In a highly competitive loan market, banks are coming up with attractive packages to attract and retain customers

Specialised banks, along with other commercial banks in Oman have, shown an impressive asset growth.The obvious reason behind the growth is the remarkable increase of credit demand in the market.
There are three specialist banks operating through 26 branches in the country. They are Oman Housing Bank and Oman Development Bank, both of which are owned by the government, and Alliance Housing Bank, which is a privately-owned institution. Ownership of freehold property was permitted across the sultanate to Omani and non-Omani individuals and companies by the Royal Decree 12/2006. This has brought about a growth in the lending sector.

The past year witnessed an impressive growth in credit, due to a substantial increase in private sector investments. The year showed a 27.9 percent assets growth of commercial banks driven by both corporate and personal credit.

There has been a 13.3 percent growth in the assets on the CAGR basis for the five-year period. The aggregate assets growth of commercial banks stood at RO4.695 billion, a more than 20 percent increase. Keeping pace with the asset growth, deposits mobilisation also grew by more than 24 percent to RO4.672 billion.

The equity market of the country has attracted international and regional investment. The overseas competition increased after Oman joined the World Trade Organization. After the creation of GCC common market, an increased competition from the GCC banks is also anticipated. Moreover, the corporate governance practice in the Sultanate is commendable and the corporate performance is positive, too. These phenomena have greatly boosted the lending sector.
Looking back Customer loans increased rapidly in 2005, compared with the previous year, as total commercial ank loans rose by 11.1 percent, compared with 5.9 percent a year earlier. Personal loans continued to occupy the lion’s share of total credits at 38 percent in 2005, followed by loans for import, trade and manufacturing, which accounted for 10.1 percent and 7.9 percent respectively.

Credit penetration remains low by regional standards. However, as a result of fast economic growth, the ratio of total credit to Gross Domestic Product (GDP) stood at 33 percent on December 31, 2005, compared to 36.8 percent at year end 2004. This suggests that there is still room for banks to expand lending activities within the country, particularly on the corporate side, where domestic companies remain reluctant to increase financial leverage.

The personal sector is highly leveraged in Oman, due to the young age of the vast majority of the population. Young people have created buoyant demand for consumer loans during the past couple of years. Outstanding consumer loans amounted to about US$1,500 per capita at the end of 2005, compared to a GDP per capita of about US$12,100. Although no official statistics exist, the interest margins of personal loans, though narrowing, remain high, says an analysis of the Standard & Poor’s. Margins on local currency private sector credits averaged 5.5 percent in the first quarter of 2006. New Central Bank of Oman (CBO) regulation, which caps personal loans at 40 percent of a bank’s total credit exposure limits the growth potential in this segment, it says.

This regulation excludes mortgage loans from the calculation of personal loans and allows banks to grant upto an additional 5 percent of total credits in housing loans.
Money supply (as defined by the M2 measure, or the amount in checking or demand-deposit accounts plus savings accounts, money market accounts, and small CDs) increased by 21.4 percent in 2005, compared to 2004, but inflation has been kept under control and stood at a low 1.9 percent. An exchange rate pegged to the dollar as well as the CBO’s effective monetary policy and liquidity management, helped control inflation growth despite high liquidity inflows stemming from the surge in oil prices.
Healthy growth On the whole, banks in Oman have shown an impressive trend. In 2006, BankMuscat and National Bank of Oman (NBO) showed great progress. Through the restructuring efforts, NBO had shown growth in the assets to RO1.9 billion, a rise of more than 24 percent with a market share of 15 percent. BankMuscat, with an estimated market share of 40 percent, showed a 48.2 percent increase of its assets to about RO3 billion. According to Bank Muscat Chairman AbdulMalik bin Abdullah Al Khalili: “The bank’s net loans and advances portfolio grew by RO463 million or 33.7 percent to RO1,835 million as on December 2006, as compared to RO1,372 million as on December 2005.”
The bank introduced a travel loan facility last year to meet the needs of customers requiring loans for travel and tourism purposes.

The growth in the lending sector of commercial banks can be attributed to the rise in credit demand in the private and retail sectors. As a result, the banks increased their gross loans during 2006 – BankMuscat RO1.9 billion, NBO RO788 million, Oman Arab Bank RO79 million, Bank Dhofar RO62 million.
Oman International Bank, however, lagged behind. The bank’s chairperson Reem Bint Omar Al Zawawi has been quoted as saying: “Our emphasis on increasing the quality of the loan book continues with the provision for loan impairment decreasing by 31.2 percent to RO0.928 million.” In the first quarter of 2007, Bank Dhofar’s net loans and advances increased by RO90.74 million or 19.14 percent to RO564.91 million in March 2007, up from RO474.17 million in the same period last year.

NBO Chairman Sheikh Suhail Salim Bahwan said: “NBO’s loans and advances increased by RO60 million during the quarter (the first three months of 2007) to RO763 million.”

