MONEY BANKING AND FINANCIAL INSTITUTIONS

Over the last decade the role of banking in the process of financial intermediation has undergone profound transformation as a consequence of fast evolving changes in the global financial arena. The proliferation of financial innovations has blurred the distinction between traditional banking and other forms of financial intermediation. The Central Bank of Oman has all along been encouraging the process of financial sector reforms supported by legal changes as evident by the new Banking Law decreed in December 2000. The new Banking Law has opened up more opportunities to strengthen the financial system and to render it truly competitive, well structured and resilient. Commercial banks have been given greater freedom in investment areas both locally and globally so that they can respond flexibly to different phases of the business cycle. Initiatives for technological changes have been an integral part of the reform process. Greater transparency, stringent conditions for disclosure of provisions as well as the necessity of setting aside provisions for diminution in value of investments, stiff capital adequacy requirements and a host of prudential norms coupled with a deposit insurance scheme provides an environment for stability and growth in the banking sector. Side by side, in order to ensure that financial reforms take place in all segments of the industry, institutional development has been intensified. The financial institutional framework in Oman is mainly composed of commercial banks. After a series of mergers during the 1990s, their number as at the end of the year 2000, stood at 15, of which six are

locally incorporated and nine are branches of foreign banks. The total commercial banks branch network continued to expand from 319 as at the end of 1999 to 331 at the end of 2000. There are also four specialised banks. Two of them in the public sector, the Oman Housing bank and Oman Development Bank, provide soft financing subsidized by the Government to mainly low and middle-income Omanis to build or purchase residential property and to private sector investors to finance small projects. The other two specialised banks are in the private sector, the Alliance Housing Bank and Industrial bank of Oman, the former providing housing loans and the latter lending to industrial and infrastructure activities. The specialised banks operate a network of 27 branches. As at the end of 2000, there were 11 commercial banks and a specialised bank authorised to engage in specific investment banking activities. In addition, there were 5 non-bank financial institutions licensed by CBO engaged in hire purchase, leasing, debt factoring and similar credit based operations. There were also 11 companies licensed by CBO to undertake the business of money exchange and issue of drafts as well as 45 money changing firms. Other financial institutions in Oman include 22 insurance companies, several Pension Funds and the Muscat Securities Market.

Banking Policy Developments

and

Oman’s financial system has undergone considerable transformation in the recent years. Banks and other financial institutions participated largely in the country’s efforts

to achieve higher growth trajectory and enhance the living standards of the people. The institutional framework has widened and the macroeconomic challenges were met with efficient mobilisation of savings and optimal financial intermediation. An essential pre-requisite to stepping up the investment rate in the economy is that of raising the saving potential over the medium to long term horizon. Banks have a major role in the mobilisation of savings and its channelling to productive areas. For this function, banks must be in a position to mobilise resources from within the country as well as within reasonable limits from abroad which could act as a supplementary source of funds. The Central Bank took a proactive step by moderating commercial banks’ overseas borrowings, much of which were short term in nature. Foreign currency borrowings by domestic local banks were subjected to certain limits. Short term liabilities, i.e. borrowings within a maturity of two years is capped at 100 percent of a bank’s net worth. Medium term borrowings, maturing between two and five years were allowed upto 200 percent of networth. This limit included the short term liabilities. Likewise long term liabilities with borrowings of over five years were allowed up to 300 percent of net worth. This limit included both short and medium term liabilities. Following the rapid expansion of credit in 1997 and 1998, the Central Bank in January 1999 imposed a quantitative ceiling of 30 percent on personal loans as a proportion to an individual banks’ private sector credit portfolio. Banks were given time up to the close of year 2000 to adjust excesses but had to execute the plan to proportionately reduce the excess over the time frame. The underlying objective of the move was to prevent excessive

