الأستاذ عبد الرزاق علي عيسى
الرئيس التنفيذي
بنك مسقط
دور القطاع المصرفي في المرحلة المقبلة
Panel 11: The Road Ahead for Omani Banking
1. Structure, Characteristics, Regulatory Environment and Development of Oman's Banking Sector:
Oman's financial sector has been considerably strengthened and transformed in recent years leading to a modern financial system consisting of commercial banks and other financial intermediaries.
The financial sector in Oman is supervised by the Central Bank of Oman (CBO) which is the apex institution and was established in 1974 to act as the central bank and the depository agency for the government. The banking law was amended in 2002. The functions of CBO include issuing the national currency (Omani Rial), act as the government's banker, supervise commercial banks operating in the country, formulate and implement the monetary policy and ensure the soundness of the financial system.
Over the last two decades, commercial banks have witnessed a period of consolidations which included a number of mergers and ecquistions. As a result, the number of licensed banks operating in the Sultanate as on 31 December 2007 stood at 19 of which, 7 are registered as local commercial banks, 10 are foreign banks and 2 are specialized banks. However, the banking sector is dominated by three local banks (Bank Muscat, National Bank of Oman, and Oman International Bank) which account for over 70% of total banking assets. Bank Muscat enjoys a market share of 41% in terms of total assets, 42% in terms of total credit and 35% in terms of total customer deposits as at 31 December 2007.
In addition to commercial banks, there are specialized financial institutions, namely Oman Housing Bank and Oman Development Bank.
The financial sector also comprises:
- Exchange houses: Dealing in the exchange of currency and remittances;
- Non – banking credit institutions: Leasing companies, hire purchase and finance companies;
- Non-monetary institutions without credit functions: Insurance companies, pension funds, mutual funds and investment companies; and
- Muscat Securities Market: Facilitates the issuing of securities to the public and trading in securities listed on the market.
2. Opportunities and challenges for the growth of banking in Oman
Opportunities:
The Banking sector in Oman is benefiting from the rapid economic growth and infrastructure development of the country. The Real GDP growth is estimated at 5.3% during 2007 (Source - Economist Intelligence Unit March 2008) with nominal GDP reaching RO 15 Bn (USD 39 Bn). The budget surplus is also reported to be in excess of $ 4 billion due to the price differential between budgeted ($40) and realized ($65) oil price/bbl in FY07. This is expected to improve even further due to the consistent high oil prices. On the other hand, Oman's non-oil exports have also grown rapidly and business confidence is high.
These developments auger well for the banking sector as they provide opportunities to increase lending in both the retail as well as the corporate and project sectors. The recent CBO publication suggests a 45% increase in loans and advances by the Omani Banking Sector during the first two months of the current year and we expect this trend to continue.
With growth of the economy, and the government's focus on diversification of the economy, there are opportunities for financing infrastructure, industry, real estate and oil & gas projects. Oman has been immensely successful in privatizing its power generation sector, which has been largely financed by commercial banks including local, regional and international banks. The large scale industrial sector and the buoyancy in real estate sectors offers banks opportunities to finance viable projects. Financing these projects would support the government's objectives of diversification and supporting the private sector.
Compared to the regional peers, Oman is also relatively under-penetrated from a retail banking standpoint with low credit to GDP ratios, which gives room for banks to increase lending to various sectors including housing loans, vehicle loans, cards business etc… These offer opportunities, which have not been exploited to its full potential till date. New banks will provide competition but we think the market is big enough to enable all the players to grow.
Challenges:
Amidst the all around growth environment in the GCC, some challenges remain for the banking sector. These challenges are certainly not insurmountable, but will require concerted effort, co-operation and sharing of experience between the parties involved to effectively overcome them.
Systemic risks: Experience suggests that generally, with material and substantive improvements in the financial and operational results of banks, underpinned by economic growth, there is also a build up of new risks. These periods of rapid growth are accompanied with increased likelihood of systemic risks. Current loan quality may not effectively indicate the loss content of loans which are tested under more adverse economic and market conditions. Several banks have or are in the process if implementing strong risk parameters and policies to assess credit risk issues associated with lending. These risk management capabilities, also part of the advanced approach of Basel II recommendations, need to be implemented. Implementation of advanced systems require sophisticated risk management techniques as well as qualified human resources which may prove to be constraints. These constraints need to be overcome.
Exposure to real estate and construction sector: With the booming property market, banks' exposure to the real estate, construction and contracting sector normally grow rapidly. Current trends also indicate that the buoyancy in real estate is likely to continue which would lead to more exposure. However, possible reversal of real estate values could place these banks which are heavily exposed to this sector under strain. A conservative real estate policy and cautious approach may be a key determinant of sustained success.
Technology and Human Resources: The growth of banks along with increased competition and enhanced services have added pressure on the local and regional banks to keep pace with the rapid technological developments that are occurring in the industry. There are new products constantly coming to market along with an increasing sophisticated customer base which puts additional demand on the banks to upgrade technologically. For sustaining this pace of change, there is an urgent need in the industry for trained human resources and work force. This poses a challenge to the management of banks who have to increase their efforts in recruiting expertise and training and retaining their human resources.
Consolidation of Banks: Driven by the desire to obtain market power and become more efficient, banks are now witnessing a quickening pace in bank consolidation across the region. The potential benefits of bank consolidation are well known and include increased capital and market presence, reduction in costs, expansion in range of products, economies of scale and greater efficiency. However, consolidation also poses challenges of integration of both human resources and technology. Once again, the sharing of experiences between institutions that have been through these processes will be invaluable to those who are in the process of change.
3. Role and abilities of banks in financing the ongoing economic expansion.
Role: The Omani economy hay doing well and this economic engine that empowers the growth of a nation's economy. Omani banks are no different. They have been an entegral of the nation's growth. As financial intermediaries, local banks have helped translate the buoyant economic situation into growth for different sectors.
For example, this is clearly evident in the area of project finance and project advisory where Omani banks, and particularly BankMuscat, have played a pivotal role. The Bank has been a Tier I lender in several projects including power and water projects, oil & gas, petrochemicals and industrial projects. The Bank has developed considerable experience in project advisory as well as financing these projects and this has positioned us to actively take part in the forthcoming project opportunities in the country.
Challenges: However, a few constraints remain; while Omani banks can provide project finance, they have not been active on the investments front owing to a cap on their investment limits. Relaxing the investment limits of banks will spur the growth of the capital market and provide improved access to finance for accelerated economic growth.
Current market conditions and constraints in USD liquidity is another challenge in project financing. Almost all project being financed in Oman require long term funding and are generally denominated in US Dollars. Sourcing of US Dollars in the current global economic environment is proving to be a challenge. Although we expect this situation to be short-lived, it has brought to the fore that local currency trenches may be the way forward, and an effective arrangement to fix long-term OMR rates needs to be evolved.
4. Role of foreign / regional banks entering Oman
Currently, we are witnessing a global environment. The current economic outlook, aided by the current high oil prices and a stable political environment, make Oman very attractive to regional and international banks.
Foreign as well as regional banks have been very active in the financing of large-scale projects for over a decade now. In fact, most of the large projects including Oman LNG and Sohar Aluminum have banking consortia made up of several international and regional banks. The support of these banks for projects proves that Oman has been an attractive destination for financing.
Entry of foreign players also helps local banks become more competitive; more customer-focused and help raise the service standards. We welcome new banks to Oman, and we are gearing up with our own expansion plans too.