HE Hamood Sangour Al-Zadjali Executive President
Central Bank of Oman
Financial stability reports and stress tests, recently developed by the Financial Stability Department of CBO, reflected the durability, resilience and sectoral diversity of the banking system in general.
During the period 2014-2015, Oman’s banking sector has continued to play a pivotal role by attracting national savings and directing them to meet the financial requirements of the Sultanate’s economy. According to the latest data, the banking sector has achieved high-growth rates. This reflects customers’ trust in the quality of the services provided and the inclusiveness of these services, attracting people from across the spectrum of the society. Assets and deposits grew by 17.6 per cent and 10.4 per cent from August 2014 till August 2015 to reach RO29.598 million and RO19.476 million respectively. Total credit grew by 13.7 per cent to reach RO19.458 million from August 2014 to August 2015. The non-performing loan (NPLs) ratio, which is considered low by global standards, has further declined to 2 per cent at the end of June 2015. In addition to this, the various banking institutions are sitting on piles of cash: total capital and reserves grew by 12.2 per cent during the same period. Total capital adequacy ratio of the banking system stood at 16.3 per cent at the end of June 2015, compared with the 12 per cent ratio determined by the Central Bank of Oman (CBO).
In addition, financial stability reports and stress tests, recently developed by the Financial Stability Department of CBO, reflected the durability, resilience and sectoral diversity of the banking system in general. Under the supervision of CBO, work is underway to develop appropriate regulatory and supervisory frameworks for the banking sector in line with international standards and best practices. To maintain the integrity and durability of the commercial banks and allow them get lucrative opportunities overseas, taking advantage of economic liberalisation and globalization, in conjunction with an acceptable level of risk, CBO has circulated in March, 2014 precautionary guidelines about credit exposure to non-residents and overseas deposits. It should be noted that these guidelines were drafted in consultation with commercial banks, who provided valuable inputs in this regard. With regards to the banking supervision and regulation, CBO’s inspection on commercial banks has become the most risk-sensitive methodology. All licensed banks in the Sultanate are operating the Internal Capital Adequacy Assessment Process (ICAAP). Furthermore, more focus was given to immediate corrective measures with a review of the developments which require changes in the banks’ capital adequacy requirements.
The Joint Committee for Financial Stability was formed in 2014 as decided by the Board of Governors of the CBO. Several government authorities are members of the Committee. The committee’s powers include studying systematic risk on banking and capital market, providing appropriate solutions and proposals to manage these financial risks and crises, and implementing precautionary control to promote financial stability in Oman. The creation of such a committee aims to complement the Department of Financial Stability of the CBO, which supervises the overall precautionary safety of the banking system through operating a control and regulatory risk analysis system, to enhance financial stability and overall financial monitoring, in addition to introducing quarterly reports of stress tests and annual financial stability report.
As part of the procedures to promote financial stability, the Domestic Systemically Important Banks (D-SIBs) has been adopted. The new framework requires creating an enhanced version of the supervisory system to deal with the banks that fall within the category of “too big to fail.” D-SIBs category banks should be subject to more stringent measures. In addition, early warning system, crisis management mechanism, recovery and resilience plan and comprehensive risk awareness framework were introduced. Moreover, an enhanced capital requirement shall be gradually imposed, which would add 1 per cent to the capital adequacy ratio required from such banks.
CBO ensures that commercial banks comply with the Omani banking law and the best international practices as per Basel III instructions. As part of these efforts, CBO issued in December 2014 the final framework of liquidity coverage requirements and relevant standard disclosure requirements under Basel III instructions, after conducting the necessary consultations. The Basel Committee on Banking Supervision (BCBS) has developed “Liquidity Coverage Ratio’’ (LCR) to enhance banks’ resilience against liquidity risk on the short-term. The LCR requires banks to hold a stock of high-quality liquid assets (HQLA) to meet any material stress conditions up to 30 days. The LCR standard was introduced on 1 January 2015, with a minimum requirement of 60 per cent and will rise gradually in equal annual steps of 10 per cent to reach 100 per cent on 1 January 2019. In addition to this ratio, BCBS developed the Net Stable Funding Ratio (NSFR) to provide a measure of sustainable maturity structure of assets and liabilities.
By the end of December 2014, the number of licensed commercial banks in the Sultanate reached 16, including seven local banks and branches of nine foreign banks. They are involved in various banking and investment activities through 514 branches across the Sultanate. There are also two Sharia-compliant banks, in addition to six Islamic windows of commercial banks. The total branch network of Islamic banking entities (IBEs) operating in the Sultanate reached 46 as of 2014. The year 2014 saw a significant growth in the expansion of branch networks, with a total of 46 new branches of various banks and Islamic banks opened by the end of the year. In addition, there are two specialist state-owned banks: The Oman Housing Bank, The Oman Development Bank, which have nice and 14 branches respectively.
As for the Omanisation policy in the banking sector, which is one of the priority areas of the CBO, the total Omanisation in the banking sector by the end of December 2014 stood at 92.4 per cent. To stimulate lending towards income-generating projects and to encourage housing loans to provide adequate housing for citizens, CBO amended the regulation of personal loans granted by commercial banks to control personal loans. The limit of personal loans cannot be exceeded 35 percent of the total credit while the ceiling for housing loans was specified at 15 per cent starting from the end of June 2014.
To provide more facilities to borrowers, the interest rate on personal loans (including housing loans) was lowered to 6 per cent. This decision comes in the context of directing the banking sector towards increased lending to productive sectors rather than focusing on personal loans which may negatively impact the economy in general.
The latest data show that Islamic banking activities in the Sultanate has grown considerably recently, contributing to promote financial deepening through increased branch network. Islamic banking accounted for 6.3 per cent of the total banking assets in Oman at the end of August 2015. This growth has been achieved thanks to the increased demand for Sharia-compliant products, provided by Islamic banking units in deposits or loans. Islamic banking units may play an active role in financing government over the coming period, along with conventional banks, through investing in Islamic instruments issued by the Government.
SUPPORT TO SMEs
The government, in collaboration with CBO, exerts a lot of efforts to develop small and medium-sized enterprises (SMEs) through boosting capacities of prospective entrepreneurs, identifying the most important areas in which SMEs require financing and facilitating cooperation between the public and private sectors. The government focuses on empowering entrepreneurship and preferential treatment for SMEs in government tenders, subcontracts and other procedures aimed at encouraging such institutions. CBO stipulates that banks should allocate 5 per cent of their total credit to SMEs by no later than the end of December 2015. In addition, the precautionary requirements that banks should meet while lending SMEs were mitigated in terms of general provisions and risk weights requirements. Under CBO’s instructions, conventional and Islamic banks in the Sultanate have set up directorates dedicated to provide banking services for SMEs. In addition, Islamic banking units may find financing SMEs more attractive.
BOOSTING THE BANKING SECTOR
I want the banking sector to enjoy high financial indicators in terms of asset quality, capital adequacy and robust profitability. Qualitative and quantitative indicators reflect continued banking financial deepening and inclusiveness. To further maintain and boost this favourable situation for the banking sector, we should continue to tighten control, based on the appropriate regulatory framework such as the Banking Law for the year 2000 and the Islamic Banking Regulatory Framework for the year 2012, in addition to keeping up with the best international standards and practices through adopting latest developments under Basel instructions. Besides, the CBO issues the appropriate circulars based on developments, taking into account the nature of the local banking sector and the Omani economy in general.