Interview: Tahir bin Salim Al Amri
How would you assess liquidity in the market, and what is being done to alleviate rising funding costs?
TAHIR BIN SALIM AL AMRI: The existing deposit base and capital buffer provide banks ample space for additional loans without breaching the prudential limits. Capital adequacy is more than sufficient, with an average ratio of 18.1%, and the average lending ratio stands at about 80%, with the potential to increase to 87.5%. Furthermore, considering the increased diversification away from the hydrocarbons sector on the back of the National Programme for Enhancing Economic Diversification and a number of other initiatives, banks may not need to maintain such a high level of capital to deal with the challenges emanating from volatile oil prices. Consequently, banks would be in a position to use part of the excess capital for additional lending.
Therefore, the greater issue is with funding costs and choice of assets. Funding costs have risen in line with rising interest rates on deposits: the weighted average interest on Omani rial deposits has increased from 0.94% in December 2015 to 1.99% in September 2019. Interest rates have increased due to the transmission of monetary policy normalisation by the US Federal Reserve, but the Central Bank of Oman has ensured adequate liquidity in the banking system. Omani banks, however, are trying to find safe alternative assets to balance these rising funding costs. For example, they are buying more government development bonds. We are working with the Ministry of Finance with regards to bond issuances, ensuring that domestic funding is available to the government without crowding out the private investment that continues to be critical for successful non-oil economic activities.
To what extent is disruptive fintech progressing within the banking sector?
AL AMRI: The banking sector has always welcomed new avenues of improving banking systems and is open to adopting new financial service technologies. Regarding the establishment of fintech, we are concerned with three main aspects: practicality, security and cost. There have been many key developments so far. First, we have laid down the infrastructure for payment systems, with the ratification of the payments law in February 2018. This was a huge step in enabling the usage of e-wallets in collaboration as well as on a standalone basis. Second, while at the moment all fintech-related players hold banking licences and are monitored by the CBO, we are planning to allow non-banking fintech entities to operate under a separate licence. Third, in addition to e-know-your-customer onboarding, we are pushing for banks to issue contactless cards, for example, with the goal of lowering local settlement and facility fees.
We are aware that institutions and regulators may be concerned that fintech companies serve as major competition to banks’ existing business models, but we are really positive about the extensive benefits fintech is bringing to the sultanate, namely the provision of faster and more affordable financial services for customers, and enhanced financial intermediation in terms of both increased outreach and efficiency.
What is being done to improve the ease of doing business in the sultanate?
AL AMRI: Recent policy measures implemented by the CBO to improve the ease of doing business include reducing the minimum capital adequacy ratio by one percentage point; allowing banks to consider their net domestic interbank borrowings for lending ratio purposes; increasing the prudential limit for credit exposures to non-residents and placing funds abroad as a percentage of local net worth from 50% to 75%; and rolling out the bank resolution framework. While the bankruptcy and insolvency laws will allow for systematic and amicable resolutions of firms under debt stress through restructuring, change of ownership or liquidation, they still require some time to fully develop.
