Oman: Islamic Banking On The Rise

The Omani banking sector is a small but prudent and well performing sector. Profitability among Oman’s banks has been healthy due to good margins, increasing non-interest income and good loan asset quality. In 2012, Omani banks recorded profit growth of around 20 per cent but 2013 growth may not match this. While government and state enterprises support sector funding by accounting for 35 per cent deposits, unlike other GCC markets their borrowings are quite small.

The private sector accounts for around 87 per cent of total credit and has represented the principal area of growth for banks over the past few years. However, more recently loan growth has slowed due to the implementation of macro prudential regulations by the Central Bank of Oman (CBO). The Omani banking sector’s loan asset quality is currently good, with NPLs at around two per cent of gross loans.

The banking sector in Oman is heavily concentrated with the top three banks (Bank Muscat, National Bank of Oman and Bank Dhofar) accounting for approximately two-thirds of total credit. Bank Muscat holds a commanding position in the sector.

Despite this, there are a number of small banks, and in early 2013, the Capital Market Authority publicly encouraged consolidation in the country’s financial sector and suggested limiting issuances of new bank licenses in the country. There has been some activity, with HSBC acquiring Oman International Bank’s operations to form HSBC Oman. Domestic Omani banks continue to grow and to support this have raised over $1 billion in capital and subordinated debt over the past year.

Islamic banking in Oman has become increasingly important since 2011 when the CBO announced its decision to license Islamic banking services with the objective of diversifying and widening banking services. A Royal Decree amending the banking law and the legal authorisation for Islamic banking was issued in December 2012. Detailed instructions by way of the Islamic banking regulatory framework have also been introduced.

Two new local banks – Bank Nizwa and Al Izz Islamic Bank – were granted approval to operate as Islamic banks. Bank Nizwa commenced operations in December 2012 and more recently Al Izz started business. The new bank’s deposit products include a current account based on the concept of ‘Qard-Hassan’, allowing customers instant access to their money in multiple currencies, using their international debit card. It is the first fully-fledged Islamic bank in Oman to offer Sharia-compliant titanium and platinum credit cards. A number of conventional banks have established windows for Islamic banking.

Good GDP growth in Oman and favourable monetary and fiscal policies has had a positive impact on the growth and performance of the commercial banks in Oman. The balance sheets of commercial banks have strengthened, further supported by the robust growth in deposits and credit. While credit to the government declined in 2012, credit to public enterprises and the private sector increased robustly. Lending to the private sector was fairly balanced between corporate and retail sectors. The latter comprises mainly of personal loans including residential housing, which account for around 46 per cent of the total retail book.

The short to medium-term outlook for the Omani economy is positive based on current expectations of relatively favourable world energy prices and ongoing and planned investment to boost oil and gas capacity. This favourable operating environment will thus continue to support Omani banks’ lending growth and profitability over the short to medium-term.

The CBO has over the past few years initiated a number of regulatory and supervisory measures to improve efficiency of the country’s financial system in general and the banking system in particular. The CBO also reduced the interest rate ceiling on all new personal loans from eight per cent to seven per cent and introduced new micro prudential norms for personal loans.

The debt service ratio for salary linked loans was capped at 50 per cent of net salary on non-housing personal loans and 60 per cent on housing loans. The tenor is not to exceed ten years for the former and 25 years for the latter (excluding maximum of two monthly waivers in a year).

Bank Muscat’s net profit for the nine months to the end of September 2013 was RO102.5 million against RO104.2 million in the same period of 2012. In part, the marginally lower performance was linked to provisions made earlier in the year against prepaid travel card fraud. Net interest income from conventional banking stood at RO163.8 million at the end of September against RO168.3 million in the corresponding period. Non-interest income was, however, higher.

National Bank of Oman (NBO), owned 35 per cent by Commercial Bank of Qatar, also reported slightly weaker operating profit in the first half of 2013 with revenues flat. Impairment charges also rose. However, the bank has good coverage and liquidity. NBO’s Islamic banking operations have also provided another source of revenue although contributions are modest at the moment.

The sultanate’s economy is expected to have grown by around six per cent in 2013 but could fall to below four per cent in 2014 due to a weaker oil price. The increased expenditure in 2013 is anticipated to give a boost to commercial and economic activity. Allocation for the development programmes of ministries and government units is to be enhanced by about 30 per cent to complete ongoing infrastructure projects, such as ports, airports, roads, water, sanitary drainage, and infrastructure projects for the Duqm special economic zone and other economic zones.

While the growth of the expenditure side of the budget is high and unprecedented, this is anticipated to be financed from real resources without the need to borrow or withdraw from funds in an unplanned manner if oil prices go down severely.

Going forward, with the reasonable economic growth conditions in Oman, the Omani banking sector should be able to expand both deposits and assets with returns remaining sound if not spectacular.