As a cornerstone of the economy, Oman’s banking sector experienced significant growth and development between 2012 and 2022. While the disruption of the Covid-19 pandemic – and in particular its knock-on effects on global energy markets, supply chains and inflation – has weighed on the pace of expansion, Omani banks’ strong performance and stability in the years preceding the health crisis have allowed the sector to weather the multiple global economic headwinds since 2020.
Structure & Oversight
A key strength of the banking sector is its well-regulated environment, which is overseen by the Central Bank of Oman (CBO). The CBO has implemented strict regulations to ensure that banks operate in a safe and sound manner, which has helped to maintain the stability of the wider financial system. It has also implemented measures to promote financial inclusion, such as the introduction of mobile banking and the expansion of branch networks to reach underserved areas.
The banking sector is composed of both conventional and Islamic banks. Conventional banks offer traditional banking products and services, such as deposits, loans and credit cards, while Islamic banks adhere to sharia law and offer products and services that are compliant with Islamic principles, such as profit and loss sharing. Both types of banks are supervised by the CBO, which is responsible for maintaining the stability of the financial system and protecting the interests of depositors. Notably, conventional institutions are permitted to set up fully fledged Islamic banks or operate Islamic banking windows; the latter is not always the case in markets with Islamic banking segments.
In 2022 there were seven local and nine foreign banks operating in the country. The sector also includes two specialised banks – Oman Housing Bank and Oman Development Bank – as well as seven Islamic banks and windows, according to the CBO.
The central bank oversees the activities of banks through various means, including both on-site inspections and off-site surveillance. It sets regulations and guidelines for banks, such as capital adequacy ratios and liquidity requirements. The CBO also has the authority to take enforcement action against lenders that do not comply with regulations, such as imposing fines or revoking licences. It works closely with other regulatory bodies in the sultanate, including the Capital Market Authority (CMA), the Securities and Exchange Commission, and the Public Authority for Consumer Protection to create a comprehensive framework for the financial sector.
The central bank is responsible for implementing monetary policy, which includes setting interest rates and regulating the banking sector. The CBO also ensures that banks in Oman maintain adequate levels of capital in accordance with Basel III capital adequacy ratios. These ratios set minimum requirements relative to risk-weighted assets for Tier-1 capital, which includes common stock and retained earnings, as well as Tier-2 capital, which comprises items such as undisclosed reserves and general provisions. These and other regulatory measures seek to ensure that Omani banks are able to withstand domestic or international economic shocks.
Policies & Strategies
In recent years, as was the case in many markets around the world, the CBO cut interest rates in response to the global economic downturn caused by the pandemic. Oman began to lower its policy rates in March 2020 to provide support to the economy and encourage lending by banks. The repurchase (repo) rate reached a low of 0.5% in December 2021; the same month saw the interbank lending rate dip to 0.369%, down from the rate of 0.7% recorded in the previous year.
While the CBO sought to keep interest rates low in 2020-21 to support economic recovery, the resurgence in inflation in 2022 – exacerbated by Russia’s invasion of Ukraine in February that same year and its subsequent impact on global commodity markets – prompted the CBO to hike benchmark rates in step with the US Federal Reserve.
As of mid-June 2022 Oman’s repo rate had undergone three successive revisions, bringing it to 2.25%. By mid-December 2022 it had reached 5%. Although many countries increased interest rates to curb inflation, this pattern is particularly common in markets with exchange rates fixed to the US dollar during periods of monetary tightening in the US.
“Oman has developed resilience against interest rate variations in both high and low scenarios,” Faisal Mohamed Al Yousef, chairman of Muscat Finance Company, a local non-banking finance company, told OBG. “This is largely due to the sultanate’s focus on reducing its debt to manageable levels, allowing it to sustain macroeconomic shocks even when global economies are affected by anti-inflationary measures undertaken by the US Federal Reserve.”
Beyond interest rates, the CBO has undertaken a number of policies to promote expansion in areas of the banking sector that have been deemed strategic for accelerating growth and improving financial inclusion. Islamic banks and the broader Islamic financial services segment have been targets of enabling regulation in recent years. As of early 2023 the CBO was in the process of developing a medium-term strategy for the Islamic banking segment; it plans to create a lender of last resort for sharia-compliant entities, allowing them to take on more risk and grow their role in financing economic growth at the national level, as well as a sharia-compliant deposit insurance mechanism, among other initiatives.
As of the end of 2021 Islamic banks accounted for 10.4% of total financing of government and public enterprise projects, up from 4.6% at the end of 2020, but below the 16.1% recorded for their conventional counterparts, according to figures from international credit ratings agency Fitch. Global bodies such as the IMF and the Islamic Financial Service Board consider a market to have a “systemically important Islamic banking system” when asset share exceeds the 15% threshold. Increased financing of government and public projects has helped Islamic lenders close the gap in the years since the country’s first Islamic bank was licensed in December 2012.
