2017 was a challenging year for non-banking finance companies in Oman. There was stress on the net margin due to the liquidity crunch in the local market and the consequent increase in the cost of funds. Banks’ penetration into vehicle financing and SME funding further reduced the market share forcing NBFCs to offer very competitive lending rates. Muhammed Nafie reports
2017 was a challenging year for finance and leasing companies (FLCs) in particular and the financial services industry as a whole. The tightening of liquidity in the market raised the cost of short-term funding for banks and finance companies and also triggered the fears about steep hike in interest rates amidst prevailing depressed business sentiments. Against the backdrop of the challenging economic situation, the banks were facing the task of maintaining adequate liquidity and a healthy asset quality.
During the year, FLCs faced stiff competition from commercial banks as well as Islamic banks including the Islamic windows of commercial banks in the retail and SME segment. Banks’ penetration into vehicle financing and SME funding further reduced the market share forcing FLCs to offer very competitive lending rates.
In addition, the restrained spending on new developmental projects provided limited opportunities for expansion of business. The market witnessed a decline in the demand for commercial vehicles and equipment due to a dearth of avenues for deployment of assets, drop in hiring rates and delayed settlement of dues by contractors. The demand for private vehicles also registered a decline as a result of increase in petrol prices prompting citizens and residents to opt for used cars. Contraction in the overall demand triggered intense competition amongst peers.
Market liquidity remained under pressure almost throughout the year resulting in higher interest rates on borrowings and contraction of net margins. There was no respite from the delayed payment cycle which severely affected the cash flow of borrowers forcing them to delay or default on their loan obligations. This trend triggered a spurt in delinquencies during the year.
The industry as a whole witnessed a negative growth in FY 2017.
Oman Orix Leasing Company recorded the highest business volumes in its history. Gross lease receivables of the company increased by 14.7 per cent to RO258.77mn compared with RO225.73mn in 2016. Growth has resulted in an increase of 1.75 per cent in the operating profits, to RO8.84mn compared with RO8.69mn in 2016. Total revenue for the year increased by 14 per cent to RO21.11mn compared with RO18.47mn in 2016.
National Finance maintained its positive growth trajectory. Net finance assets have grown 4.2 per cent during the year to reach RO200.5mn from RO192.5mn in 2016. The company recorded a net profit of RO7.05mn in 2017 representing an increase of 10.57 per cent over the 2016 profit of RO6.35mn.
National Finance is in an advanced stage in the acquisition process of Oman Orix Leasing Company through a merger by incorporation. The merged company will emerge as the largest finance and leasing company in Sultanate. The company aims to raise RO45.84mn through a combination of perpetual bonds of RO18.20mn and rights issue of RO27.64mn. The company believes that the merger will enhance its market presence through increase in customer reach, service channels and enable rapid expansion through launch of new products.
Upon completion of the merger, the company’s headcount will approximately double. It is expected that the process of streamlining and consolidation of operations will result in more people being redeployed from back end operations to customer facing areas. National Finance expects that consolidation of systems and processes and adopting best practices across the merged company would result in a substantially improved customer experience, increased staff efficiency levels and higher speed of business operations.
Taageer Finance reported a growth of 9.90 per cent in the total revenues 2017 and the PAT grew by 5.12 per cent despite stiff competition in the industry from peers and the banks as well. Taageer became the first non-banking finance company to launch the new customer service electronic delivery channel, by launching its mobile app during the year.
Al Omaniya Financial Services Company, the largest NBFC in Oman in terms of assets size, net worth, market capitalisation and provisioning cover for NPLs etc., achieved a net operating income of Ro13.2mn as compared to Ro12.71mn in the previous year. The profit before provision and tax earned for the year 2017 is RO8.58mn as compared to RO7.87mn for the year 2016. The company’s net installment finance receivables stood at RO216.75mn as of December 31, 2017 and the total assets size is RO244.604mn. The company has provided Ro3.1mn towards provision for impairment for the year 2017. The profit after tax and deferred tax adjustment is RO6.98mn which has resulted in a growth in profitability of 31 per cent over the previous year.
Muscat Finance continued to maintain a cautious approach to asset growth, and the net loans and advances shrunk by RO6.33mn during the year. Although the company shrunk its debtors’ portfolio, it was able to achieve a net profit after tax of RO4.048mn. During the year, the company decreased its provision charge to the profits by 9 per cent. Incremental provisions for the year after write offs, comprised of almost RO1.2mn and cumulative provisions, including reserve interest, reached RO16.55mn, representing 11.66 per cent of net assets.
United Finance Company (UFC) booked a reasonable volume of business despite the subdued market conditions. The loan book of the company as at 31 December 2017 stood at RO113.59mnas against RO114.55mn as at December 31, 2016. The company recorded a net profit of RO1.02mn for the year 2017 as against RO4.50mn for the previous year.
Looking ahead, there will be higher stress on the NBFCs to sustain the earnings and profitability with the increase in non-performing assets, shortage of talent and increase in staffing costs. The stress on the net margin of NBFCs due to the liquidity crunch in the local market and the consequent increase in the cost of funds coupled with increase in LIBOR rates is another major cause for concern.
All banks and FLCs are expected to adopt IFRS 9 reporting standards from 2018. This may require additional provisioning for impairment and could impact profit margins in the future. Companies with a sustainable business model with an emphasis on higher efficiency, risk diversification, prudence and innovation will succeed in the long run.