ADOPTING BEST PRACTICES

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HE Hamood Sangour Al Zadjali, Executive President, Central Bank of Oman shares his thoughts on Oman’s banking sector in an exclusive interview with OER.
How did Oman’s banking sector perform in 2014?
Oman’s banking sector comprises of seven local commercial banks, nine foreign banks, two specialised banks and two full-fledged Islamic banks together with six local commercial banks operating separate Islamic windows. During 2014, performance of commercial banks continued to remain favourable. The financial health of banks in terms of assets quality, provision coverage, capital adequacy and profitability remained strong. The balance sheet of commercial banks further strengthened due to the robust growth in both deposits and credits. The total assets of commercial banks increased by 11.1 per cent to RO24.8bn in December 2014 from RO22.4bn at the end of 2013. Out of the total assets, credit disbursement accounted for 68.1 per cent and increased by 11.3 per cent in 2014 to RO16.9bn. Credit to the private sector and public enterprises increased by 10.9 per cent and 14 per cent, respectively. Aggregate deposits held with commercial banks registered a significant increase of 10.9 per cent to RO17.3bn in 2014 from RO15.6bn a year ago. Islamic banking entities provided finance to the extent of RO1bn at the end of December 2014 compared to RO434mn in December 2013. Total deposits held with Islamic banks and windows also registered a substantial increase to RO688.9mn by the end of 2014 from RO171.9mn a year ago.
Despite increase in the size of the balance sheets, the gross non-performing loans (NPLs) continued to remain low. The NPLs as percentage of total credit stood at 2.2 per cent in September 2014 compared to 2.1 per cent as at the end of 2013. The capital adequacy ratio stood at 15.1 per cent of risk-weighted assets in September 2014, which was higher than the minimum regulatory requirement of 12 per cent prescribed by CBO. Consistent with the accommodative monetary policy, the liquidity situation remained robust in the banking system during 2014. In respect of domestic interest rate structure of commercial banks, both deposit and lending rates softened during this period and this has helped borrowers and corporates to obtain credit at favourable interest rates.
What are the initiatives being taken by the Central Bank of Oman to bring about better compliance and accountability in the Sultanate’s Banking sector?
The Central Bank of Oman (CBO) has been proactively fine-tuning prudential and supervisory norms through development of sound risk management systems, enhancing transparency and complying with international standards and best practices in order to strengthen the banking system in the Sultanate. Towards this direction, the CBO had initiated a number of regulatory and supervisory measures in the recent period.
As financial stability has emerged as a global issue, a financial stability department has been set up within the CBO for macro-prudential supervision of the financial system, which is now producing stress testing and financial stability reports. It is comforting to note that the latest Stress Testing Report suggests that the overall banking system appears to be quite resilient to withstand various shocks. A Higher Committee on Financial Stability has been formed to monitor financial systemic risks and enable a timely response.
The minimum regulatory capital for banks was raised from 10 per cent to 12 per cent of the risk-weighted assets. The CBO is well ahead in the implementation of Basel III framework. The final guidelines on Basel III were issued in November 2013. Again, the risk-based supervision framework for on-site examinations has been fully implemented since 2012. In order to strengthen the risk assessment procedures, CBO had issued guidelines to banks for the implementation of the Internal Capital Adequacy Process (ICAAP) which has been operationalised by all banks in Oman from December 31, 2012. Prompt corrective actions with revised trigger points like changes in capital adequacy requirement of banks are being emphasised further.
A notable development in the banking sector in the recent period was the introduction of Islamic banking in Oman in 2012, which would diversify banking services and promote financial inclusion. Several steps are being taken to promote SMEs for diversification and growth of the economy and the potential for increased job opportunities. The CBO advised banks to formulate a liberal lending policy for the SME segment and mandated that they should allocate at least five per cent of their total credit to SMEs and this target is to be achieved latest by December 2015. The prudential requirements for banks to lend to SMEs have also been relaxed in terms of general provisioning requirements and risk weightage. There are also efforts in terms of capacity building of prospective entrepreneurs, identifying key areas for SME finance and facilitating public-private cooperation.