consumption oriented credit and to utilise it for more productive uses as well as to soften the adverse effect it had on balance of payments, interest rates etc. Personal loans as a proportion to private sector credit which stood at around 40 percent in early 1999 gradually fell over the ensuing months and reached 32 percent as at the end of September 2000. In view of the favourable balance of payments position, reserve position etc., the Central Bank relaxed the overall ceiling on personal loans to 35 percent of the total credit portfolio of banks with effect from October 2000. Banks have taken the Central Bank’s advice on curbing of personal loans and are seriously pursuing funds mobilisation, within and outside, particularly long term in nature to meet the larger outlay corporate sector would require. The budget has since come out with larger emphasis on privatisation and bigger outlays for development. These provide good scope for corporate banking, directly and by way of spin-off effects. The Banking Law was revised and updated for recent domestic and international banking and financial sector developments and was officially decreed in December 2000 (Royal Decree 114/2000). The new Law takes the same broad-based approach of the earlier Law and grants greater investment powers to banks. With the opening up of investment banking for commercial banks as part of liberalisation and adoption of converging practices elsewhere, banking business has been elaborated to cover new areas. Banks have been authorised to do underwriting up to 20 percent of their net worth, subject to limitations on individual underwriting obligations. Under borrowing and lending limitations of licensed banks, they have been permitted larger exposure towards loans secured by real estate and holding

real estate securities. Licensed banks are to notify the Central Bank of any decision on appointment of chairman, directors and senior management of the concerned bank. The Central Bank continues to strengthen its supervisory and regulatory norms. The rules are reviewed regularly and are updated in the light of changing and evolving circumstances. In general, the more important rules constantly under review relate to loan-deposit ratios, capital adequacy norms, credit concentration issues, foreign currency exposure, accounting standards and provisioning requirements. The loan to deposit or lending ratio is currently set at 87.5 percent. Deposit base for lending purposes include all customer deposits, net borrowings from banks abroad as well as capital and reserves. The minimum reserve requirement for banks is set at 5 percent of total deposits. Reserves include cash, clearing balances with CBO, 5 percent of bank’s foreign currency deposits held with CBO and Treasury Bills and Government bonds (subject to a maximum of 3 percent of the deposit base). To ensure sufficient liquidity in the system, bank resources are not excessively preempted through high reserve requirements. Liquidity to banks is available from the CBO through rediscount and repos of treasury bills and through the swap facility. Banks in Oman have been in full compliance with the Basle capital adequacy minimum requirement of 8 percent since 1992. In order to further enhance the capital cushion for banks in Oman, the Central Bank mandated that banks achieve a minimum ratio of 12 percent by 1998. All banks have successfully achieved the target with many far in excess of the minimum requirement.

The Central Bank issued guidelines covering extension of credit facilities by banks in foreign currency to non-residents for operations abroad, stipulating caps on the aggregate of direct and indirect obligations by laying down that such obligations shall not exceed 5 percent of the net worth of the lending bank for any individual borrower. Additionally, for all non-resident borrowers put together, the lending bank had to operate within a limit of 30 percent of its net worth. Other selective credit control measures include a 50 percent margin requirement on loans granted for share purchases, under initial public offerings, limiting the collateral of shares to 75 percent of their market value. Total facilities to any one entity is limited to 15 percent of the bank’s net worth. Individual facilities to related parties (directors, management etc.) are limited to 10 percent of net worth and all such loans in aggregate are not to exceed 35 percent of a bank’s net worth. With regard to provisioning requirements, loans in arrears for more than 90 days are classified as non-performing. Of these, banks have to provide 25 percent, 50 percent and 100 percent against loans classified as substandard, doubtful, and loss, respectively. For non-performing assets for which specific provisions have not been made, 5 percent provisions are to be made. The ratio of non performing loans to total loans was around 6 percent as at the end of year 2000 indicating a comfortable asset quality position for commercial banks. Foreign currency exposure limited to a maximum of 40 bank’s capital and reserves. Bank also verifies banks’

