 45 months for housing loans

Household indebtedness remains high in the Sultanate relative to trends in the developed world, and thus needs to be carefully monitored to stave off potential risks to nation’s financial stability, the Central Bank of Oman (CBO) has warned.

Household debt is typically defined as the amount of money owed by all adults in the household to financial institutions. It includes personal loans, consumer debt and housing mortgages.

In the Sultanate, household debt averages about 22 months of an individual’s net salary when it comes to personal loans, rising to 45 months for housing loans.

“This level of indebtedness is considered high when compared to that in the Organisation of Economic Cooperation and Development (OECD),” the apex bank said in its newly released 2017 Financial Stability Report. The OECD groups 35 of the richest and most advanced nations of the world.

“At present, overall household credit risk indicators remain at low levels and household debt as a percentage of GDP is low. Moreover, the prudential regulations on lending to households are expected to keep the risks in this sector at manageable levels,” the CBO report noted however.

According to the Central Bank, lending to individual consumers “surpasses” all other sectors. “This kind of household indebtedness is characteristic of a resource dependent economy where the hydrocarbon sector forms a large part of the GDP and imported goods form a big share of domestic consumption.”

“However, lending to households is a sensitive territory as elevated levels of household indebtedness may have implications for financial stability because of its potential to exacerbate the cyclical downturns. Therefore, a close watch on this sector is warranted,” the report stressed.

In 2016, personal loans grew 7.7 per cent to top RO 7.9 billion, accounting for 40.1 per cent of total credit of RO 19.9 billion advanced by commercial banks in the Sultanate. Within the personal loan segment, residential housing loans accounted for 9.8 per cent of the banks’ total credit outstanding.

A distant second in the breakdown of sectors benefiting from bank credit was the construction industry with a 11.5 per cent share (RO 2.274 billion) of the total credit. In third place was the Services sector with an 8.6 per cent share (RO 1.689 billion), followed by the Manufacturing sector with a 7.8 per cent share (RO 1.523 billion). Lending to other key sectors was as follows: Import Trade RO 1.146 billion (5.8 per cent), Wholesale & Retail RO 675 million (5.1 per cent), Mining & Quarrying RO 902 million, and Transport & Communications RO 782.4 million (4 per cent).

“Personal loans turned out to be the strongest driver of bank credit,” the Central Bank noted in its 2016 Annual Report. “Personal loans including residential housing loans were largely backed by salary assignments and mortgages and this segment remained the mainstay and key profit driver for banks,” it said.