The banking sector posted solid growth in 2013 and the first half of 2014, on the back of improving asset quality, coverage and capital adequacy, a burgeoning Islamic banking segment and significant expansion in the economy. The industry comprises 16 conventional commercial banks – including seven local and nine foreign institutions – as well as two sharia-compliant banks, two state-owned specialised credit banks and a handful of non-deposit-taking leasing companies.
Taking into account steadily growing demand for financial services on both the retail and corporate sides, Oman’s banks and related institutions are looking forward to continued expansion in deposits, credit, capital and profits. “The sultanate is stable, there are a lot of major infrastructure projects coming up and there appears to be comparatively little corruption nor bureaucracy,” Lloyd Maddock, the CEO of Ahli Bank, a local lender, told OBG in August 2014. “From a banking perspective there are many reasons to be optimistic right now.”
Yet the sector does face some challenges. Oman’s government is in the midst of a long-term drive to boost private sector employment opportunities, particularly for Omanis under the age of 30, who constitute more than half of the total population, according to the National Centre for Statistics and Information. This has had a major impact on local banks, which are required to employ at least 90% Omani staff.
In addition to the “Omanisation” employment requirement, in recent years the government has initiated a large-scale programme aimed at boosting entrepreneurship and the establishment of small and medium-sized enterprises (SMEs). As part of this, the Central Bank of Oman (CBO) has introduced regulations requiring local banks to boost SME lending to at least 5% of their loan books by 2015. “In the SME segment we lend more to medium-sized enterprises than small businesses,” said Amin Al Husseini, the CEO of Oman Arab Bank (OAB). “However, banks are trying hard to support the small business sector and are even providing what is considered to be micro-financing to many ultra-small businesses.”
Other challenges include new regulations introduced by the CBO in recent years that mandate strict limits on lending and other activities; a lack of sharia-compliant investment options, which has slowed the development of the burgeoning Islamic banking industry (see analysis); and the lack of a large, qualified Omani employment pool, among other issues.
The first bank to start operating in Oman was HSBC, the British institution, which opened its doors in 1948 and was the sultanate’s sole bank until Ahli Bank opened in 1968. When Sultan Qaboos bin Said Al Said came to the throne in 1970, his government set out to establish a formal, well-regulated banking sector, in line with international best practices. This led to the establishment of the CBO in 1974, replacing the Muscat Currency Authority and the Oman Currency Board. The establishment of the CBO was a result of the Banking Law, introduced in 1974. The law is still in place, although it has been updated a number of times since. When it began operations in 1975, the CBO had a capital base of OR1m ($2.59m). As of the end of May 2014 the institution boasted total assets of OR7.35bn ($19.03bn).
Oman’s banking sector has grown rapidly over the past decade, in line with the broader financial sector throughout the Gulf region. While banking activities in the sultanate ramped up in the mid-2000s, the 2008-09 international downturn had very little impact on the sector. Indeed, a strong regulatory framework and a cautious but active regulator in the CBO meant that the market was well insulated against much of the bad debt and most of the speculative financial instruments that were in widespread use elsewhere in the world. “Financial oversight, corporate governance and reporting are very good here. Banks are strictly regulated,” said Tariq Ibrahim Al Asfoor, executive vice-president of capital markets at Oman International Development and Investment Company.
Monetary Policy & Oversight
The Omani rial has been pegged to the US dollar since the early 1970s. Since 1986 the exchange rate has been constant, meaning that the CBO’s monetary policy is heavily influenced by – and in most cases mirrors exactly – that of the US Federal Reserve Bank. As a result, interest rates remained low in 2013. The repo rate, which was set at 1% in March 2012, was unchanged through 2013, in line with the LIBOR inter-bank rate. In October 2013 the CBO reduced the ceiling rate on personal and housing loans from 7% to 6%, which was seen as an effort to lower the cost of borrowing for Omanis. This is in line with a government-led effort to shore up consumer protection in various sectors.
In 2013 Oman’s monetary situation was generally characterised by rapid economic growth and low inflation rates, driven by high oil prices, large amounts of public expenditure and low interest rates.
As a result of cheap money and rising deposits, liquidity in the banking system continued to rise over the course of the year. The CBO’s primary tool for mopping up excess bank liquidity in recent years has been short-term certificates of deposit.
The lack of depth in Oman’s debt market is a long-term challenge for banks and the CBO alike. Some upcoming government and corporate debt listings are expected to have a positive impact in this respect (see Capital Markets chapter).
In recent years the CBO has introduced a handful of new regulations. As previously mentioned, under the new rules at least 5% of banks’ loan books are required to be dedicated to SMEs by the end of 2015. Currently SMEs account for just 1-2% of most institutions’ credit portfolios. “The 5% target is a challenge within the given time frame, and the definition is very thin. I expect that most of the banks will not meet the target,” Adnan Haroon, acting CEO of Standard Chartered Bank in Oman, told OBG.