Meanwhile, on the retail banking side, in July 2022 the CBO announced it had made progress towards its planned introduction of sharia-compliant money market instruments, which could herald significant growth in both Islamic banks’ and Islamic banking windows’ liquidity, and make them more competitive with conventional institutions.
In another development expected to reshape the Islamic banking segment, in January 2022 the CBO approved sharia-compliant lender Bank Nizwa and conventional player Sohar International Bank (SIB) to begin due diligence on a potential merger. This came on the heels of the 2020 merger of Oman Arab Bank and Alizz Islamic Bank. In July 2022 SIB signed a memorandum of understanding with HSBC Bank Oman to enter exclusive discussions over another potential merger, reflecting the ongoing consolidation trend taking place in the GCC banking ecosystem (see analysis).
The growing weight of sharia-compliant finance can also be seen in the country’s capital markets. In 2021 the CMA issued new guidelines on sukuk (Islamic bonds) and conventional bonds, including instruments related to the growth area of environmental, social and governance investing. By the end of the first quarter of 2022 sukuk had come to represent roughly 19% of total listed government bonds (see Capital Markets chapter).
As Oman looks to expand its footprint in the Islamic finance industry further – it accounted for 0.7% of global Islamic banking assets as of the third quarter of 2020 – the CBO is expected to continue to play a key role in promoting growth.
While Islamic banks are an important area of expansion in the industry, conventional lenders continue to comprise the bulk of sector activity. According to data from the CBO, between 2015 and 2019 the total assets of commercial banks expanded at a compound annual growth rate (CAGR) of 4.4%, rising from OM24.8bn ($64.5bn) to OM30.8bn ($80bn). By comparison, Islamic banks and Islamic banking windows held OM4.9bn ($12.7bn) in assets as of the close of 2019.
However, the performance of the sector was adversely affected by the economic downturn associated with the pandemic. In 2020 conventional banks reported a decline in net profit due to increased provisioning for non-performing loans and lower income generated by net interest. Some of the larger players, however, managed to maintain a relatively stable performance.
The sector has, however, demonstrated a path to recovery and profitability in the face of economic headwinds, reflecting banks’ strong focus on risk management and cost control. At the end of 2022 the combined balance sheet of conventional players showed a 3.4% year-on-year (y-o-y) increase in total outstanding credit to OR23.8bn ($61.9bn). Overall assets at Islamic banks and windows, meanwhile, were up 12.2% y-o-y at OR6.4bn ($16.6bn), reaching a 16.4% share of total banking system assets. The sector-wide ratio of capital to risk-weighted assets stood at 19.4% as of end-December 2021, well above the CBO’s minimum threshold of 12.25%.
Although hydrocarbons remain a bellwether for the sector, the government has been implementing policies in line with aims to diversify the economy, and reduce its dependence on oil and gas (see Economy chapter). Domestic banks have sought to take advantage of the opportunities presented by these ongoing diversification efforts, such as the expansion of infrastructure and the development of new industries (see Industry chapter). This has in turn resulted in an increase in lending to the non-oil and gas sector, such as tourism and manufacturing.
The banking sector has also been actively working to promote the growth of the domestic economy by providing financing for small and medium-sized enterprises (SMEs). The CBO has similarly implemented policies to support the development of smaller businesses, including providing funding through banks in order to stimulate the growth of the domestic economy. SMEs account for a significant portion of GDP, estimated at around 25-26% as of February 2023, according to the Small and Medium Enterprises Development Authority (SMEDA). In countries with a more developed SME segment, this share can reach well above 50%, indicating significant room for growth.
According to the CBO, the proportion of loans allocated to SMEs was 3% as recently as 2014, when the central bank issued a requirement that banks meet a minimum threshold of 5%. As of early 2020 the share had increased modestly to 3.2%, signalling that new tools may be needed to unlock additional financing for small businesses. In January 2023 the Ministry of Commerce, Industry and Investment Promotion published new regulations in the official gazette on financing for SMEs, including detailed roles for SMEDA and Oman Development Bank.
Lending & Deposits
Bank lending and deposits have traditionally been closely linked to the performance of the oil and gas sector, which is a major contributor to GDP (see Energy chapter). The banking sector has therefore witnessed growth from the post-pandemic resurgence in global energy prices, which has been further exacerbated by Russia’s ongoing invasion of Ukraine.
Across the GCC, banking sector net profit reached a record $11.1bn in the second quarter of 2022, up 1.9% quarter-on-quarter (q-o-q) and 31.9% y-o-y. Omani banks recorded the highest q-o-q growth rate of the six-member bloc, at 12.9%, followed at some distance by Qatar (3.6%) and Bahrain (3.2%).
