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United World talks to H.E. Hamood Sangour Al Zadjali

Interview - January 19, 2012
Executive President of the Central Bank of Oman

Please give an overview of the banking and financial sector in Oman, with an emphasis on the financial institutions.

The institutional framework of the financial sector coming under the purview of Central Bank of Oman comprises mainly commercial banks, specialized banks, non-bank finance and leasing companies and money exchange establishments. As at the end of 2010, there were 17 commercial banks, of which 7 were locally incorporated and 10 were branches of foreign banks. In implementing the Royal Directives issued by His Majesty, the Board of Governors of CBO approved in May 2011 inclusion of Islamic banking under the provisions of the Omani Banking Law. The CBO Board has already approved establishment of two Islamic banks to provide banking services according to the Sharia law. They are yet to commence operations. Existing commercial banks operating in Oman can open windows for the purpose of Islamic banking. Islamic banking is expected to complement the conventional banking in promoting development in the economy. The banking system remained fairly concentrated with the three largest local banks accounting for over 60 percent of total assets, 63 percent of total credit, 57 percent of total deposits, and had combined assets of RO 9.43 billion (US $ 24.5 billion) as at the end of 2010. Commercial banks in Oman remained well capitalized with the BIS capital adequacy ratio averaging 15.8 percent as compared to the mandated ratio of 12 percent. Besides the commercial banks, there were in operation two Government owned specialized banks that provide soft financing to mainly low and middle-income Omanis to build or purchase residential property and to private sector investors to finance small projects. With regard to non-banking financial intermediaries, six finance and leasing companies (FLCs) licensed by CBO were engaged in leasing, hire purchase, debt factoring and similar asset-based financing activities. Money exchange establishments stood at 47 of which 16 operated under the license of money exchange and remittance business. Besides the above, the broad financial sector also included several insurance firms, public and private sector Pension Funds, primary capital markets, brokerage firms and the Muscat Securities Market.     

What is your forecast for the performance of the Omani banking in the next few years?

The Omani banking sector continued to depict optimism and resilience during 2011, consistent with the recovery of the real economy. The banking system remained sound, resilient and profitable due to appropriate regulatory and supervisory policies adopted by the CBO. The most significant achievement has been the improvement in the financial health of banks in terms of asset quality, provision coverage, capital adequacy and profitability, along with an increasing focus on risk management. The size of the balance sheet of commercial banks recorded stronger growth during 2011. According to the latest data available up to October 2011, the total assets of commercial banks, on a year-on-year basis, increased by 10.8 percent to RO 17.2 billion (US $ 44.7 billion). Of the total assets, credit accounted for nearly 70 percent and increased by 13.6 percent over the year to reach RO 12.1 billion at the end of October 2011. Aggregate deposits held with commercial banks increased significantly by 21.2 percent to RO 12.2 billion at the end of October 2011. Despite the increase in the size of balance sheets, there has been steady decline in gross non-performing loans (NPLs) from nearly 10% in 2004 to 2.1% in 2008, before marginally rising to 3.5% in 2009 due to the cyclical slowdown of the economy. At the end of 2010, the gross NPL ratio declined to 2.9%.

The CBO undertook a number of regulatory and supervisory initiatives during the recent period with the goal of promoting confidence in the banking sector. The policy initiatives were part of the ongoing financial reforms and were guided by CBO’s resolve in following international best practices. Risk-based supervision is being implemented in Oman. Micro-prudential regulations are being enforced for individual banks while the system level aggregation of micro-prudential indicators is being done to generate financial soundness indicators. As financial stability has emerged as a global problem,  CBO has taken the lead in setting up a financial stability unit for macro-prudential supervision of the financial system and to produce financial stability reports in due course. During 2010, a joint Mission of the IMF and World Bank conducted an update on the Financial Sector Assessment Program (FSAP) for Oman and concluded that Oman’s financial system weathered the global financial crisis without any distress while remaining resilient and sound.

