BANKING & FINANCE
regulation and opening up of new opportunities
Oman’s banking sector continues to grow at a positive rate and has maintained its success in meeting the credit needs of all economic segments, with special emphasis on the small and medium enterprise ( SME) sector, which has resulted in support for economic activities including diversification initiatives. The Central Bank of Oman ( CBO) has issued several regulatory amendments to boost liquidity and credit and to create an attractive business environment to spur economic growth. According to research firm BMI asset growth in Omani commercial banks is set to accelerate in the remaining months of 2018 as well as in 2019 as higher economic activity spurs lending. “Higher oil prices and broader hydrocarbon production gains will enable higher capital spending by the government, and will support stronger business confidence,” quoted the report.
Oil prices, which have recovered to close to $75 per barrel in 2018 have buoyed economic activity in Oman. The Sultanate has set up an oil trading unit and diversified into the largescale refining and chemicals sector to promote growth. Real gross domestic product growth will gain momentum, growing at 2.8 per cent in 2018 and 3.5 per cent in 2019 from an estimated 0.6 per cent in 2017, noted the report.
Asset growth in the Omani banking sector, which has largely enjoyed a positive outlook for the first half of 2018 will gather pace, growing at 5.5 per cent and 6.5 per cent in 2018 and 2019 from 3.3 per cent in 2017. However, profitability at banks is expected to take a hit due to the Central Bank of Oman’s policy on capping commercial loan rates. This directive will encourage greater sectoral specialisation. Greater asset growth over 2018-19 comes in stark contrast to the tepid performance of the Omani banking sector during the second half of 2016 and the first half of 2017, when it was hit by the slump in oil prices. An uptick in the construction industry will encourage lending to the sector, which is set to grow by 10.4 per cent in real terms in 2018 and 11.5 per cent in 2019, which is well above the average for the Middle East and North Africa region. A steady pipeline of infrastructure projects in the Sultanate will also underpin any increases in business credit demand. A Financial Stability report released by Central Bank of Oman recently indicated that the improvement in oil prices provided a much needed relief to the Sultanate’s economy as both current account and fiscal deficits showed marked improvement, while nominal GDP firmed up.
The Central Bank noted that the Sultanate’s fiscal and economic reforms need to continue to ensure sustainable economic growth. While acknowledging challenges faced by the economy, including twin deficit and rise in public debt, the CBO report asserted that the financial stability of the Sultanate remained intact and Oman continues to maintain sufficient foreign exchange reserves to back its fixed- exchange rate regime.
Following the slump in oil prices, Oman set off the process of fiscal adjustment along with other economic reforms including a renewed focus on diversification. ‘ While the recent recovery in oil price is a welcome development, the downside risks from twin deficit and oil price volatility remain. These risks, along with rising public debt, validate the efforts being exerted by the government to fast track the economic and fiscal reforms agenda’, the report said.
‘ While financial stability remains high on our agenda, I am pleased to note that we are on track in ensuring that financial constraints are not a drag on the growth or diversification drive’, HE Tahir bin Salim al Amri, Executive President of the CBO said in the report. He added that during these challenging times, striking the right balance between financial stability and growth would continue to guide the policy making at CBO. Oman’s banking sector has been showing remarkable resilience to the tightening of operating conditions since the severe oil price shock. Banks maintained sufficient capital buffers, remained fairly liquid, and posted decent profits. The credit growth slackened in sync with the economic growth, while the credit risk is well- contained. The CBO’S stress tests indicated low solvency and liquidity risks for the banking sector in the face of severe shocks.
CBO maintains that Basel III implementation is on schedule, whereas, industry consultations on bank resolution framework are underway. It said a new payment systems law has been promulgated that gives CBO a clear mandate to oversee and regulate all aspects of payment system. ‘ To further boost consumer confidence in the banking sector, we have plans to step up our focus on consumer protection and business conduct in the coming period.’