Total outstanding credit from both conventional and Islamic banks in Oman reached OR29.2bn ($75.9bn) as of November 2022, up 5.1% y-o-y, with credit to the private sector rising by 3.9% to OR24.3bn ($63.2bn). Non-financial corporations comprised 45.9% of the private sector total, while households accounted for 45.1%.
In terms of deposits, Oman has a relatively high savings rate, and deposits have traditionally been a major source of funding for banks. The number of bank account holders has been increasing in recent years. As of November 2022 total deposits were up 1.9% y-o-y at OR25.9bn ($67.3bn), according to the CBO’s most recent monthly bulletin. Private sector deposits, however, held steady, up 0.1% to OR17.3bn ($45bn). Households accounted for the largest share of deposits, at 52.2%, followed by non-financial corporations (28.7%) and financial corporations (16.2%). Deposits at Islamic banks and banking windows were up 11.7% y-o-y that month, to OR4.9bn ($12.7bn).
Individual bank accounts should benefit from greater integration with the global financial system once the CBO rolls out its planned International Bank Account Number (IBAN) system, first used in Europe but now a widely accepted standard for account numbering. According to a statement from an official at the central bank in October 2021, preparations has been made and the IBAN system was ready to be launched in the near term, which should improve the security of cross-border transactions and payments.
Penetration & Inclusion
Financial inclusion and banking penetration have long been a priority for the government and the CBO. The central bank has been working to promote financial inclusion and has implemented various policies to increase access to financial services for all segments of the population. Indeed, as of 2022 an estimated 75% of the population was banked, according to data from PPRO, a digital payments infrastructure provider, compared to 46% on average across the MENA region and 67% globally. Oman also outperforms MENA and the rest of the world in credit card penetration, at 30% compared to 8% in MENA and 19% globally.
“Notable advancements in financial inclusion have been made in recent decades, and the ecosystem needs to continue developing so that Omanis can have easy access to more sophisticated and customised financial products and services,” Bassam Al Jamali, general manager of the Oman Credit and Financial Information Centre, told OBG.
Banking services are widely available in Oman, and people have access to banking services both in urban and rural areas, though the growth of financial technology (fintech) could usher in some degree of shrinkage in the physical branch network in the country, following a pattern seen in countries with a more mature fintech and digital banking segment.
In terms of bank branches, the country’s 16 commercial banks had 438 branches as of 2021, according to the most recent CBO annual report, up marginally from 436 branches in 2017 but down from 453 in 2020. Islamic banking entities, for their part, grew their branch network from 76 to 93 over the same period. In terms of ATMs, the conventional commercial bank network expanded from 1288 in 2017 to 1507 in 2021, while Islamic entities’ more than doubled their footprint from 79 to 160.
Oman has been working to develop its fintech segment and promote innovation in the financial services industry. The CBO has actively supported the development of fintech in the country, and has established a regulatory sandbox to encourage experimentation and innovation. Regulators are also actively exploring open banking, which could galvanise innovation and job creation in the sector.
“Open banking promotes the value chain in the financial services industry because it not only makes use of banks, but also third-party platforms to provide services,” Ali Hassan Moosa, CEO of the Oman Banks Association, a representative body for licensed entities in the sultanate, told local media in mid-2022. “Consequently, it creates new companies and new jobs, opens up investment opportunities and advances financial inclusion – thereby supporting economic growth once at its full potential.”
Digital payments have been growing in popularity, with the pandemic acting as a major catalyst for the segment by driving consumers online. The volume of e-payment transactions increased by 40.6% in 2021, marking an acceleration from the 19.2% growth posted in 2020, according to CBO data. In addition to lockdowns, the central bank credits increasing consumer awareness and government initiatives in support of electronic payments for the growing share of the market that point-of-sale (POS) transactions are capturing from ATMs.
The related sphere of e-commerce has also been expanding rapidly, with e-commerce comprising 17.5% of local transaction value in 2021, compared to 63.3% for ATMs and 19% for POS (see ICT chapter). This represents a sharp increase from 0.5% in 2017.
Oman’s banking sector has maintained a strong degree of profitability despite the challenging global economic environment in recent years. This reflects the efficiency and effectiveness of Omani banks, as well as their continued focus on risk management and cost control. By taking advantage of the various financing opportunities presented by the country’s expanding and diversifying economy, conventional and Islamic lenders alike are positioning themselves as major development partners for the public and the private sector.
As Oman navigates the longer post-pandemic arc of recovery, the banking sector is in a strong position in a well-regulated and diversified market that has demonstrated its ability to withstand global economic challenges. While resilience is a key determinant of long-term success, Omani banks will also need to continue adapting to the changing demands of customers as the industry evolves and digitalises.