Banking on the Future
Oman’s banking sector seems poised to go through the global financial meltdown without much of an impact, though it may lose some steam in the short-to-medium term

By Oliver Cornock

Oman’s fast-growing banking sector looks strongly placed to withstand the pressures of the global financial turmoil. However, while local banks have little direct exposure to toxic assets, tighter liquidity and lower economic growth are likely to impact banks to some extent. The Central Bank of Oman (CBO) has therefore made sensible moves to bolster short-term confidence.

Banking results from the first nine months of 2008 paint the picture of a very dynamic sector. The profits of Oman’s six listed banks rose 37.6 per cent. As a report by Kuwait’s Global Investment House noted, this performance was particularly impressive given the shakedown that several Gulf financial institutions have undergone over recent months. Global praised the “commendable” performance, noting that while “some of the major regional banks in the GCC registered a decline in profits,” no Oman-based lender saw profit growth dip below double figures.”

These are tough times for the global financial system as a whole. The international credit crunch, which commenced more than a year ago with a range of banks announcing large write-downs attributed to sub-prime mortgage loans and associated products, entered a new and dramatic phase this autumn. With banks in North America and Europe folding or at imminent risk of collapse, governments have stepped in with huge “bail out” packages designed to inject new liquidity into their financial systems and underwrite debts – in some cases, resorting to partial nationalisation.

Contagion effect
The effects of the crisis may have started to spread to GCC member states. On October 26, Kuwait’s Central Bank moved to halt trading of shares in Gulf Bank, one of the country’s largest lenders. Two days later, the Kuwait government announced that it was ready to invest in a proposed capital increase for Gulf Bank designed to keep the lender afloat and passed a law extending deposit guarantees – the latter policy designed to shore up savers and therefore confidence in the banking system. The Saudi Arabian Monetary Agency (SAMA) recently injected $3bn into the domestic banking system, ostensibly to ease borrowing conditions for the poor.

While Gulf Bank has been the only major incidence of a bank requiring the deployment of rescue policies, the Gulf‘s overall financial sector has been somewhat shaken by falling stock markets, partly connected to fears that what many have seen as a real estate bubble might burst. Business confidence is declining, and should this creeping pessimism beset the banking system, the Gulf‘s thriving economies could be in real trouble.

Even without direct exposure to the toxic assets associated with the crisis elsewhere, Gulf banks -including Oman‘s - face a number of pressures from the global credit crunch and related circumstances. Firstly, they may find it harder to raise capital to expand, as international lenders become more wary of extending loans, and interbank borrowing becomes more expensive. They may also feel some of the effects of the economic slowdown currently affecting the global economy, including more sluggish deposit growth and, possibly, an increase in defaults. This seems likely to temper bank’s growth, which is closely linked to that of the economy as a whole.

Confident stance
However, the GGC states’ governments and central bankers remain confident that their banks are robust, relatively underexposed to the crisis, and flush with liquidity. The chairman of the SAMA has dispelled rumours that the Kingdom will push banks to merge in order that they might better withstand the financial storms, stating that there is ample liquidity in the system. His comments have been echoed by counterparts in other Gulf countries, including Qatar and Oman.

On October 21, CBO executive president HE Hamood Sangour Al Zadjali stated that, “The banking system in Oman is quite resilient and strong, with no exposure to the US mortgage markets,” adding that banks in Oman are “sound and well capitalised.” According to HE Zadjali, banks’ core capital and reserves total $4bn, while interbank lending rates – a key measure of the ease with which liquidity moves around the financial system – were below two per cent in October, down from 2.6 per cent in the same month of 2007. Commercial banks have ample access to cash through the CBO.

Nonetheless, the central bank is wisely taking a cautious stance on the crisis. It has opted to delay the tightening of the loan-to-deposit ratio scheduled for November 2008. This move was planned to constrict liquidity (with the end aim of slowing inflation) by decreasing the proportion of deposits that can be lent out from 85 per cent to 82.5 per cent. This should help prevent credit from drying up as it has elsewhere. While there is little immediate scope for actually increasing the ration, given the fact that inflation hit 13.7 per cent in August, the easing of inflationary pressures seems likely to provide more possibilities for a relaxation of monetary policy in 2009 should the necessity arise.

Slow but steady
In practice, the CBO does not have the key monetary lever – interest rates – at its disposal due to the rial’s dollar peg. It is effectively obliged to track US Federal Reserve policy; for the first time in several years, the Fed’s moves to cut rates may in fact fit with Oman’s needs, by making money cheaper, easing pressure on indebted businesses and households, and bolstering consumer confidence. Ensuring that banks still have ample access to liquidity is important as deposit growth moderates and external credit dries up. It should also allow continued expansion of one of the newer markets for banks – financing small and medium enterprises (SMEs), which are an important, if somewhat overlooked, part of Oman’s diversification drive.

Over the medium term, it is not only the credit crunch (and its effects of lower economic growth and commodity prices) that seems likely to slow banks’ expansion. The relatively young Omani banking market will near saturation in the coming years. Furthermore, somewhat tighter monetary policy may be required in order to head off inflationary spikes to which Oman is vulnerable, and to prevent excessive credit expansion that could threaten economic stability in the event of a downturn. After all, one of the key causes of the credit crisis was overenthusiastic borrowing and lending. Somewhat slower growth is therefore the likely outcome of a maturing market and cautious oversight – positive trends for the industry. In the short-to-medium-term, the likeliest course for banks in Oman is more sedately but steadily ahead.

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