However total credit growth is expected to lose its current momentum over averages seen in the long- run, with a slowdown in recent quarters in personal loan growth dragging down overall lending. BMI put the drag down to central bank regulations, which have stipulated that personal loans only account for 35 per cent of commercial banks’ total credit portfolio, down from 40 per cent in 2013. While risks have been managed rather successfully by the larger banks such as Bank Muscat, for which personal loans account for 27.3 per cent of total credit, smaller lenders in the country are squeezed to the limits, restricting further potential for loan growth.
With tighter profit margins, banks will
Improvement in oil prices provided a much needed relief to the Sultanate’s economy as both current account and fiscal deficits showed marked improvement
move towards increasing sectoral specialisations. BMI anticipates a rate hike in Oman, with the Central Bank expected to increase its policy rate over 2018 and 2019 to support the rial’s value and reduce any tax- induced inflationary pressures. Oman earlier this year introduced new fees and taxes for individuals and businesses based in the capital Muscat. International hotels, restaurants and tourist centres are also subject to the new tax measures.
FINANCIAL BREAK UP
Credit extended to the private sector by the banking sector in Oman increased by 6.0 per cent to RO21.5 billion at the end of April, 45.5 per cent of which was made available to the household sector, while 46.1 per cent was granted to the non- financial corporate sector. Financial corporations and other sectors obtained 4.9 per cent and 3.5 per cent of the total amount of credit, respectively. Total deposits registered a growth of 2.3 per cent growth to RO22.0 billion, with private sector deposits growing by 1.8 per cent to RO14.1 billion at the end of April 2018 compared to same period in the previous year. Households accounted for 49.6 per cent of total private sector deposits, followed by non- financial corporations at 29.3 per cent, financial corporations at 18.4 per cent, and other sectors at 2.7 per cent. A review of the activities of conventional banks indicated that total outstanding credit increased by 6 per cent to RO20.9 billion at the end of April 2018, while credit extended to the private sector increased by 3.9 per cent to RO18.5 billion.
Omani banks stand to benefit from a robust growth in oil prices and an easing of capital and credit norms of commercial banks. Like any other Gulf country, the growth in oil revenue in Oman will drive demand for credit from private sector. Apart from a growth in oil price, economic growth also started recovering, which will demand for bank credit. A high oil revenue will definitely lead to a growth in liquidity in the financial sector, which bodes well for deposit growth.
The asset growth of Omani banks is expected to gather momentum, which has already seen in the financial system. In a move to ease lending to drive economic growth, Oman’s banking regulator eased capital and credit exposure rules for commercial banks in April 2018. Two years ago, the Omani economy and financial markets came under pressure from low oil prices and rising US interest rates, which are closely linked to rial rates, so authorities are keen to keep banks liquid and to encourage them to lend.
The capital adequacy ratio, the proportion of capital that banks must hold back from lending, was reduced to 11 per cent from 12 per cent. This is expected to increase the volume of additional credit available to RO7.8 billion from RO5.2 billion. Among other steps, banks are able to consider deposits obtained from other local banks towards their own deposit bases. This will give them more room to lend while obeying a regulatory requirement to limit the credit they extend to 87.5 per cent of their deposit bases.
Prudential limits for banks’ exposure in all currencies for various short- term maturities were increased, in order to let banks manage their liquidity gaps more efficiently. This will give banks more flexibility to utilise credit lines available to them with their foreign and local correspondents at a reasonable cost.
In addition, the ceiling for banks’ credit exposure to non- residents and placement of their funds abroad was raised to 75 per cent of their local net worth from 50 per cent, which will increase their external borrowing capacity to finance local projects of national importance. In another move to ease lending conditions, the Central bank allowed commercial banks to factor in their local interbank money market positions when calculating deposit bases.
In fact, the liquidity situation in the financial system was tight in 2017, as several government entities withdrew their deposits. However, the cash flow started improving since the beginning of 2018. Since Oman government and state- owned entities like the Electricity Holding Company and Petroleum Development Oman were relying heavily on overseas markets for their funding requirements in 2017, the pressure on liquidity within the domestic market was less.