The interest rate ceiling on all new personal loans was reduced from seven per cent to six per cent per annum, effective from October 2013. With regard to the quantitative ceiling on personal loans, effective June 30, 2014, banks will have to operate within a ceiling of 35 per cent, while housing loans can be extended up to a ceiling of 15 per cent of the total credit portfolio of the bank. CBO also reviewed some of the existing regulatory norms with regard to cross border exposures of banks and certain modifications have been made with regard to the limits placed on the aggregate funded and non-funded exposures by bank to non-resident borrowers.
With oil price trading at $50-$60 per barrel range, do you foresee any macroeconomic challenges for the banking sector in Oman?
In the present situation of low oil prices, the main objective of the government and the CBO is to avoid any slowdown in the growth process and continue with the diversification process. It is expected that the government will contain the fiscal deficit with relevant policies both on the revenue and expenditure side. Also, it is expected that with a proper mix of financing options there will not be much problem in financing higher fiscal deficits envisaged under the scenario of lower oil prices. Our experience shows that Oman has the resilience and inner strength to withstand lower oil prices and sustain its growth process.
On the other hand, with lower oil prices, the CBO will continue to closely monitor liquidity situation in the banking sector. The CBO is always prepared to inject liquidity in the banking system as and when the situation arises. The CBO will continue to enhance the role of the banking sector in the economic development by encouraging credit growth to productive sectors including SMEs and promote saving behaviour among the population. The State General Budget 2015 also endeavours to continue the investment spending despite lower oil prices. All the infrastructural projects will continue to be implemented as per their schedule, which will help banks to grow at the same pace. Banks are also efficiently and effectively building up their capacity in terms of higher capital, exposure and leveraging abilities, technological capabilities and foreign currency funding sources all of which play an important catalytic role in the current situation.
The Central Bank is also responsible for monetary regulation to keep inflation at acceptable levels. Are there any specific initiatives being taken by the CBO to curb inflation?
The inflation situation in the Sultanate of Oman continued to remain comfortable with inflation rate hovering around one per cent during 2013 and 2014. Annual inflation rate measured by movement in the average CPI for the Sultanate stood at one per cent in 2014 as compared to 1.1 per cent in 2013. The CBO and the government have been keeping a close watch on the price situation. There has been effort towards increasing market awareness of consumers, proper monitoring of supply situations and diversifying imports.
The evolution of monetary aggregates in Oman during 2014 has been consistent with the policy stance of CBO aimed at ensuring adequate liquidity in the system, maintaining orderly conditions in the markets and supporting faster growth. In its quest to achieve monetary stability, the CBO uses both direct and indirect instruments for liquidity management. As regards direct instruments, the CBO used the cash reserve requirement and the lending ratio when circumstances dictated to do so. Indirect policy instruments include sale of CBO CDs to absorb excess liquidity, repo operation to inject liquidity in domestic currency and swap and reverse swap operation for lending in foreign currency to the domestic commercial banks as and when required. In addition, CBO can provide discounting facility to the commercial banks against eligible securities. Thus, CBO has adequate tools to manage liquidity in the system and contain inflation pressures, if any.
How do you foresee the future of Oman’s banking sector in 2015?
The State General Budget 2015 envisages that with continued investment spending, the Omani economy will be able to grow by five per cent in real terms during 2015, supported by the non-oil sector, which is expected to grow by 5.5 per cent. The government will continue to implement the development and infrastructure projects as per their set schedule and new priority projects approved under the current five-year development plan. Given the government initiative to continue with existing projects and undertake new projects combined with supportive demographic profile of the population in Oman, it is expected that the demand for banking products will continue to increase even with lower oil prices. Our regulatory outlook will aim at increasing the role of the private sector in the national economy by stimulating domestic and foreign investment for the growth of the economy and our financial sector will play a leading role in achieving this objective. With greater participation of commercial banks in the development process together with large investments by the government, the balance sheet and profits of commercial banks are expected to remain healthy during 2015.

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