Development of Banking and the Financial Sector, Oman
By Dr Hamed S al Marjan
Central Bank of Oman
THE development of the Oman’s financial sector, particularly the banks, has kept pace with the rest of the economy. Oman’s financial sector includes a diversified commercial banking system, financial institutions and a securities market. The continuous liberalisation and modernisation of financial institutions and the capital markets are among the main objectives of the Sultanate.
Oman’s banking system has developed over the years with the first commercial bank, the British Bank of the Middle East, (BBME) which opened in 1948. This was followed by Chartered Bank (The Orient) which opened in 1966 and the Grindlays Bank (The Ottomin Bank) in 1969. Between 1948 and 1969, banking activity was limited due to the lack of a national currency and a government body to supervise operations. This changed in 1969 when oil was discovered. But no statistics are available about the assets and liabilities between 1948 and 1970 for the three commercial banks operating in Oman.
The BBME (now HSBC) was the leading commercial bank in Oman due to its long historical presence in Muscat, and its role as the government’s bank, assisting the government in currency management. Until 1970, there was no national currency. Prior to 1970, the Indian Rupee and Maria Teresa Silver Coin were used in currency transactions. Oman decided to issue a national currency in mid-1970, the first step towards the establishment of the Central Bank of Oman under the Banking Law in 1974. Upon issuing the new currency laws in April 1970, the Muscat Currency Board (MCB) was established and assigned two responsibilities:
1) To control and administer the national currency and foreign currency reserves used as currency cover.
2) To represent foreign central banks and international monetary organisations in Oman.
Although the powers of the MCB were limited it was allowed to open accounts with banks abroad, buy and sell foreign currencies and make short-term investments.
In November 1972, the Currency Laws were issued replacing the Saiedy Riyal on a one-to-one basis. The Oman Currency Board (OCB) replaced the MCB and was established with a capital of RO 0.1 million and took over the responsibilities of currency issue and administration of foreign exchange reserves used as currency cover. Under the new currency laws the OCB was authorised to do the following:
1) Buy and sell gold and foreign currency.
2) Accept demand deposits from commercial banks, credit institutions and international organisations.
3) Act as an agent for any central bank or monetary authority and appoint agents for one or more of the commercial banks in Oman.
4) OCB by law is not allowed to engage in direct trade activities or to accept deposits from or extend loans to individuals and OCB shall not compete with commercial banks in Oman
5) All applications for a licence for the establishment of a new bank in Oman are to be submitted to His Majesty the Sultan via the OCB.
6) Granting or cancelling new or existing licences should be done under Royal Decree after consultation with the OCB.
7) All commercial banks should submit an annual financial report to the office of the Financial Controller, who is the member of the OCB.
During 1973-74 there was an increase in banking activities. The British Bank of the Middle East was operating four branches, as were Standard Chartered Bank and Grindlays Bank, Habib Bank was established in 1972 with 15 branches and Habib Bank AG Zurich was established in 1973 with five offices.
The Bank of Credit and Commerce International was established in 1974 and operated 12 branches. Also the same year Bank Melli Iran was established with one branch. In terms of local banks, the National Bank of Oman was established in 1973 with 49 branches followed by the Bank of Oman, Bahrain and Kuwait, which was established in 1974 with 24 branches. By the end of 1974 there were nine banks (local and foreign) operating in Oman with 114 branches.
The fast expansion of commercial banks prompted the government to increase the powers of OCB, by providing a clearing house in an effort to accommodate the increasing activities of the commercial banks. At the beginning of 1974 a new law was issued which re-organised the operations of the OCB. At the end of 1974 the banking law was enacted which created a Central Bank of Oman. The law provided for the following:
1) To promote and develop banking institutions in a way conducive to maintaining monetary stability and enhancing economic, industrial and financial growth.
2) To establish a Central Bank to issue currency, maintain the stability of its exchange rate, supervise banking activities and provide advice to the government on monetary and fiscal policy issues.
3) Extend credit facilities necessary for the development of the free economic system of the Sultanate of Oman and help the Omani people to benefit from the services of the banking institutions operating in Oman.
4) To contribute to the financial and monetary development of Oman through active participation in the activities of international monetary organisations.
The steady expansion of the banking sector has resulted in subsequent rise in the number of commercial banks branches in various parts of the Sultanate. By the end of 2002, the number of branches of commercial banks stood at 330.
The development of the banking system in Oman enabled Omanis to carry out various business transactions locally and internationally. It also allowed the government greater control on monetary matters thereby leading to stability and the eradication of uncertainty in reliance on foreign currency as the basis of the Omani Rial.