Under another recent piece of CBO legislation, banks are required to limit consumer lending to 35% of their loan books, down from 40% previously. Many institutions are already at or near this limit, so have responded by ramping up corporate lending in order to grow their overall credit portfolio. Another related piece of new legislation instituted a requirement that banks cannot issue a consumer loan if it brings the borrower’s monthly repayment costs beyond 50% of that person’s income. These new regulations are currently being implemented across the sector.
In 2012 the CBO issued finalised Basel III implementation requirements for Omani banks. Given the high level of capitalisation – the sector’s capital adequacy ratio was at 16.2% at the end of 2013, according to the CBO – the implementation of Basel III is widely considered to be somewhat redundant. Regardless, the industry is expected to meet or exceed Basel III norms – including a CBO-mandated minimum total capital adequacy ratio of 12% – by the end of 2017, a year ahead of the global target date set by the Basel Committee on Banking Supervision.
By The Numbers
As of the end of June 2014, the total asset base of commercial banks in Oman was OR24.6bn ($63.8bn), up from OR22.4bn ($58bn) at the end of 2013 and OR20.9bn ($54.1bn) at the end of 2012, according to CBO data. Commercial banking institutions reported profits of OR351.3m ($910m) in 2013, up from OR305.3m ($791m) the previous year. These figures are in line with growth in the broader economy. Indeed, between 2011 and 2013 Oman saw average GDP growth of 10.2%. During the same period the sultanate’s inflation rate was just 2.7%.
In recent years bank profits have grown on the back of increases in both deposits and lending. Indeed, credit allotments made up 68% of total banking assets in Oman in 2013, up 6% on the previous year, while deposits grew 10% over the same period, from OR14.2bn ($36.8bn) at the end of 2012 to OR15.6bn ($40.4bn) at the end of 2013.
Even as lending increased, non-performing loans (NPLs) as a percentage of total credit issued decreased from 2.2% at the end of 2012 to 2.1% at the end of 2013, according to CBO data. Retail issuance currently constitutes 35-40% of most banks’ loan books, though this figure is expected to drop in the coming years as banks work to meet the CBO’s new lending ratios. According to local media reports, government deposits account for approximately one-third of total commercial banking deposits.
The seven conventional, domestic commercial banks are Bank Muscat, the sultanate’s largest bank; NBO; Bank Dhofar; HSBC Bank Oman; OAB; Bank Sohar; and Ahli Bank. Commercial banking assets are heavily concentrated at the top. According to CBO data, at the end of 2013 Oman’s three largest banks– Bank Muscat, NBO and Bank Dhofar – accounted for 62.2% of total sector assets, just under 60% of deposits and over 65% of issued credit. Together these banks had total assets of OR13.9bn ($36bn) at the end of 2013. Six of the sultanate’s conventional domestic banks – all but OAB – are listed on the Muscat Securities Market (MSM), the stock exchange. Together, the six make up a substantial percentage of the MSM’s total market capitalisation. In September 2014 the MSM general index stood at over 7450 points, its highest since late 2008.
Bank Muscat reported total assets of OR8.5bn ($22bn), some 37% of total sector assets, at the end of 2013. In the same period the bank also had 37% of total loans and 33% of deposits. Bank Muscat offers a range of retail and corporate banking, financing, and investment products and services. As of August 2014 the bank was one of the MSM’s largest listings. In 2013 Bank Muscat pulled in OR152.2m ($394.1m) in net profits, equal to around 70% of the earnings of the rest of Oman’s financial institutions combined. Bank Muscat has invested heavily in technology in recent years. Most recently, in August 2014, it introduced biometric fingerprint scanning systems at 137 branches, which allows customers to access a raft of account services with a quick scan of their finger.
NBO, Oman’s second-largest bank, boasted assets of OR2.9bn ($7.51bn) at the end of 2013, up 14% from OR2.5bn ($6.47bn) the previous year. The bank offers a wide range of retail and corporate products. In 2013 NBO brought in OR41.4m ($107.2m) in net profits. Beginning in April 2014 the bank was a major contributor to the banking rally on the MSM, posting growth in excess of 34% through early August.
Bank Dhofar, Oman’s third-largest bank, reported assets of OR2.6bn ($6.73bn) at the end of 2013, up from OR2.1bn ($5.44bn) the previous year. Founded in 1990, Bank Dhofar saw its stock jump 20% in the first seven months of 2014. The lender has been in merger talks with Bank Sohar since mid-2013. The merger, which in August 2014 was moving forward, would create the second-largest bank in the country.
HSBC is the fourth-largest bank in Oman, with assets of OR2.2bn ($5.7bn) at the end of 2013, down from OR2.4bn ($6.21bn) the previous year. The current iteration of HSBC Oman is the result of a 2012 merger between HSBC and Oman International Bank.
A wide variety of foreign conventional banks are also active in Oman, including Standard Chartered, Habib Bank, the National Bank of Abu Dhabi, Qatar National Bank, the Bank of Baroda, the State Bank of India, Bank Melli Iran, Bank Saderat Iran and the Bank of Beirut.
