HE Tahir bin Salim bin Abdullah Al Amri, Executive President of Central Bank of Oman, talks to OER about the initiatives and policy measures to strengthen Oman’s banking sector. Excerpts from an interview 

What are the new policy measures taken by the Central Bank of Oman to strengthen the banking sector and make it compliant with international best practices and standards?

The Central Bank of Oman (CBO) continues to make significant inroads to ensure that its regulatory framework and policies continue to cater to the changing operating conditions in Oman, while at the same time remaining compliant with the international best practices and standards. Some of the new policies introduced over the past few years include guidelines on sound compensation practices and correspondent banking relationships, instructions on fraud risk management, policies to improve financial inclusion, adoption of IFRS 9, a framework to identify and deal with domestic systematically important banks (D-SIBs), implementation of Basel III  capital and liquidity standards.

Additionally, CBO has also issued guidelines on Regulatory Capital and Composition of Capital Disclosure Requirements under Basel III in November 2013. Licensed banks in the Sultanate are advised to maintain a capital to Risk Weighted Assets Ratio (CRAR) of at least 11 per cent on an ongoing basis. In addition, they are required to maintain Capital Conservation Buffer (CCB) which is being implemented in phases and would reach 2.5 per cent when fully phased in. Liquidity Coverage Ratio (LCR) Framework has been implemented. The minimum required level of LCR which is 90 per cent at present will reach 100 per cent with effect from January 2109. Furthermore, Net Stable Funding Ratio (NSFR) standard is effective from January 1, 2018 with the requirement set at a minimum of 100 per cent.

Recently, a National Payment System Law has been promulgated which is all set to strengthen the payment system in Oman. A review of the extra regulations is underway while the Banking Law is being reviewed to ensure that banking sector is guided by legislation, which sufficiently reckons the changes in the financial sector landscape and emerging challenges. Moreover, CBO is in the process of finalising a ‘Resolution Framework for Oman’ in line with recommendations of Financial Stability Board for handling episodes of orderly resolution of financial institutions licensed by CBO.

How was the banking sector’s performance in Oman during 2017?

The banking sector in Oman has continued to grow reasonably well during 2017 despite the challenging operating conditions. Provisional data shows that total assets of the banking sector stood at RO 31.5bn at the end of 2017, registering a growth of 5.3 per cent during 2017, while the credit portfolio of banks grew by 6.4 per cent during the year to reach RO23. 6bn at the end of 2017. Similarly, the deposits rose to RO21.6bn at the end of 2017 registering a growth of 5.6 per cent during the year. These growth rates are lower than those of the previous year’s rates, but remain commensurate with the economic growth.

The stability of the banking sector remained intact as the banks remained well capitalised, profitable and fairy liquid with low infection ratio. The non-performing loans (NPLs) of banks remained low, with an NPL ratio of only 1.88 per cent reflecting strong asset quality. The capital to risk-weighted asset ratio (CRAR) of the banking sector was 17.9 at the end of 2017 as compared to CBO’S requirements of 13.25 per cent and Basel III requirements of 9.25 per cent. The profitability of the banking sector also improved slightly with profit before tax of RO450mn during 2017, corresponding to return on assets of 1.47 percent and return on equity of 9.8 per cent.

 The policy and overnight rates in Oman moved in line with the Fed Fund rates; however, liquidity in the banking sector remained fairly comfortable with banks complying with both LCR and NSFR of 215.9 per cent (CBO requirement: 80 per cent) and 116 2 per cent (effective 2018: 100 per cent) respectively. Moreover, the banks also maintained excess reserves of over RO590mn during 2017. The recent Eurobond issue of $6.5bn is expected to further support liquidity in the banking sector.

How have Islamic banks and windows strengthened the banking sector in Oman? 

Islamic banking operations began in Oman in December 2012. Required amendments were made to banking law and a comprehensive Islamic Banking Regulatory Framework (IBRF) was issued to facilitate this new component of banking system.

The differentiating feature of IBRF in Oman is its focus on effective Sharia-compliance in all aspects, with the overall objective of creating true Sharia-compliance perception among all stakeholders. Hence, CBO has paid due attention to appropriate Sharia governance framework requirements in a comprehensive manner so that Sharia-compliance can be ensured effectively.

Being asset and real economic activities based, Islamic banking adds to real economic development and helps in financial inclusion by attracting faith sensitive customers who rely on Islamic banking’s Sharia-compliant practices.

Islamic banking and finance products are mainly asset or service-based and the system relies, overall, on the idea of profit-loss and risk sharing, on both the liability and asset side. Islamic banking activities, by virtue of their design, create closer link between various economic activities that generate value and facilitate economic development while fostering financial stability. Performance of Islamic banking entities over the past five years in Oman underlines the important role played by them in strengthening the banking sector in the country.

Has the challenging macroeconomic environment of the last couple of years had an impact on Oman’s banking sector?

Well, as indicated earlier, the banking sector in Oman continues to be resilient despite challenging economic conditions. Although the twin deficit persisted while the government is moving towards fiscal consolidation, crude prices have risen from their lows of previous years and have remained stable hovering around $60/barrel since December 2016. The new oil price range which is now better understood has allowed better fiscal planning by the government.

Despite rising interest rates and challenging macroeconomic conditions in view of the lower oil prices, the banking sector in Oman is faring well, registering continued growth with strong capital, satisfactory asset quality and robust profitability.

The banking sector in Oman appears to withstand the current operating challenges. Our stress testing exercises have indicated that the banks operating in Oman have remained resilient to a battery of rigorous solvency and liquidity stress scenarios.

Please share your thoughts on the initiatives planned by the CBO for the banking sector in 2018? 

The promotion of a dynamic and resilient financial sector that supports sustainable growth without compromising financial stability, a robust payment and settlement system, and prudent regulatory and supervisory architecture that inculcates good corporate governance standards and practices, is at the centre of the financial sector policy of CBO.

In this backdrop, CBO has been introducing several policy reforms for the banking sector, particularly in the areas of capital adequacy, liquidity, accounting standards, financial inclusion, corporate governance, and risk management. It is envisaged to continue to keep abreast of global developments and to fine-tune our existing regulatory and suspensory norms. It is also envisaged that we shall continue to evaluate the appropriateness of adopting new standards that are introduced by global standard setting bodies such as Bank of International Settlements, Financial Stability Board, Islamic Financial Services Board, Accounting and Auditing Organisation for Islamic Financial Institutions and International Accounting Standard Board etc.

In order to address the emerging challenges and to be in sync with the changing landscape of the financial sector, we have embarked on the process of revising the banking law. Moreover, in view of the current macroeconomic environment, we have reviewed the extant prudential regulations governing the banking sector to ensure that the regulations remain relevant the changing needs of the economy. After a thorough review, in March 2018, we issued an array of circulars with a view to strike the right balance between growth and stability. These changes are meant to streamline the regulations and to provide more room for banks to contribute to the diversifications efforts. It is expected that banks would positively respond to these changes and access to finance will not be an impediment to the growth of the real sector.

As mentioned earlier, we are at an advanced stage of finalising a bank resolution framework for orderly resolution of banks and in particular the identified D-SIBs. The existing Prompt Corrective Action Framework will be refined to work in tandem with the resolution framework.

We also intend to further our work on feasible Sharia-compliant liquidity management tools, and a Sharia- compliant deposit insurance (takaful) scheme for depositors of Islamic banking entities. Moreover, we are also looking in to the aspect of facilitating the use of emerging technologies in the financial sector by developing a regulatory framework for FinTech.