Market forces and indirect means of control, such as variation in reserve requirements, are used to regulate the financial industry. In 1988 the government embarked on a long-term plan to achieve a gradual Omanisation of 90 per cent in the financial sector, which in 2003, reached 99 per cent. Oman’s financial institutions can be divided into two categories, monetary institutions and other financial institutions. They are the Central Bank of Oman; commercial banks; and specialised banks.
1. The Central Bank of Oman
The Central Bank of Oman (the CBO), established in 1974, makes monetary and credit policies under the direction of the Monetary Board. The Minister of Civil Services presides over the meetings of the Board, ensuring co-ordination of the CBO policies with the government’s economic goals. The CBO supervises local commercial banks and branches of foreign banks through its office of Bank Supervision. It also serves as the government’s bank, as a “bank of last resort” and as an issuer of currency. The CBO has three branches, in the capital, Salalah and Sohar.
2. Commercial Banks
The country’s 13 commercial banks are almost entirely in private hands. Five are locally owned and the remaining eight are of foreign ownership. There are three specialised banks. Locally incorporated commercial banks have 330 branches in the country. The specialised banks operate 26 branches. The Central Bank of Oman regulates all commercial bank activities under Royal Decree No (7/1974). The bulk of their lending activity consists of short-term loans or discounts. There is no law prohibiting commercial banks from engaging in long-term lending, however, this is largely carried out by the two specialised banks.
In 1975, the total assets and liabilities of commercial banks according to the Statistical Year Book of 1986 (old series classification) were RO 197,314 and in 1979 the total assets and liabilities rose to RO 408,677. From 1979 to 1983 the total assets and liabilities reached RO 1,218,557 million and in 1989 reached RO 1,493,900 million, while the non-resident commercial bank’s share was counted 10 per cent in 1986 and 7 per cent in 1989 of the total assets and liabilities.
3. Specialised Banks
Two specialised banks have been established in the Sultanate, each with its own function in the economy and supervised by the government. The specialised banks receive funds from the government as well as from shareholders. These banks play a significant role in the implementation of the government’s economic policy through loans to designated industrial sectors. The government established a specific development bank for dealing directly with development projects in the Sultanate. Two of these are 1) Oman Development Bank; and 2) Oman Housing Bank.
1. Oman Development Bank
The Oman Development Bank (ODB) was created under the Royal Decree No 31/1976 with only one branch in Muscat. The Bank commenced operation in March 1979 and immediately started to provide loans to Omani companies in manufacturing, agriculture, oil and mining and also assisting Omani companies to conduct feasibility studies. The Bank has paid up capital of RO 10 million and the government holds 54 per cent of shares with Omani nationals holding 6 per cent and other regional and international shareholders holding 40 per cent. Through its Research Department, the bank helps investors conduct feasibility studies and provide market research without any cost to the investor. Since 1989 the Bank has financed 27 projects.
2. Oman Housing Bank
The Oman Housing Bank (OHB) was established under the Royal Decree No 35/1973 with the title of “The Omani National Company for the Development of Housing” with a capital of RO 2.0 million. The government subscribed to 37.5 per cent of its shares and the British Bank of the Middle East 10 per cent. The balance was tendered to the public on July 11, 1977 under the Royal Decree No 51/1977. The name of the company was changed to “Oman Housing Bank”, a joint company with a capital of RO 30.0 million, subscribed to by the government and the BBME.
The BBME returned to the government its shareholding of 10 per cent in 1979/80 making the government’s share 60.9 per cent, with the Bank of Kuwait holding 39 per cent and the Development Bank of Oman holding 0.1 per cent. The objectives and aims of the Bank are to support the construction of the housing sector within the framework of the Development Plan by providing loans to Omanis to construct, purchase, expand or complete new houses. Loans are repayable within 20 years and should not exceed RO 35,000. The interest rate is subsidised by the Omani government and only partially paid by the borrower based on income.
That is those whose income is RO 200 would pay only 2 per cent whilst the government pays 7 per cent. Likewise those with income ranging from RO 200 to RO 400 pay 3 per cent and the government 6 per cent. Those with income of RO 600 to RO 800 pay 6 per cent and the government 3 per cent. Incomes of RO 800 to RO 1,000 pay 8 per cent and the government 1 per cent, and finally those with an income of over RO 1,000 would pay the full 9 per cent. Since its establishment, the Bank has approved 14,455 loans worth RO 208,955,288 million.
This is a very progressive national policy, which is aimed at providing adequate housing for Omanis. However, this policy should be continued until all Omanis are housed and special provisions should be made for those who fall outside the income qualification at the lowest end. Encouraging the housing industry not only provides people with a basic human right, but act as a powerful engine of economic growth.
Oman Observer, 18th July 2004
