Lending to become scarcer, more expensive this year

MUSCAT: Analysts reckon that lending in Oman will be more expensive and will fall by almost 50 per cent in 2017, compared to 2016 figures.

Data from the Central Bank of Oman showed that average lending rates in Oman increased from 4.763 per cent in November 2015 to 5.081 per cent in November last year. Experts believe this phenomenon is likely to continue during the 2017-18 period

Detailing Oman centric data from the report titled, ‘ GCC banks will resist weaker operating conditions in 2017-2018,’ Dr. Mohammed Damak, Global Head of Islamic Banking at S&P and primary analyst of the report, said flattening deposits in banks will dull the once vibrant loan market.

“It will be harder for companies and individuals to obtain loans. We think lending will become scarcer and more expensive in 2017-2018. We expect loan growth to slow down from 11 per cent in 2016 to 6 per cent in 201718 period, driven by tightening liquidity, crowding out from public sector and reduction in credit demand from households and corporates,” he stated.

This data is substantiated by Moody’s research which reported that credit demand will dive by as much as 6-8 per cent in 2017 owing to slower economy.

A major portfolio of bank profits is accounted for by interest payment stemming out of retail lending, which includes automotive and private loans, and is also the most popular method to finance high cost household items. Hike in interest rates would be another blow to the already busi- ness starved retail sector as it comes out of a tough 2016.

“Retail sector, which already exhibits high level of household debts, is going to be one of the most affected industries,” Dr. Damak added.

Ahmed, an Indian expat who recently came to Oman, narrated his experience of spending three months without a vehicle because he was unable to obtain a loan.

“I returned to Oman after living in India for five years. I remember that taking loans was much easier back then. Now it is more expensive and there is so much hassle. I was under a three-month probation period, so they denied me a car loan, citing lower salary during probation as a reason. I am still not sure of the right reason yet,” he said.

Personal loans

“I have seen a lot of Omanis and expats taking personal loans for all sorts of things, such as marriage, education or buying new items like cars but surely this trend will change or at least the loan amount and spending pattern will significantly decline. Also, it will not be as easy to get loans as before,” a senior bank official said.

Recent NCSI data showed that the number of new cars registered in 2016 fell by 21 per cent and, according to an official at a leading car sales company in Oman, automotive sector will be the hardest hit by this interest rate increase.

“The automotive sector nearly completely relies on some form of financing. No one will want to pay more, especially in such times when everyone is cash strapped. Although there is every reason for optimism in the next five years, I believe the next couple of years are going to be crucial for the automotive industry,” the official said. Following the hike in interest rate by the Federal Reserve in USA, all GCC countries except Oman officially hiked their interest rates. According to Mohammed Nayaz, Partner at Ernst & Young (EY), recent hike in rates by the Federal Reserve is likely to aggravate the situation in Oman caused by low oil prices.

“Omani banks are expected to provide a complicated lending trend. Hence, unless the Omani banks have sufficient buffers for feasible financial profile management, getting loans in Oman is going to be harder and expensive,” he explained.

According to Dr. Damak, the Central Bank of Oman (CBO) has recently capped retail lending at 35 per cent of total loans, compared to 40 per cent previously. This suggests a prudent approach by the regulator to control surging non-performing loans that are expected to top 3 per cent in 2017.

One of the major drawbacks of fiscal austerity reforms at a time of slowing economy is the lack of disposable income.

As government spending decreases following limited revenues, projects are affected due to delayed payments and corporate and individuals tend to run out their reserves, mainly held in banks, to cover rising costs, consequently leading to a fall in cash in banks.

To keep depositing money in banks is still attractive to the customers as banks hike interest rates for deposits, which, in turn,leads to an increase in the lending rates. This leads to a drop in demand for loans as spending by individuals and companies is limited.