Interview: Tahir Salim Al Amri

What is the CBO doing to enhance liquidity management for the Islamic banking segment?

TAHIR SALIM AL AMRI: Liquidity management in the Islamic banking industry has been a big challenge as the non-sharia elements of conventional instruments make them unsuitable for the segment. There has been an increasing number of sukuk (Islamic bonds) issuances from Islamic countries as well as other jurisdictions, reflecting their popularity and ability to meet large financing needs. Sukuk issuances from government entities and the private sector, however, fluctuate depending on need, liquidity and risk appetite. As for Oman, it may be noted that the government’s first sharia-compliant sovereign sukuk was oversubscribed. There have been some private issuances, too; and one of the Islamic banking entities has issued a musharaka-based (joint venture) sukuk, and another issuance is currently in process.

Short-term liquidity management, as of now, is being done through interbank transactions, mostly wakala-based (agency). Islamic banking entities can also use the Sukuk secondary market to address short-term liquidity needs. The CBO is currently engaged in the consultative process of establishing liquidity management tools, and the initial progress in this regard has been satisfactory.

There are numerous sharia compliance requirements that need to be ensured, and they include appropriate practices and processes, as well as legal concerns and other facilitations. Wakala arrangements and collateralised partnerships are currently under product review, and we look forward to addressing this market gap as soon as possible.

How has the government’s fiscal policy impacted broader liquidity conditions?

AL AMRI: The local economy is currently witnessing a slowdown along with fiscal deficits. The slowdown has reduced credit demand, while fiscal deficits have led to an increase in the government’s financing requirements. A part of the government debt has been issued in domestic currency using the space created by the deceleration in credit growth.

Hence, we feel that the government’s budgetary needs have helped in balancing liquidity in the banking system. The government debt management strategy in Oman, however, weighs options of domestic and external debt issuances judiciously so that liquidity and credit requirements are not adversely impacted. The CBO also closely monitors the impact of government debt on liquidity conditions in the banking sector and takes appropriate measures to mitigate any such problem.

What tools does the CBO have at its disposal to stimulate non-oil activity?

AL AMRI: The monetary conditions of the US get mirrored in most of the GCC countries due to their currency pegs to the US dollar. Accordingly, US interest rate hikes lead to corresponding hikes in GCC economies, which dampens money supply growth. Though interest cost is one of the factors that influences non-oil economic activity, Oman’s infrastructure and its huge economic potential could overcome the interest factor. Nevertheless, the CBO ensures that appropriate liquidity is available in the banking system so that the credit needs of all segments of the economy are met. The CBO also provides special dispensation with regard to credit disbursement for some special segments, such as small and medium-sized enterprises (SMEs), which play an important role in non-oil activity and economic diversification. Presently, banks are advised to follow liberal lending policies for SMEs, with a mandate to extend a minimum of 5% of their total credit to them. The CBO can tweak the regulatory limits, such as the lending ratio, if need be to promote credit expansion within the non-oil sector.