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Oman Banking
The Omani banking sector is largely the product of a
November
1974 banking law that established the Central Bank of Oman
(CBO),
effective April 1975. The law also facilitated the entry
of
foreign-owned banks and permitted an increase in the
number of
local banks in the sultanate. As of September 1992, there
were
twenty-one commercial banks in comparison with three
registered
in 1972. In addition, there were three specialized
development
banks: the Oman Development Bank (1977); the Oman Housing
Bank
(1977); and the Oman Bank for Agriculture and Fisheries
(1981).
However, the Omani banking market is the smallest in the
GCC. Of
the twenty-one commercial banks, eleven are foreign owned
and
concentrate primarily on financing trade. Ten are local
banks
operating in an increasingly competitive market. Because
of
competition, the government seeks to encourage
consolidation. The
expectation is that five or six local banks will emerge as
the
core, with those facing financial difficulties ceasing
operations
or merging with more profitable institutions. A similar
pattern
may apply to foreign banks, of which only five or six
would
continue to undertake significant business.
The CBO effectively replaces the Oman Currency Board,
which
was created in 1972 to issue currency, manage government
accounts, and execute banking transactions with commercial
banks
and international institutions. A board of governors
appointed by
the sultan manages the CBO. The board's responsibilities
include
management of the government's foreign assets. The CBO is
empowered to make advances to the government to cover
temporary
deficiencies in current revenues; to purchase government
treasury
notes and securities with a maximum maturity of ten years;
to
make advances to commercial banks; and to buy, sell,
discount,
and rediscount commercial paper. In 1991 the banking law
was
amended to empower the CBO to withdraw the license or
suspend the
activities of banks under its jurisdiction, allowing the
CBO to
liquidate, reorganize, or manage a bank directly.
The CBO exercised these expanded powers with regard to
the
takeover of the Bank of Credit and Commerce International
(BCCI)
branches in the sultanate. BCCI was incorporated in
Luxembourg in
1972 and established a presence in Oman in July 1974.
Since 1974
it expanded its local operations to include twelve
branches
having total assets of RO67 million (US$174 million) as
against
total deposit liabilities of RO57 million (US$148
million). Gross
mismanagement of assets resulted in a decision by central
banks
of various countries to freeze BCCI operations on July 5,
1991.
Accordingly, the CBO suspended BCCI operations in the
sultanate
on July 6, 1991, and its board of governors offered BCCI
branches
for sale to locally incorporated banks. An agreement was
signed
with Bank Dhofar al Omani al Fransi, effective February
15, 1992,
to assume all assets and liabilities of BCCI Oman. Bank
Dhofar al
Omani al Fransi received a grant of RO15 million to cover
BCCI's
frozen assets abroad and a guarantee of RO4 million
against
future claims. The arrangement made Bank Dhofar al Omani
al
Fransi the second largest capitalized bank in the
sultanate. The
sale did not affect the National Bank of Oman, the largest
bank
in the sultanate, in which BCCI was a 40 percent
shareholder.
In 1992 this sale was the most recent in a series of
restructuring arrangements of the Omani banking market.
The Union
Bank of Oman was restructured in June 1990 and thereafter
was
called the Omani European Bank. Kuwaiti institutions lost
their
shares in the bank, the shares of France's Banque Indosuez
increased, and several Omani groups held the remaining
shares:
Zubair Enterprises, Royal Oman Police Pension Trust, Oman
International Development and Investment Company, Oman
Aviation
Services, and the Port Services Corporation. In January
1989, the
Bank of Muscat purchased the assets and liabilities of the
Oman
Banking Corporation, which itself was a product of the
restructuring of the Bank of Oman and the Gulf.
Consumer loans rose to 31.3 percent of total loans in
1990
from 18.8 percent in 1985. There was an accompanying
decline in
the share of construction and trade to 44.8 percent from
57.3
percent in the same period, reflecting the shift in
commercial
bank lending from commerce and real estate to personal
loans. The
decline also indicated the different development needs
within the
sultanate. During the early 1980s, large-scale
infrastructural
growth prompted banks to extend loan facilities for
construction
and real estate. The 1986 oil price collapse and the
subsequent
economic retrenchment contributed to repayment
difficulties, and
nonperforming loans diminished the net profits of banks.
In its declared interest in promoting mergers in the
banking
industry, in 1991 the government placed a ceiling on the
amount
banks could lend to their directors. Banks could lend up
to 15
percent of their net capital to related individuals or
their
business interests, in comparison with the previous
ceiling of 20
percent. An amendment to the 1974 banking law announced in
May
1992, increasing the minimum required capitalization for
banks to
RO10 million for local banks and RO3 million for branches
of
foreign banks, was similarly designed to encourage mergers
and
rationalization of the banking sector.
The three specialized development banks serve as
mechanisms
to promote government policies of economic
diversification,
private-sector development, and indigenization of the work
force.
The Oman Housing Bank is a joint venture developed by the
government, Kuwait's Ministry of Finance, and the Oman
Development Bank. In 1991 the Oman Housing Bank recorded a
net
profit of RO4.1 million (US$10.7 million), as compared
with RO3.4
million (US$8.8 million) the previous year.
The Oman Development Bank extends loans to industrial
development projects. The government holds 40 percent of
the
shares, regional and foreign institutions 40 percent, and
20
percent is open for private Omani subscription. In March
1991,
the bank offered five- to six-year interest-free loans of
up to
RO50,000 (US$131,600) for establishing small businesses if
all
employees were Omanis. Businesses employing foreigners
were to be
levied 3 percent interest.
The government holds 98 percent of the capital of the
Oman
Bank for Agriculture and Fisheries, which, as its name
implies,
is authorized to extend loans to individuals or
enterprises to
finance activities in agriculture and fishing. By March
31, 1992,
the bank had thirteen operating branches.
Data as of January 1993
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