Interview: Hamood Al Zadjali

What regulations have been formulated to mitigate the underlying risk profile of exposures, such as bank lending to non-resident entities?

HAMOOD AL ZADJALI: To reduce risks related to the banks’ overseas activities, certain prudential limits have been put on non-resident lending and the placement of funds abroad. The limits are reviewed from time to time based on domestic and global developments. There are certain overall exposure limitations placed on banks. These include foreign exchange exposure limited to 40% of net worth and having dues from banks abroad as a negative factor under deposit base (for the purpose of lending ratios), which also act to mitigate risk.

How is the CBO supporting the banking community to accelerate credit flows to the small and medium-sized enterprise (SME) sector?

AL ZADJALI: The CBO has advised the banks that they should formulate a liberal lending policy for the SME segment. The financing of SMEs needs to be considered in the context of the bigger picture, and banks should not be guided mainly by collateral in their credit decisions. They should have a separate department with adequate staff and proper delegation of work to deal with SME finance.

A credit target for financing SMEs by banks has also been specified. The CBO has advised that banks should allocate 5% of their total credit to SMEs and that this target should be achieved by December 2014. This will be reviewed from time to time with scope for a further rise in this percentage.

To encourage lending to SMEs, the prudential requirement for banks to lend to SMEs has also been relaxed. The commencement of Islamic banking will provide further impetus to SME financing, particularly as Islamic banking entities will be looking for financing based upon acquisition of assets, actual transactions and the like. A royal decree has been issued establishing the Public Authority for the Development of SMEs, which will enable the continuous development of this sector.

What aspects of Basel III will enhance the ability of banks to withstand periods of economic and financial stress? How well prepared are Omani banks?

AL ZADJALI: Micro-prudential as well as macro-prudential measures are included in Basel III. The micro-prudential measures are bank level measures that will help raise the resilience of individual banking institutions in periods of stress. The macro-prudential measures address systemic risks as well as the pro-cyclical amplification of these risks over time. The roadmap for the implementation of Basel III guidelines was issued in August 2012 to all licensed banks in the sultanate. This roadmap follows a consultative approach with the banks and broadly pursues the timeline indicated under the Basel III guidelines, phasing in the regulatory measures from the end of 2013 to 2019. The CBO will also be bringing out regular concept papers on the definition of capital and enhanced disclosure requirements. Other concept papers will also be issued in due course, to ensure that all banks are well aware and prepared for the implementation of Basel III guidelines.

What are the main variations of the adoption of Islamic banking in Oman and why were they considered advisable?

AL ZADJALI: By taking into account local sensitivities and requirements, the guidelines for the authorisation and conduct of Islamic banking in the sultanate have been formulated with the Islamic Banking Regulatory Framework (IBRF). The IBRF serves as a one-stop shop for all stakeholders by providing all the requirements, including licensing, sharia (Islamic law) governance framework, risk management, capital adequacy and auditing standards. The IBRF stresses the importance of the Sharia Governance Framework, policies and practices. The conduct of Islamic banking should inspire the market for faith-based banking. There are ample opportunities provided by adopting the standards of the Islamic Financial Services Board and the Accounting and Auditing Organisation for Islamic Financial Institutions.