The sultanate is also home to six non-bank finance and leasing companies (FLCs), which are licensed to lend and can accept deposits of a minimum of OR10,000 ($25,900), for a minimum tenor of one year, from corporates only and to 100% of net worth only in total. As of the end of 2013 the FLCs had OR855.6m ($2.22bn) in total combined assets. Finally, Oman also hosts two specialised government-owned banks, the Oman Development Bank and the Oman Housing Bank, both of which offer various specialised low-cost and subsidised products.
A handful of Islamic financial institutions have been established in Oman in recent years. Prior to 2012 sharia-compliant banking was prohibited by the CBO. However, as a result of increasing demand from both consumers and the financial sector, in 2012 the central bank introduced the Islamic Banking Regulatory Framework, a comprehensive set of standards and regulations for sharia-compliant banking. A variety of new institutions have since been set up in the sultanate.
Oman is home to two full-fledged Islamic banks: Bank Nizwa, which began operations in January 2013, and alizz islamic bank, which opened in September 2013. Both are listed on the MSM. Additionally, six of the country’s seven conventional domestic banks have set up Islamic “windows” – sharia-compliant entities that are required by law to maintain a certain degree of separation in terms of capital and operations.
Retail sharia-compliant products have proved popular in Oman. At the end of 2013 Islamic institutions controlled 3.6% of total banking sector assets, according to CBO data. By the end of the first half of 2014 combined revenues at Islamic banks reached OR16.6m ($43m), up nearly 150% from OR6.7m ($17.3m) at the end of the first half of 2013, according to Oman News Agency. Bank Muscat’s Islamic subsidiary, Meethaq Islamic Banking, has taken the majority of sharia-compliant deposits so far. Other major players include Bank Nizwa, Ahli Bank’s Al Hilal and Bank Dhofar’s Maisarah. In addition to the fully fledged institution alizz, other Islamic players in the sultanate include the NBO-controlled window Muzn, Bank Sohar’s Sohar Islamic and OAB’s Al Yusr (see analysis).
While Oman is home to a burgeoning Islamic financial services segment, the sultanate’s sharia-compliant banks face a number of challenges. The most problematic of these is the fact that most institutions are sitting on a substantial amount of liquidity and have nowhere to put it.
“There are very few Islamic investment products available to us at the moment,” Jamil El Jaroudi, CEO of Bank Nizwa, told OBG. “This has made it very challenging to place our capital efficiently.”
In an effort to allow banks to diversify their holdings and revenues, in 2013 the CBO announced the temporary removal of restrictions on the amount of foreign assets that sharia-compliant banks were allowed to hold. The stay on restrictions on foreign investment was initially granted for a period of one year, at which point banks will likely be required to reduce their foreign exposure as soon as the number of domestic products increases. This could take place as soon as the end of 2014. Indeed, the government is planning a sovereign sukuk (Islamic bond) issue, which is expected to attract a considerable amount of attention from the sultanate’s nascent Islamic institutions (see Capital Markets chapter).
Attracting deposits and other types of business from corporates is another key challenge facing the sharia-compliant banking industry. Most of Oman’s large corporates have well-established existing relationships with one or more conventional banks, and are not eager to incur the expense and hassle of moving their accounts to a new institution, Islamic or otherwise. “The main competition for us is not coming from the other Islamic banks or the windows,” said Jaroudi, “but mostly from the conventional banks, as financing cost and level of services are the main important considerations by the corporates.”
In recent years the domestic banking sector – including both conventional and Islamic institutions – has seen rapid growth on the back of rising awareness among Omanis about the benefits of financial services. That said, a large percentage of the population remains unbanked and, in some cases, sceptical about joining the formal financial system. This represents a challenge, but also an opportunity for future growth.
Other positive challenges facing the sector include the increasing requirement for Omanisation at senior management grades and the state’s recent drive to build up the SME segment. “Banks, in addition to other industry players, are already being proactive in providing guidance to SME entrepreneurs, for example by hosting development programmes, training courses and industry seminars,” said Maddock.
Indeed, despite these and a handful of other issues, the banking sector is currently well positioned for ongoing expansion and growth. Deposits have been buoyed by considerable rises in public sector salaries since 2011. Despite the CBO’s recently introduced caps on lending, credit issuance is up and demand for credit is strong. The ratio of NPLs to the overall loan base is negligible. Most banks are investing heavily in e-banking and related digital services, which are considered to be a key growth area. “The retail segment is becoming increasingly sophisticated,” Al Husseini told OBG. “Mobile phone penetration is driving the demand for mobile banking and other technical banking services.” Oman’s numerous ongoing large-scale infrastructure development projects – including the Oman National Railway initiative (see Transport chapter) – are expected to provide a variety of financing opportunities for local banks for years to come. “Banks are becoming more involved in development projects,” said Al Husseini. “Omani banks are now shifting from simply financing projects to offering full financial solutions.” With these upcoming opportunities in mind, and taking into account the strong sector fundamentals, the future looks bright.
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