of banks is percent of a The Central policies and

procedures for identification, monitoring and control of exposure to country risk in international lending and investment activities. Banks follow international accounting standards. Apart from the Central banks pivotal role in organising, supervising and regulating the monetary and financial system, widening and deepening of financial markets has been accorded focus and priority. All the segments of the financial market, namely, money market, capital market and forex market have grown significantly with improvement in both quality and range of products. The main function of the money market is to provide short-term funds and comprises mainly the inter-bank call money market and the Bill market. In regard to call money market segment, the main function is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of cash. Overnight inter-bank rates have become somewhat finer and serve as an useful indicator of liquidity in the system. In the Bill market, Treasury bills are the most important followed by commercial bills. Treasury bills were first issued in June 1987 with 91 day maturity. In August 1994, 30 day TBs were issued and in June 1999, 182 days TBs were introduced. With a view to further activating the money market and developing a yield curve, 364 days TBs are to be issued. Besides rediscounting facility, the repo facility is available for Treasury bills and with it the market has attained larger breadth. The capital market deals mainly in medium term and long term funds. Beginning in 1991, the government began issuing bonds mostly for funding its capital expenditures. The development bonds are sold to both residents and non-residents while banks in

Oman are allowed to buy a maximum of 30 percent of their net worth in these bonds. The maturity period of Government Development bonds issued thus far ranged between 2 to 7 years and carried coupon rates from 6.75 percent to 8.5 percent. The bonds as in the case of TBs are eligible securities for repos both at the interbank level and with the Central Bank. Further the Central Bank has appointed certain banks as over-the-counter trading agents for government securities to promote secondary market trading and liquidity. The foreign exchange market is relatively significant as the Omani economy is essentially foreign trade oriented. The foreign exchange market is primarily a wholesale inter-bank market for the sale and purchase of foreign currencies. Commercial banks remain the main players in the foreign exchange market, participating as intermediaries for their corporate customers, government agencies, exporters, importers as well as for their own account. The Central Bank provides foreign exchange to the commercial banks but does not buy or sell in the forward market other than for swap purposes. Commercial banks are subject to a 40 percent of net worth limit to hold open foreign exchange positions.

Table 5.1 Monetary Survey Amount in Million RO End of Period

Change in million RO

% Change

2000/99

2000/99

1996

1997

1998

1999

2000

1. Domestic Liquidity (A+B)

1633.8

2034.2

2131.3

2267.5

2404.0

136.5

6.0

A. Money

502.3

539.0

502.8

509.5

533.9

24.4

4.8

a) Currency with public

231.2

242.2

244.3

273.5

276.8

3.3

1.2

b) Demand deposits in RO

271.1

296.8

258.5

236.0

257.1

21.1

8.9

1131.5

1495.2

1628.5

1758.0

1870.1

112.1

6.4

(194.7)

(241.2)

(261.0)

(204.2)

(221.9)

(17.7)

(8.7)

2. Foreign Assets (net)

891.5

993.1

654.1

829.3

773.8

-55.5

-6.7

3. Domestic Assets

742.3

1041.1

1477.2

1438.2

1630.2

192.0

13.4

a) Claims on Government (net)

-19.6

-146.3

8.2

-220.3

-4.5

215.8

i) Government borrowings

222.8

190.1

357.6

338.4

327.5

-10.9

Less : ii) Government deposits (-)

(-242.4)

(-336.4)

(-349.4)

(-558.7)

(-332.0)

226.7

b) Domestic claims on Pvt. Sector

1564.9

2170.9

2563.1

2783.3

2809.2

25.9

0.9

c) Claims on Public enterprises

4.8

0.6

-

4.1

16.3

12.2

297.6

d) Other items (net)

-807.8

-984.1

-1094.1

-1128.9

-1190.8

-61.9

i) Monetary authorities

-564.9

-565.7

-629.5

-577.8

-642.8

-65.0

ii) Commercial banks

-242.9

-418.4

-464.6

-551.1

-548.0

3.1

B. Quasi Money (of which foreign cy. deposits)

Source : Central Bank of Oman

-3.2

Monetary Developments Domestic Liquidity

and

In Oman, with a fixed exchange rate arrangement, the conduct of monetary policy is essentially guided by the prime objective of price stability and in protecting the exchange rate parity. Providing adequate credit flow to the private and public sectors thereby facilitating economic growth is another element of monetary policy. The policy also aims at smoothening out short term fluctuations in bank liquidity to avoid excessive adjustment costs to the banking system. Shifts in interest rate differentials between the Rial Omani and US dollar have also influenced the growth of domestic liquidity through their effect on private capital flows and by the composition of quasi money. During the year 2000, the narrow measure of money (M1) which represents the aggregate of currency with the public and local currency demand deposits rose by 4.8 percent as against a moderate rise of 1.3 percent in the previous year. The components of M1 reflected an increase of 8.9 percent in Rial Omani demand deposits while currency with the public rose by 1.2 percent. Quasi money (Rial Omani savings, time deposits, margins and forex deposits) registered an increase of 6.4 percent (RO112.1 million) during the year to reach RO 1870.1 million. Quasi money growth resulted mainly from an increase of 14.5 percent in Rial Omani savings deposits from RO 340.4 million in December 1999 to RO 389.8 million in December 2000 as well as from Rial Omani

