HE Hamood Sangour Al-Zadjali, Executive President, Central Bank of Oman, shares his views on the progress made by the Sultanate’s banking industry in an exclusive interview to OER

How was the banking sector’s performance in Oman during 2016?
Notwithstanding the challenges facing the Omani economy, the banking sector remained robust supporting economic diversification initiatives and credit needs in 2016. The performance of the banking sector continued to be positive in 2016. The combined balance sheet of conventional and Islamic banks (other depository corporations) strengthened over the years due to the robust growth in both deposits and credit. The total assets of other depository corporations stood at RO29.9bn in December 2016. The total outstanding credit extended by the other depository corporations stood at RO22.1bn as at the end of December 2016, a rise of 10.1 per cent over the level witnessed a year ago. Credit to the private sector increased by 10.1 per cent to RO19.7bn as at the end of December 2016. Total deposits registered a modest growth of 5.2 per cent to RO20.4bn as at the end of December 2016.
What policy measures are being taken by CBO to strengthen the banking sector in Oman and is the banking sector in Oman compliant with international best practices and standards?
A well-calibrated approach to banking sector reforms by the CBO such as adoption of risk-based supervision of banks, implementation of Basel accords and the development of modern payment and settlement system has led to the emergence of a strong and resilient banking system over the years. Policy measures in the recent period were formulated against the backdrop of economic slowdown, lower inflation, rising rial Omani interest rates on deposits and deficits in fiscal and balance of payment positions.
With a view to augment liquidity with banks and to ensure that credit requirements are met, the CBO permitted banks’ investments in unencumbered treasury bills, government development bonds and Oman government Sukuk to be a part of eligible reserves up to maximum of two per cent of deposits effective April 1, 2016. It may be noted that the reserve requirements remain unchanged at five per cent. By this action, banks were freed with liquid funds approximately to the tune of RO400mn increasing the lendable resources of the banks in Oman.
Banks in Oman are adequately capitalised with the Basel capital adequacy ratio averaging around 16 per cent in September 2016 as against the 12 per cent plus the 0.625 per cent conservation buffer mandated. The core equity stood at 13.9 per cent in September 2016. The Basel Committee on Banking Supervision developed the Liquidity Coverage Ratio (LCR) to promote the short-term resilience of the liquidity risk profile of banks by ensuring that they have sufficient high quality liquid assets to survive a significant stress scenario. Our banks have started implementing the LCR and associated disclosure requirements. Another ratio, called Net Stable Funding Ratio (NSFR) has been developed by the Basel Committee to provide a measure of sustainable maturity structure of assets and liabilities. Our guidelines have been issued recently and NSFR will be implemented in 2018 as a minimum standard of 100 per cent, as per Basel Committee’s timeline. The CBO will also continuously refine and strengthen the regulatory and supervisory framework in accordance with evolving conditions.
With a view to ease the challenges faced by borrowers due to weakened economic activity and to ensure flow of credit to productive sectors, the specific provisions on restructured loans have been moderated from the stipulated 15 per cent to be implemented in a phased manner of five per cent for the year 2016, 10 per cent by the year 2017 and 15 per cent by the year 2018. We can be reassured that our banking sector is compliant with international best practices stipulated by global standard setting bodies.
CBO has allowed Islamic banking in Oman. How is this helping customers and the banking industry?
Since the introduction of Islamic banking in the Sultanate in 2012, two full-fledged Islamic banks were established and six local banks have formed Windows for practicing Islamic banking. Islamic banks have opened up new segments and players and thus added to the competitive environment not only in terms of efficiency and innovation, but by also providing customers the benefit of choosing between both conventional and Islamic banking products. Islamic banking entities provided financing to the extent of RO2.4bn as at the end of December 2016 when compared to RO1.8bn a year ago. Major part of the credit extended came from the Islamic windows of conventional banks and the remaining from the two full-fledged Islamic banks which are in the process of gaining greater market share. Total deposits held with Islamic banks and windows also registered a significant increase to RO2.2bn in December 2016 from RO1.5bn outstanding as at the end of December 2015. The total assets of Islamic banks and windows combined amounted to RO3.1bn as at the end of December 2016 which constituted about 10.3 per cent of the banking system assets. The availability of diverse banking services has helped in promoting financial inclusion and deepening in the banking sector in Oman. We are optimistic that Islamic banking will be in a position to significantly increase their business and this will augur well for the economy as a whole.
How is the macroeconomic situation in Oman in light of low oil prices and has it impacted the banking sector?
With oil prices continuing to remain relatively low in 2016, economic activity in the Sultanate remained subdued despite sustained expansion in hydrocarbon output. Preliminary national accounts data for the Sultanate of Oman pointed to a nine per cent drop in nominal gross domestic product (GDP) over the period January-September 2016 as compared to a more pronounced decrease of 16 per cent over the same period in 2015. Inflation in the Sultanate registered a modest rise in 2016 due to revision in energy prices, user fees and turnaround in global commodity prices. On account of weakened economic activity and reduction in public spending, some tightening of liquidity conditions is observed in the recent period, with increased competition among banks for deposit mobilisation leading to marginal increase in the level of interest rates. The weighted average interest rate on rial Omani deposits which stood at 0.936 per cent in December 2015 edged up to 1.493 per cent in December 2016. However, there is no cause for concern as the CBO is fully aware of the challenges and have been taking necessary steps to address the issue.