Conventional banks have achieved a year- on-year growth in total credit of 6 per cent by March- end, mainly due to a 4.1 per cent growth in credit to the private sector at RO18.6 billion. Conventional banks’ overall investments in securities grew by 2.7 per cent to RO3.2 billion. Investment in government treasury bills stood at RO429.8 million by end- March 2018. Aggregate deposits held with conventional banks marginally increased by 0.6 per cent to RO19.1
Omani banks stand to benefit from a robust growth in oil prices and an easing of capital and credit norms of commercial banks.
billion in March 2018, from RO19 billion for the same period a year ago.
Islamic banks provided financing to the extent of RO3.2 billion by end- March, compared with RO2.6 billion a year ago. Total deposits held with Islamic banks and windows also registered a significant increase to RO3.2 billion in March 2018, from RO2.4 billion as of the end of March 2017. The total assets of Islamic banks and windows amounted to RO4 billion as of the end of March 2018.
Within a short span of five years, Islamic institutions have emerged as one of the fastest growing segments within the financial services industry in Oman. Also, Islamic banks are trying to strengthen their position by expanding branch network and with new products and better services. Islamic financial institutions, including window operations of conventional banks, have more than 12 per cent share in total bank assets in the country. An important segment which will drive demand for credit this year is going to be the corporate sector. As some of the projects have reached the implementation stage, demand for project finance is expected to grow, compared to last year.
These projects include a $ 5.65 billionrefinery in Duqm, Salalah ammonia project, Salalah Liquefied Petroleum Gas, an acetic acid project, an automobile body building unit, a liquid berth, an integrated fishing harbour and several petrochemical ventures are in various stages of planning and implementation.
The state- owned Oman Oil Company ( OOC) started work on two major projects - Salalah Ammonia Plant and Salalah Liquefied Petroleum Gas ( SLPG) - in Dhofar. A major portion of SLPG’S capital expenditure of $ 826 million is funded by financial institutions. The project, which has LPG extraction facilities at Salalah Free Zone, is developed by Oman Gas Company – a subsidiary of Oman Oil Company.
The cost for the ammonia project, developed by Salalah Methanol Company, a subsidiary of Oman Oil Company, is estimated at $ 463 million. The project will span over 12 hectares at Salalah Free Zone and will include facilities for manufacturing, storing and exporting ammonia. The construction work of the plant, which will produce 1,000 tonnes of ammonia per day, is expected to be completed by 2020. Energy major BP is in discussion with the Oman government, its energy investment arm Oman Oil Company ( OOC) as well as a potential partner, to press ahead with the implementation of its world- scale acetic acid plant in Duqm — a project involving an investment of around $ 1 billion. This will also drive demand for project finance.
The proposed Duqm acetic acid project, first unveiled few years ago, envisions a large- scale petrochemical project based on BP’S proprietary Saabre technology. Apart from these projects, the private sector, along with an active participation of investment funds, are also setting up several other major projects, which include a dairy venture, a poultry project and a red meat venture. These are in addition to a series of tourism projects, especially hotels and resorts, planned in different parts of the country. The flow of credit to the traditional sectors, especially agriculture and fisheries, have also strengthened to support farmers and fishermen in an apparent move to diversify the economy.
The state- owned Oman Development Bank ( ODB) is focusing on providing farm loan to support a government initiative to strengthen food security. The loan for farmers will help achieve self- sufficiency to maintain agriculture crops and livestock, and help establish and sustain agriculture with value addition and growth in production. The bank provides subsidised developmental loans for the agricultural sector in many fields, which include establishing new farms, irrigation systems, expansion and development of farms; developing and maintaining farms, drilling wells for agricultural purposes and beekeeping.
The bank’s loans are mainly for seasonal crops, which have a short cultivation period with a fixed productive cycle. The bank has fixed a maximum limit for seasonal loan at RO50,000 and can be utilised for cultivating vegetables and fruits, including chilli, cucumber, eggplant, watermelon, melon, tomatoes, potatoes, cabbage and wheat. Agricultural loans provided by ODB offer several advantages over other loans as it has simple procedures to get approval and the fund is disbursed directly to the owner of the agricultural land.
