Maintaining growth momentum

The future prospects of banking sector remains promising, despite the current economic slowdown, says HE Hamood Sangour Al-Zadjali Executive President, Central Bank of Oman, in an interview

he-hgamood-zadjaliWhat are the areas that CBO needs to focus in 2017 to further support the banking sector?

The banking sector in an economy performs the crucial role of mobilising financial savings for efficient allocation among competing economic needs, and in that process serves as the engine for realising economic growth and development. The accommodative policy stance of CBO will continue aimed at ensuring adequate liquidity in the system so that all genuine credit demand is fully met, maintaining orderly conditions in the market and supporting growth. Intensified efforts related to further deepening the financial sector, improving investment climate and promoting small and medium enterprises (SMEs) will remain in focus. Average annual inflation remained moderate at 1.04 per cent during January – October 2016 and containment of inflationary tendencies will remain a priority. Despite the challenges currently faced by the economy, the future prospects of the banking sector remains promising taking into perspective the pace of economic diversification, sustained domestic demand with a growing young population and the enhanced role of the private sector in the growth process.

What measures were taken by CBO in 2016 to further strengthen the banking sector and make it par with global banking standards?

The Central Bank of Oman (CBO) plays an important role in maintaining financial stability, pursuing appropriate monetary policies, developing financial markets and supervising and regulating the banking sector. Despite the challenges faced by the hydrocarbon sector with the drop in crude oil prices, the banking sector in Oman continued the positive growth trend during the year 2016. The financial health of the banking sector in terms of asset quality, provision coverage, capital adequacy and profitability remained resilient in 2015-16. The combined balance sheet of conventional and Islamic banks (other depository corporations) further strengthened in 2016 due to the continued growth in both deposits and credit. The total outstanding credit extended by banks stood at RO21.9bn at the end of October 2016, a rise of 10.2 per cent over the level witnessed a year ago. Total deposits registered an annual growth of five per cent to RO20.5bn as at the end of October 2016. Liquidity conditions in the banking sector so far have continued to remain comfortable with no upward pressure seen with regard to interest rates.

Banking sector regulations and reforms by CBO has resulted in a strong and resilient banking system over the years. Conduct of monetary policy, risk-based supervision of banks, implementation of Basel accords, development of modern payment and settlement systems and supporting growth with containment of inflation have led to financial stability. Credit growth to the productive sectors including SMEs continue to be encouraged by CBO. The CBO advised banks to formulate liberal lending policies for the SME segment and mandated that they allocate at least five per cent of their total credit to SMEs. Banks in Oman are adequately capitalised with the Basel capital adequacy ratio averaging around 16 per cent in June 2016. The Basel Committee on Banking Supervision has developed the Liquidity Coverage Ratio (LCR) to promote the short-term resilience of the liquidity risk profile of banks by ensuring that they have sufficient high-quality liquid assets to survive a significant stress scenario. Our banks have started implementing the LCR and associated disclosure requirements. Another ratio, called Net Stable Funding Ratio (NSFR) has been developed by the Basel Committee to provide a measure of sustainable maturity structure of assets and liabilities. NSFR will be implemented in 2018 as a minimum standard of 100 per cent as per Basel Committee’s timeline and guidelines. With a view to ease the challenges faced by borrowers due to weakened economic activity and to ensure the flow of credit to productive sectors, the specific provisions on restructured loans have been moderated from the stipulated 15 per cent to be implemented in a phased manner of five percent for the year 2016, 10 per cent by the year 2017 and 15 per cent by the year 2018. During 2016, CBO also reviewed some of the existing regulatory norms on cross border exposure of banks and certain modifications have been made with regard to the limit placed on the aggregate funded and non-funded exposure by banks to non-resident borrowers. We can be confident that the banking sector is compliant with international best practices followed by global standard setting bodies, both with regard to regulatory norms and accounting practices.

How effective has been your strategy in maintaining liquidity despite the tough economic environment?

Liquidity in the banking system is ascertained by looking at several indicators such as adherence to the reserve requirement stipulations, excess or shortage of reserves, if any, lending ratio regulation, deposit versus credit growth, interest rate movements including domestic inter-bank interest rates and banks’ resort to repos and discounting. The CBO has been continuously reviewing the liquidity situation and no significant pressures have been noticed. Of course, some relative tightening may have emanated given the containment of Government expenditure. As a proactive measure and in line with accommodative monetary policy stance of CBO and with a view to augment liquidity in the system, it was decided to permit banks’ investment in unencumbered treasury bills, government development bonds and Oman Government Sukuk to be a part of the eligible reserves, to be held with CBO up to a maximum of 2 per cent of deposits effective from April 1, 2016. The move boosted banks’ liquidity by about RO400mn, thereby increasing the availability of the lendable resources with the banks in Oman.

How do you look at the journey of Islamic banking since its introduction in December 2012 in Oman?

A notable development in the banking sector in Oman was the introduction of Islamic banking, commencing in December 2012. The Government and the CBO have vigorously pursued to promote Islamic banking and thereby diversified banking services and aided financial inclusion. Within a short period, two full-fledged Islamic banks were established and six local banks have formed dedicated windows for practicing and offering Islamic banking products. All these institutions have established their own Sharia supervisory boards to guide them in Sharia-related matters. Further, as part of strengthening the Sharia regulatory framework, a high Sharia supervisory board was established in CBO with eminent scholars. The functions of the board include giving opinion and advice to CBO on Sharia related matters and deciding on issues which are subject of a Fiqh dispute between Sharia supervisory boards in licensed banks. Islamic banking operations in Oman are governed by the adoption of accounting standards of AAOIFI and guidance by IFSB Standards. There has been considerable increase in the number of branches and assets held by the Islamic banks and windows. Islamic banks have opened up new segments and players and thereby added to a wider competitive environment by providing customers the benefit of choosing between conventional and Islamic banking products.

Islamic banking entities provided credit to the extent of RO2.3bn as at the end of October 2016, compared to RO1.6bn a year ago. Total deposits held with Islamic banks and windows also registered a significant increase to RO 2.2bn in October 2016 from RO1.4bn outstanding as at the end of October 2015. Their total assets amounted to RO3bn at the end of October 2016 which constituted about 10 per cent of the banking system assets. Going forward, CBO is optimistic that Islamic banking will be in a position to significantly increase their share of business and this will certainly benefit the banking industry in particular and the domestic economy as a whole.

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