The outlook for the Omani banking sector in the next few years remains positive. Oman’s savings and investment as proportion to GDP has increased significantly during the recent years. In fact, Oman has emerged as an attractive destination for foreign direct investment due to its free market system, stable macroeconomic environment and political stability. As a safeguard against financial contagion, international support is building up for tighter regulatory regime, including dynamic provisioning, countercyclical capital buffers and the perimeter of regulations is being extended to financial markets and innovative financial products. The future of Oman’s banking system remains promising with international rating agencies affirming and upgrading Oman’s sovereign rating.   

How will the Government’s Eighth Five Year Plan boost bank profits?

The Sultanate of Oman’s Eighth Five-Year Development Plan (2011-2015) was formulated within the context of a strategic framework aimed at promoting an economic environment capable of sustaining long-term growth. It is designed to speed the pace of economic diversification and further promote the role of the private sector in the development process. The completion of some physical infrastructure projects from the seventh Five Year Plan and several new projects also feature prominently in the Eighth  Five Year Plan. The Government also plans to enhance the existing coordination between fiscal and monetary policy. Under the Plan, the CBO will continue to enhance the role of the banking sector in the economic development by encouraging credit growth to productive sectors including SMEs and promote saving behaviour among the population. With greater participation of commercial banks in the development process together with large investments by the Government, the profits of commercial banks are expected to remain healthy. In fact, despite adverse international developments, banks in Oman earned impressive profits amounting to RO 190.8 million in 2009, RO 247.7 million in 2010 and provisional figures up to October 2011 indicate profits at RO 218 million.   

Oman decided to continue with the Rial peg to the US dollar instead of joining the proposed GCC single currency. What motivated this decision?

Pegging the Rial Omani to the US dollar has overall served the Sultanate’s economy well, and hence the rationale for maintaining this exchange rate policy. It is important to note that despite the current financial challenges faced by the United States, the US dollar remains the main currency of trade globally and the reserve currency for many countries. The pegging of the domestic currency to the US dollar, has provided monetary and financial stability in Oman and convinced investors of the exchange rate credibility.

Oman took the decision to remain out of the proposed GCC currency Union because the convergence criteria could limit our ability to pursue sustainable diversification plans, which is essential to us, given our current level of high dependence on oil. However, we remain committed to strengthen our economic relationship with all GCC countries by being part of the Customs Union or even a Common Market.     

Expand on the topic of the potential for Oman to issue Islamic bonds. Do you see Oman becoming one of the major centres for Islamic banking?

Oman is on a developmental trajectory, more so now with diversification needs and larger social aspirations in perspective. This naturally gives rise to long term higher financing needs and with it the potential for issue of Sukuks and the like. Such issues will, however, require adequate preparation on various fronts, including legal. With the recent opening up of Islamic banking, work is continuing on the setting up of a regulatory framework, particularly on Shariah compliance aspects. The scope and sensitivities of the market are to be tested, through certain private sector proposals for setting up Islamic banks forecast a potential of 15 to 25 percent of market share for Islamic banks in the medium term.   

What has been the Central Bank’s role in ensuring and enhancing the transparent and competitive business environment in Oman?

Oman has a very attractive foreign investment policy, and under the WTO and US – Oman FTA, foreign ownership in a locally incorporated business entity is allowed up to 70 percent. Local operations through 100 percent foreign owned branches are also permitted as is the case with our foreign bank branches. There are no restrictions on repatriation of profits or capital, since Oman has an open capital account. Tax rates have been harmonized and a level playing field is available to both local and foreign banks. Oman offers a sound banking and financial system, a stable exchange rate policy which together represents strong pull factors for conducive investment.

Please share a final message about Oman with the readers of USA Today.

Despite global uncertainties, the growth outlook for Oman remains positive in 2011 and beyond. The medium-term fundamentals of the economy remain strong with resilient banking system, stable exchange rate, sufficient foreign exchange reserves, adequate physical infrastructure and above all attractive foreign investment policy pursued by the Government. Government has large investment programs under the Eighth Five-Year Development Plan (2011-2015). Wise investors, both domestic and foreign, would like to be partners in progress rather that miss the opportunities.