time deposits which went up from RO 1186.5 million to RO 1236 million giving a growth of 4.2 percent. The broad measure of money M2 (M1 + quasi money) thus increased by 6 percent over the year to reach RO 2404 million as at the end of year 2000. The factors affecting changes in broad money are presented in the Monetary Survey table 5.1. It can be seen that the increase in broad money by RO 136.5 million during the year was accounted by an increase of RO 192 million in domestic assets while net foreign assets of the banking system declined by RO 55.5 million. The increase in domestic assets resulted mainly from a rise in net claims on the Government, primarily due to the sharp fall in Government deposits held with the Central Bank. Increase in domestic assets also resulted from a moderate rise in claims on the private sector and public enterprises by RO 38.1 million during the period as mostly lending for personal purposes stagnated between end-1999 and end2000. The decline in net foreign assets noted above was a consequence of the decrease in foreign currency deposits of the Government held with CBO by RO 198.4 million which resulted in Central Banks net foreign assets showing a decline of 13.7 percent or RO 149 million. This coupled with an increase of RO 93.5 million in net foreign assets of commercial banks led to the overall decline of RO 55.5 million in the banking system’s net foreign assets.

Table 5.2 Money Supply

M1 End of Period

Million RO

M2

% Change

% Change

Million

% Change

% Change

over prev.

over 12

RO

over prev.

over 12

period

months

period

months

1996

502.3

7.1

7.1

1633.8

8.1

8.1

1997

539.0

7.3

7.3

2034.2

24.5

24.5

1998

502.8

-6.7

-6.7

2131.3

4.8

4.8

IQ

508.0

1.0

-9.4

2098.0

-1.6

1.4

IIQ

492.4

-3.1

-5.9

2137.0

1.9

6.4

IIIQ

457.6

-7.1

-5.5

2132.0

-0.2

6.0

IVQ

509.5

11.3

1.3

2267.5

6.4

6.4

Jan

477.5

-6.2

-4.2

2168.3

-4.4

3.7

Feb

492.3

3.1

2.6

2213.5

2.1

6.2

Mar

509.2

3.4

0.2

2195.4

-0.8

4.6

Apr

504.6

-0.9

3.0

2201.4

0.3

4.2

May

504.2

-0.1

2.1

2219.5

0.8

4.5

June

504.5

0.1

2.5

2253.8

1.5

5.5

July

481.2

-4.6

1.8

2227.6

-1.2

7.4

Aug

463.1

-3.8

1.7

2222.5

-0.2

7.9

Sept.

461.3

-0.4

0.8

2215.5

-0.3

3.9

Oct.

472.4

2.4

4.0

2236.2

0.9

4.9

Nov.

493.3

4.4

7.2

2318.1

3.7

4.8

Dec.

533.9

8.2

4.8

2404.0

3.7

6.0

1999

2000

Source : Central Bank of Oman

The changes in the composition of money stock has its impact on both liquidity as well as on interest rate differentials. The share of currency with public in the broad measure of money declined steadily over the years from 14.1 percent in 1996 to 11.5 percent in the year 2000. Much the same trend was seen in the case of demand deposits in local currency which also registered a

continuous fall from 16.6 percent in 1996 to 10.7 percent in 2000. The importance of quasi-money in total money stock grew uninterruptedly over the period under review, from 69.3 percent in 1996 to 77.8 percent in the year 2000. The main impetus for quasi money growth came from increases in time deposits designated in local currency.

Table 5.3 Components of Private Domestic Liquidity A. In Million RO

End of Period

1996

1997

1998

1999

2000

502.3

539.0

502.8

509.5

533.9

Currency with public

231.2

242.2

244.3

273.5

276.8

Demand deposits in local cy.