Leasing and hire purchase firms are showing signs of stability and overall asset growth is expected to rebound this year. A recovery in economic
Within a short span of five years, Islamic institutions have emerged as one of the fastest growing segments within the financial services industry in Oman.
growth since last year is a positive sign for the sector. A growth in investment in infrastructure generally results in a ‘trickle- down effect’ as it will increase demand for capital goods and the general demand for credit will go up.
Non-banking finance companies (NBFCS) will also go through a period of consolidation, better management of receivables and better focus on the quality of assets. Since the overall growth in demand for finance was reduced due to a slowdown in economic activity last year, the competition among NBFCS and other players is growing. The number of players in the market has gone up with the entry of Islamic banks and windows more than three years ago.
A fall in demand for vehicles and a slowdown in government expenditure have resulted in a lower demand for funds from leasing firms last year. As the market conditions are challenging, two leading leasing firms have decided to go for a merger. National Finance Company has acquired Oman Orix Leasing Company. After the acquisition, National Finance turnout to be the biggest nonbanking finance company (NBFC) in Oman, with a combined strength of 23 branches, including its head office, across the country. It is the largest leasing firm in Oman in terms of paid-up capital, net worth, lending assets, net profit and branch network. National Finance issued additional shares of the company to the shareholders of Oman Orix at a swap ratio mutually agreed by the shareholders of both companies.
Al Omaniya Financial Services ( AOFS) is another large NBFC which has successfully completed over 20 years of operations in Oman. AOFS was formed with a mission to be the best financial services provider in the country through ethics. It endeavored to create superior value for all it’s stakeholders - customers, investors, or employees. The company started its business in retail auto financing with an objective to provide a premium service at an affordable price to local citizens as well as expatriates and help them to get affordable transportation means. The company’s products are structured with a customer- centric philosophy.
Oman’s insurance sector will record the strongest year- on-year growth in 2018 of more than ten per cent, due to the introduction of new compulsory medical cover for expatriates, According to S& P Global Ratings.
Despite ongoing regulatory and competitive challenges in the insurance sector in the GCC countries, credit conditions for rated insurers will remain strong and broadly stable in 2018, S& P said in its report ‘Gulf insurers: The gap between big and small insurers could widen in 2018’. ‘ We forecast that the insurance sector in Oman will record the strongest year- on-year growth in 2018 of more than ten per cent, due to the introduction of new compulsory medical cover for expatriates’, it said.
After strengthening capital base to RO10 million, five Omani insurance companies - Al Ahlia Insurance Company, Vision Insurance, Oman Qatar Insurance, National Life and General Insurance and Arabian Falcon Insurance floated their IPOS and got listed on the Muscat Securities Market in the second half of 2017 and the first half of 2018, while two mergers have reduced the number of players.
Although the Sultanate has more than 20 insurance companies, only nine companies — Dhofar Insurance, Oman United Insurance, Al Madina Takaful, Takaful Oman, Al Ahlia Insurance, Vision Insurance, Oman Qatar Insurance, National Life and General Insurance and Arabian Falcon Insurance — are listed.
Insurance firms need a solid capital base to achieve sustainable growth and for retaining a major portion of the business within the country. With this aim, the Oman government in 2014 asked national insurance firms to float shares on the Muscat Securities Market ( MSM) within three years, besides raising their minimum capital to RO10 million from RO5 million.
The regulations mark a new chapter in the Omani insurance sector, as local companies will be able to withstand competition by strengthening their financial, technical and human resources. Further, a higher capital base will make these institutions large enough to underwrite more risks and retain premiums within the country.
National Life and General Insurance Company’s IPO closed on November 20, 2017 and was one of the biggest events in the insurance industry with an initial public offering of 66,250,000, where shares were sold at an offer price of 320 baisas per share. The company’s growth story and its expertise in medical underwriting, its plans to expand in other countries, growth strategy spurred strong demand from both institutional and individual investors to make the IPO a success.
Oman’s insurance sector will record the strongest year-on-year growth in 2018 of more than ten per cent,