May 21, 2004

THE OMANI BANKING SYSTEM: EFFICIENCY, STABILITY AND CAPACITY TO ADJUST TO REGIONAL AND INTERNATIONAL DEVELOPMENTS. WITH THE ACHIEVEMENT OF GOOD GROWTH RATES THE BANKING SECTOR IS A MAIN PILLAR IN THE ACTIVATION OF THE ECONOMY. The establishment of the Central Bank of Oman in the beginning of 1974 was a natural outcome of the steady evolution of the monetary system in the Sultanate of Oman coupled with the prospects of the vast economic developments the country was about to witness. Until 1970, when Sultan Qaboos Ibn Said took over, there was no national authority responsible for the supervision of the incipient banking system. The number of banks was small and the banking activities were limited in scales. The two monetary authorities that preceded the establishment of the Central Bank of Oman, namely the Muscat Currency Authority in 1970 and the Oman Currency Board in 1972, were not vested with full banking status, but, they had well prepared the ground for the emergence of the Central Bank of Oman. However the major event heralding the eminent creation of the Central Bank of Oman was the launching of the Banking Law in 1974 (which was amended vide Royal Decree No. 114/2000). The Central Bank of Oman acts as the depository agency for the Government of the Sultanate of Oman. It makes advance payments to the Government in respect to temporary deficiencies in recurrent revenues. It manages loans on behalf of the Government. It maintains, at all times, a part of the Sultanate's foreign assets as cover for the currency in circulation at prescribed ratios. It accepts deposits from banks operating in the Sultanate and from other foreign Central Banks, International Monetary and Financial Institutions. There are two types of deposits that the Central Bank of Oman accepts from commercial banks: deposits which are required by the Banking Law or sanctioned by the Board of Governors and voluntary deposits which are deposited by banks' own will with a view to gain the benefits attached to such deposits. It advances credit to local banks and engages in investment activities through the purchase and sale of financial instruments. It determines discount and rediscount rates. It provides clearing house services for all member banks. It issues the national currency, supervises its circulation, preserves its value and manages foreign assets. In addition to the above mentioned traditional functions, the Central Bank of Oman also acts as the advisor of the Government in economic matters in general and monetary and financial matters in particular. The steady expansion of the banking sector has resulted in subsequent rise in the number of commercial banks' branches opened in various parts of the Sultanate. By the end of 2002, the number of branches opened by commercial banks in the whole country stood at 330 branches (in additions to 26 branches of 3 specialized banks, namely: Oman Housing Bank, Oman Development Bank, and Alliance Housing Bank) as against 55 branches in 1975. To render services to the branches of the Commercial banks, the Central Bank of Oman opened two branches, one in Salalah, in the South in 1978, and the other in Sohar, in the North, in 1988. CBO's services through the establishment of these branches cover a wide range of essential banking activities such as clearing house facilities, inter bank transfers, issuance and redeeming of currency, selling commemorative coins, and accepting old currency for new one. Oman's financial sector has been considerably strengthened and transformed in recent years leading to a modern financial system consisting of commercial banks, specialized banks and other financial intermediaries. Out of the 14 commercial banks, 5 are locally incorporated and 9 are the local branches of foreign banks. Together they operate a branch network of 330. The banking sector however is dominated by three local banks (Bank Muscat, National Bank of Oman, and Oman International Bank) accounted for 69% of total banking assets, 65% of total deposits and 70% of total banking credits as of end 2002. These banks also dominate the Muscat Securities Market trading index. The financial sector in Oman is supervised by the Central Bank of Oman (CBO). 