271.1

296.8

258.5

236.0

257.1

1131.5

1495.2

1628.5

1758.0

1870.1

Savings deposits in local cy.

341.0

351.6

358.6

340.4

389.8

Time deposits in local cy.

584.3

887.1

989.3

1186.5

1236.0

Deposits in foreign cy.

194.7

241.2

261.0

204.2

221.9

Margins

11.5

15.3

19.6

26.9

22.4

1633.8

2034.2

2131.3

2267.5

2404.0

Money Supply (M1)

Quasi Money

Overall Domestic Liquidity (M2)

B. Percentage to Total Money Supply (M1)

30.7

26.5

23.6

22.5

22.2

Currency with public

14.1

11.9

11.5

12.1

11.5

Demand deposits in local cy.

16.6

14.6

12.1

10.4

10.7

69.3

73.5

76.4

77.5

77.8

Savings deposits in local cy.

20.9

17.3

16.8

15.0

16.2

Time deposits in local cy.

35.8

43.6

46.4

52.3

51.4

Deposits in foreign cy.

11.9

11.9

12.2

9.0

9.2

Margins

0.7

0.7

1.0

1.2

1.0

100.0

100.0

100.0

100.0

100.0

Quasi Money

Overall Domestic Liquidity (M2) Source : Central Bank of Oman

Monetary and Banking Indicators The Central Bank’s initiatives in financial deepening and the intermediation process included restructuring of financial institutions and emphasizing prudential supervision and regulatory system reforms. The financial system that evolved over the past decade saw the creation and expansion of nonbank financial intermediaries which included specialized financial institutions, exchange companies, money changers and Securities Market. The use of the banking system also heightened within an institutional framework of fewer commercial banks (from 22 in 1990 to 15 in 2000). The nature of financial deepening that evolved

can be summarized in a few indicators presented in Table 5.4. It can be seen that the average size of population served by commercial bank branches has been declining. From a population per branch of 7647 in 1996, there has been a continued decline to 7251 by the year 2000. Both per capita bank deposits and credit registered impressive growth over the years 1996 to 2000. While per capita deposits rose from RO 731 in 1996 to RO 1045 in 2000, per capita commercial bank credit expanded significantly from 753 in 1996 to 1242 in 2000. An evidence of financial deepening was a virtual steady fall in the ratio of currency

Table 5.4 Select Monetary and Banking Indicators 1996

1997

1998

1999

2000

Population estimate (in million) *

2.21

2.26

2.29

2.33

2.40

Number of branches of Commercial Banks

289

304

312

319

331

Population per branch

7647

7434

7339

7304

7251

Number of cheques cleared (in thousand)

1693

1702

1965

1695

1647

Average amount per cheque

1071

1256

1195

1129

1101

Commercial Bank deposits (in million)

1615.6

2096.0

2193.9

2349.6

2507.4

Per capita commercial bank deposit

731

927

958

1008

1045

Total commercial bank credit (in million)

1663.8

2242.4

2629.8

2898.9

2980.7

Per capita bank credit

753

992

1148

1244

1242

Share of currency in M2 (percent)

14.1

11.9

11.5

12.1

11.5

Share of currency in GDP

3.9

4.0

4.5

4.6

3.6

Share of demand deposit in M2 (percent)

16.6

14.6

12.1

10.4

10.7

Share of quasi-money in M2 (percent)

69.3

73.5

76.4

77.5

77.8

Share of quasi-money to GDP (percent)

19.3

24.6

29.9

29.2

24.6

Income velocity of M2

3.6

3.0

2.6

2.7

3.2

Reserve Money

326.4

354.4

379.6

375.4

408.3

Money multiplier for M2

5.0

5.7

5.6

6.0

5.9

* mid year estimate to broad money from 14.1 percent in 1996 to 11.5 percent in year 2000. In the event, the ratio of quasi-money to GDP rose from 19.3 percent in 1996 to 24.6 percent in 2000. In effect, this may represent the increased financial saving rate in the banking system. The steady increase in the share of quasi-money to M2 reflects both the weakening preference of the public to hold currency and the increasing importance being attached to time deposits. The income velocity of money (the ratio of GDP at current prices to M2) also declined over the period from 3.6 in 1996 to 3.2 in 2000 reflective of increased banking habits. The

money multiplier with respect to broad money (M2 over reserve money) rose over the period from 5 in 1996 to 5.9 in 2000 reflecting the financial deepening in the system.

