HE Hamoud bin Sangour Al Zadjali, Executive President of the Central Bank of Oman says that the resilience and flexibility of Oman’s banking sector will enable it to stand up to the challenges of oil price decline in the global market.
Banking sector in Oman is operating soundly under the regulation and supervision of the Central Bank of Oman (CBO). Banks in the Sultanate are showing strong financial indicators in terms of asset quality, provision coverage, capital adequacy and profitability. Reflecting the strong domestic demand, the banking sector, from September 2014 to September 2015, recorded a growth of 16.4 per cent in the total assets to reach RO29.6bn. The total finance increased by 12.9 per cent to reach RO19.6bn. On the other hand, the deposit grew by 11 per cent to reach RO19.5bn and total capital and reserves by 12.3 per cent to reach RO3.5bn. Also, the capital adequacy for all banks together was 15.5 per cent as of September 2015 compared with CBO required limits of 12 per cent.
The main objective of the CBO’s monetary policy is to ensure the stability in the financial system and maintain liquidity in the banking sector in order to meet the private sector demand for finance in different economic sectors and to finance the government needs of money for possible deficit in the government budget. In order to achieve this goal, we will take steps to ensure the availability of sources of funds at banks, including the use of repurchase operations to inject liquidity in the local currency if the need arises, in addition to foreign currency swap operations.
Resilient and flexible
In order to keep abreast of the (recent) developments and their impact on the banking sector in Oman, the ‘monetary policy and banking development committee’ in the CBO monitors the operation of monetary policy and liquidity management. It monitors the balances of banks with the CBO and the volume of lending between banks and interests rates in the markets as well as the volume of lending between banks and interest rates in the market and the volume of investment in treasure bills and certificates of deposit of the CBO. In addition to the above, financial stability and stress test reports recently prepared by the financial stability department of the Central Bank of Oman indicate that the banking system enjoys, in general, resilience and flexibility and accommodate various developments, including the decline/ depression in global oil markets.
The most important challenge facing the banks in the Sultanate at the moment is continuing to support the national economy, by persisting to attract national savings and meet the various economic sectors’ need in the country and providing sufficient flexibility to deal with different economic fluctuations, including the declining trend in oil prices in global markets. It is very important to maintain a sound and flexible financial position that banks enjoyed in accordance with international standards, especially the requirements of the Basel norms for financial safety.
Financial condition of banks in the Sultanate, in general, can be seen in the light of above facts. It requires that there is need to put more efforts, both at local and regional or global levels, to strengthen the system and work to meet the challenges, in a way that the financial conditions of banks do not impair stakeholders’ confidence in the banking system.
Sharia-compliant banking
The introduction of Islamic banks in Oman in 2013 was aimed at diversifying banking services in the local market in terms of financial inclusion, which is a challenge requiring further efforts by Islamic banks and Islamic windows and the CBO for success.
CBO has made amendments to Royal Decree No. 114/2000 Banking Law in order to develop the legal, regulatory and supervisory framework governing Islamic banking, which is considered unique. To support Islamic banks and Islamic windows at the developing stage, CBO followed a balanced supervisory approach by allowing certain regulatory relaxations and exceptions, including allowing Islamic banking entities to provide personal finance, up to 60 per cent of the total financing portfolio and reduce this ratio gradually to 50 per cent.
In continuation of the efforts, CBO has set up a high sharia supervisory authority with the objective of providing advices/guidance to the CBO and facilitating market harmony on reference of Fiqh disputes, if any, among sharia supervisory boards of banks to the high-sharia supervisory authority. The authority’s opinion will be binding on SSBs of banks.
Islamic banks and windows in the Sultanate have succeeded in attracting a notable share in domestic banking market due to demand for sharia-compliant products both on deposits and financing. The recent data indicates growth of Islamic banking business in the Sultanate in the two full-fledged Islamist banks and six Islamic windows. The share of Islamic banking in the total assets of the Omani banking sector amounted to about 6.5 per cent at the end of September 2015.
Needless to state that this progress requires a clear understanding of the concepts, sharia and operational rules and regulations of finance, which in turn requires developing human resources to enable them to work properly to promote Islamic banking. Therefore, the banks and Islamic windows need to plan and make further efforts to identify the opportunities which can be offered by Islamic banking to the community. The banks must also increase awareness of Islamic banking services through seminars, conferences and meetings with business people and create awareness on Islamic banking. Commitment with the cause and spirit of Islamic banking has utmost importance to be realised by the management and the staff of Islamic banking institutions. In order to create a true sharia-compliance perception among the stakeholders, especially among the public, banks need to focus in purposeful innovation in developing viable and acceptable sharia-compliant products and services instead of replication of conventional approach.
Excerpts from the key-note address at Islamic Banking Forum organised by Bank Nizwa.