reg­u­la­tion and open­ing up of new op­por­tu­ni­ties

Oman - A Nation on the Move - - Contents -

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.


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,

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