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. In addition to the above mentioned traditional functions, the CBO also act as the advisor to the Government in economic matters in general and monetary and financial matters in particular. The CBO has been urging the local banks to enhance their financial position and introduced new international accounting standards and corporate governance principles to reduce fraud and malpractices. The mandatory application of International Accounting Standards (IAS 39) for the year 2001 required banks to set aside provisions for bad loans and the stringent provisioning policy has set the stage for comparatively better results in the subsequent years. Banks are also following new corporate governance principles by revealing related party transactions and balance sheet details. The cumulative assets of Omani commercial banks have recorded a growth of 4.3% (CAGR) during the four years period 1999-2002 with most of the growth coming from the credit issues to the domestic private sector. In 2002, cumulative assets of banks increased by about 1.5% over the previous year. Total credit to private and public enterprises stood at RO3.27bn in 2002, an increase of 0.9% over previous year. Amounts related to 'due from banks abroad' showed the highest growth of 60.6% at RO325.2mn in 2002. Total securities, both domestic and foreign, accounted for about 10% of the total assets of banks in 2002. In the first nine months of 2003, total bank assets increased by 1.2% over 2002. During the period, securities held by the banks showed a growth of 15.4% over 2002. On the liabilities side, total deposits, which consist of deposits from public and private sectors, have grown at a CAGR of over 5.7% during the four years period 1999-2002. In 2002 total deposits grew by 3.5% over the previous year, largely driven by deposits from the private sector which was higher by 4.1% over 2001. Demand and Savings deposits exhibited a healthy growth of 18.9% and 21.3% respectively in 2002 which were largely offset by the time deposits which fell by 7.7%. The deposits of public enterprises grew the most, at a CAGR of about 23.5% during the period 1999-2002 to RO 229mn in 2002. Oman witnessed rapid credit expansion between 1995 and 1999 both in domestic and corporate accounts. The distribution of credit facilities by sector shows that Personal loans constituted about 36%, Import trade 9.6% and Manufacturing 8.8% of the total credit of commercial banks at the end of 2002. In view of requests from the banking and business community, CBO raised the personal loans ceiling to 35% in August 2000. In Dec 2001, CBO further enhanced the personal loan limit to 40% thereby allowing banks additional room to originate high yielding personal loans, which had become even more attractive due to the record low interest rates. This change had a noticeable impact in 2001 and as a result the personal loan stock consisted of 36% of the total banking loans portfolio in 2002. Domestic loans which have been growing at a rate of over 9% since 2000, continue to drive the overall loan growth in the industry. Bank Muscat (BM), the largest bank in Oman, has a substantial presence in corporate and retail banking and is considered a leader in Project Finance activities. It also has the largest retail franchise with 90 counters spread throughout the country and also operates one of the largest ATM networks in Oman with over 150 machines. In the recent past, BM substantially increased its market share through mergers and acquisitions combined with impressive organic growth. It has acquired the Commercial Bank of Oman, ABN Amro's Bahrain operations, Industrial Bank of Oman and Al Ahlia securities. Realizing the potential of the domestic market, the bank is actively pursuing a regional growth strategy. In 2001, BM took over the Bahrain operations of ABN-Amro, which gave it access to the Bahraini financial market where it is focusing on deposit mobilization projects to increase its base. It has also taken a strategic 26% stake in Centurion Bank a new private bank in India. The bank is focusing on non-interest income sectors such as trade financing as potential areas to focus outside Oman. In July 2003, Bank Muscat issued a 10-year corporate bond issue for RO10mn, the first one in GCC with a 10-year tenure at 7% fixed rate with an option to retain additional RO15mn over subscription. BM has been adjudged as 'the best bank' in the country by major international banking and financial publications such as Global Finance, Euro-money and FT. National Bank of Oman (NBO), the second largest bank in Oman, operates a network of 50 branches in Oman with 5 branches in Egypt and one in UAE. NBO has a strong franchise in Oman banking sector with a sizeable presence in corporate and retail banking and strong deposit base. It also has got the maximum NPA exposure in and outside Oman. Oman International Bank (OIB), the other big bracket bank of the country, operates with a domestic network of 82 branches. Its loan book comprises of accounts from as far and diverse as countries in GCC, India, Pakistan and other OECD countries. The other big leaguer, Bank Dhofar Al Omani Al Fransi (BDOF) was a relative latecomer to the Omani banking scene, and was founded as recently as 1990 when Banque Paribas branches were acquired and converted in Muscat and Salalah. From the outset, therefore, Bank Dhofar had to search for viable