The housing mortgage segment with a limit of 5 percent of total loan books for commercial banks in the sultanate opened up in 2006. This generated a stiff competition in the housing sector as new products were launched in the market by NBO, Bank Dhofar, BankMuscat and Oman Arab Bank. Earlier, Alliance Housing Bank and Oman Housing Bank monopolised this segment.

In the face of this competition, however, institutions like Oman Housing Bank have taken a fresh look at their offers. “The bank has been giving subsidised loans for housing to Omani nationals. These loans depend on the income of the applicant. While 3 percent interest is charged from those who fall in the income group of up to RO200, 4 percent is charged from the ones within the income bracket of RO200 to RO400, 6 percent from the income group of RO400 to RO600, and 8 percent from RO600 and above,” says an official of the bank. “Within a year, the bank plans to give loans for the purchase of land,” he adds.
The bank has also increased its budget for subsidised loans. Thus, “in 2006, RO8 million was added to the previous year’s budget of RO12 million. The budget for non-subsidised loans has also increased to RO12 million from RO8 million. We are planning to increase it to RO18 million this year,” he said.
“The bank has also approved a reduction in charges on commercial loans as on July 1, 2005 to make it 8 percent, instead of 10 percent, a matter that attracted many to avail of the bank’s loans. Even those who did not meet the terms of the subsidised loans can avail of this new system. This action helped utilise the whole amount of RO8 million, which contributed to the improvement of the commercial loan portfolio,” he says. The competition has also prompted the bank to reduce the queue period from two years to two months.

The official, however, says there is no harm in competition as all banks operate within the CBO regulations. “But sometimes it affects subsidised loans. For example, if a person has a salary account in a certain bank, he/she would be forced to choose that bank for the purpose of loan. The advantage of Oman Housing Bank is that it only deals with the instalment of the loans.”

Talking about its success, Keith Scott, General Manager, Alliance Housing Bank, says: “In the face of significant competition from all the major banks in Oman, the bank has continued to grow its loan book and achieve good levels of profitability. Compared with the final quarter of last year, our first quarter results are 38 percent up.

“We are undoubtedly the leaders in housing finance in Oman. We are able to offer our customers a quality of product that the competition simply cannot match. We offer larger loans, lower instalments and among the lowest insurance rates in Oman. Coupled with our expertise in housing finance, this gives us an unbeatable combination for plans in the years ahead.”

The pace of competition has picked up with the introduction of another bank in April – Bank Sohar.
Upward trend

As the year 2006 came to an end, the combined net profit of the banks in Oman was RO158.091 million (according to the provisional figures released by Central Bank of Oman). In terms of total income growth, all banks in the country have shown an upward trend in their performance. The net interest income driven by a healthy growth in assets has also shown an impressive progress.

Regulatory environment Standard & Poor’s considers the CBO to be an effective regulator and regards its active involvement as positive for the Omani banking system. Prudential regulations have been regularly strengthened over the past decade. The most recent regulatory developments carried out by the CBO were the:

• Amendment to the reserves requirement, entailing the maintenance of at least 3 percent of all daily local and foreign currency deposit demands ( savings and time deposits), except domestic inter-bank deposits;

• Reduction in 2005 of the ceiling on the yield for
personal loans to 9 percent;

• Strengthening of the risk classification and provisioning framework in September 2004 with the introduction of general provision requirement (1 percent for performing non personal loans and 2 percent of performing personal loans);

• Adoption of a stricter definition of commercial banks’ net worth in May 2005;

• Setting up of stringent rules for related party exposures(requiring separation between decision maker and counter party, two or more levels of control for all decisions, transparency in all records, and clear definition of approval and reporting responsibilities);

• Increase of the minimum capital requirement to RO50 million from RO20 million for commercial local banks and to RO10 million from RO5 million for foreign banks, with the obligation to comply with this rule before the end of 2008; and

• Exemption of residential housing loan from the calculation of personal loans, allowing banks to grant up to 5 percent of total credits in residential housing loans and reducing the ceiling on personal lending from 42.5 percent to 40 percent of total loans, with the obligation to comply with this rule before March 31, 2007

• Supervision is a blend of examination of regulatory reports and on-site inspection. Full bank inspections are carried out every year. The CBO reviews in detail banks’ asset classification and provisioning. In addition, the CBO undertakes ad hoc inspections.

The CBO has created the Banks Off-Site Surveillance Unit, which electronically obtains from banks detailed information on their operations on a monthly and quarterly basis. It is designed to generate ‘early warning’ reports. The small number of banks makes it easy for the CBO to have informal contacts with senior management, and enables it to be in close touch with banking developments. The CBO has also institutionalized annual meetings with commercial banks’ CEOs and auditors, to keep itself updated with the banking sector’s situation and needs