branch locations that were not already served by the other well-entrenched competitors. In 1992, BDOF acquired 12 domestic branches of Bank of Credit & Commerce International (BCCI).Then again, in 2001, BDOF acquired 16 branches from the Commercial Bank of Oman and so increased its branch network to 45 branches and 58 ATMs. The total assets of the bank grew by 24% in 2001; a considerable feat considering the overall growth figure for the banking industry in 2001 was just 9%. BDOF acquired Majan International Bank in a deal that was completed in March 2002 after two years of negotiations. So far this strategy of merger and acquisitions has worked well for the young bank, now the fourth largest in the Sultanate in terms of assets. Recent reports emanating from Muscat depict a rosie picture for the country's banking sector with regards to consolidation and turnaround. The banking sector profitability (net of provisions and tax) for the year 2000, 2001 and 2002 stood at RO51.9mn, RO4.9mn and RO61.9mn, respectively. The local banks are now adopting high-tech banking with the introduction of internet banking and smart card technology in a big way with a view to keep themselves ready from the overseas competition in view of Oman joining the WTO. Oman's economy shows the signs of further improvement boosted by higher net profits of private companies in the first quarter of 2004 to pave the way for business expansions and job creation. "The financial results of Oman's biggest companies are very encouraging in the first three months of this year. It is a sign that the economy of the country is doing well and the by-product of higher profits will undoubtedly benefit local businesses and encourage further expansions to create better job opportunities," Salim Al Hosni, a financial expert at Sultan Qaboos University said. Oman Cement Company (OCC) leads the way improving its net profit by 90 percent in the first quarter of this year to 2.74 million rials compared to 1.44 million rials in the first quarter of 2003. "OCC has definitely benefited from its privatisation, which will encourage the government to sell more stakes in other state-run companies such as Omantel. It is the way forward and OCC has proved that privatisation can be very profitable," Al Hosni added. Other companies to make healthy net profits, despite stiff business competition, are Shell Oman Marketing, one of the three fuel retailers in the sultanate, and Salalah Port Services. However, the local financial institutions have stepped up their net profits in the first quarter exceeding expectations. Oman International Bank (OIB) made the biggest financial growth among banks in the first quarter with an impressive 84 percent rise in net profit. The bank earned 3.4 million rials rising from 1.84 million rials while Bank Dhofar posted a net profit of 2.81 million rials up from 2.32 million rials. Oman's largest financial institution, Bank Muscat, made seven million rials from 6.4 million rials in the same period last year. Alliance Housing Bank, Oman's only private mortgage lender and the country's newest financial institution, reported a 48 percent increase in net profit to 805,000 from 545,000. National Bank of Oman (NBO) shrugged off its recent disappointments by earning 1.3 million rials from 127,000 in the first three months of 2003. Economists attributed the good profitability of companies to higher government spending and the buoyant international oil prices. "The 2004 budget has been a catalyst to the economy improvement so far this year. It made an immediate impact and took no time at all in making its presence felt. The higher state expenditure has a direct benefit to private companies and I predict the good performance will continue for the rest of the year," an economist at Oman Arab Bank said. Oman's expenditure has been forecast at 3.425 billion rials this year, a 14 percent hike compared to three billion rials a year earlier. "Oil prices so far this year have exceeded the level the budget has been based on, which is a good thing since we will see more money pouring to the economy to finance projects. We expect the extra liquidity in the private sector to create employment to boost the Omanisation programme," he added. Oman based its budget at the oil price of $21 per barrel but officials at the National Economy Ministry expect a much higher level for the rest of the year. "We cannot predict yet for the rest of 2004, since it is too early in the year to do so, but the way it is going now, the average oil price for our oil will by far exceed the budget bench mark," an official of the ministry said. No official figures have been released yet but analysts said that the average oil price of Omani oil in the first three months of 2004 was estimated at $27 per barrel, six dollars above the budget benchmark.