Central Bank Operations A comparative position of the balance sheet of the Central Bank is given for a five year period in Table 5.5. As can be seen from the data, the pattern of growth in total assets is mainly dependent on the growth of foreign assets which constitutes the major item in total assets. The level of foreign assets is also linked to the order of foreign currency deposits

Table 5.5 Central Bank of Oman Assets and Liabilities 1996

1997

In Million RO 1998 1999

Foreign Assets a) Gold b) IMF Reserve assets c) Balances with banks abroad d) Securities

780.8 26.3 23.7 511.2 219.6

822.3 26.3 21.4 574.8 199.8

771.6 26.3 23.1 426.4 295.8

1090.4 26.3 27.0 621.5 415.6

941.4 26.3 26.5 399.0 489.6

41.3 16.9 45.8 40.5

-13.7 -1.9 -35.8 17.8

Due from Government

47.0

32.7

159.1

3.8

4.5

-97.6

18.4

Due from Banks and other Institutions

17.8

17.8

12.5

30.1

2.9

140.8

-90.4

Fixed Assets

8.4

12.8

12.2

8.3

6.9

-32.0

-16.9

Other Assets

67.1

64.3

68.9

100.4

97.8

45.7

-2.6

Total Assets / Liabilities

921.1

949.9

1024.3

20.4

-14.6

Currency Issued Net Worth a) Capital b) General Reserves c) Others

258.0 487.2 200.0 64.9 222.3

273.2 473.3 200.0 79.9 193.4

279.5 508.7 200.0 94.6 214.1

1233.0 1053. 5 328.5 327.6 509.6 531.9 250.0 250.0 59.1 89.7 200.5 192.2

17.5 0.2 25.0 -37.5 -6.4

-0.3 4.4 51.8 -4.2

Due to Government

31.1

46.6

57.0

242.6

26.0

325.6

-89.3

Due to banks and other institutions

68.4

81.2

100.1

46.9

80.7

-53.1

72.1

Foreign Liabilities

0.4

0.6

0.4

0.4

0.4

-

-

Other Liabilities

76.0

75.0

78.6

105.0

86.9

33.6

-17.2

2000

Growth (%) 99/98 2000/9 9

Source : Central Bank of Oman

of the Government held with CBO, Rial Omani requirements of the Government against which foreign currency is tendered and sale of foreign currency to commercial banks mainly for import and remittance purposes. Foreign assets increased sharply by 41.3 percent in 1999 to RO 1090.4 million from RO 771.6 million in 1998. The

increase of this magnitude was mainly due to the high level of foreign currency deposits of the Government held with CBO and which in turn are placed abroad. With the reduction in foreign currency deposits of the Government held with CBO, from a high of RO 213.7 million in December 1999 to RO 15.3 million in December 2000, the foreign

assets of the Central Bank also declined to a lesser extent of 13.7 percent. If foreign currency placements made on behalf of the Government and local banks are

Bond Price Fluctuation by another RO 4 million.

Commercial Banks Operations

Table 5.6 Central Bank’s Own Foreign Assets (In Million RO) Dec. 99

Dec. 00

Absolute Change 2000/99

1. Gross Foreign Assets a) Gold b) IMF Reserve Assets c) Short term placements d) Securities Less: Foreign currency deposits from Government Foreign currency deposits from local banks

1090.4 26.3 27.0 621.5 415.6

941.4 26.3 26.5 399.0 489.6

-149.0 -0.5 -222.5 74.0

213.7 2.0

15.3 -

-198.4 -2.0

2. Central Bank’s own foreign assets

874.7

926.1

51.4

Source : Central Bank of Oman netted out, the Central Banks’ own foreign assets increased by RO 51.4 million to reach RO 926.1 million as at the end of the year 2000 compared to RO 874.7 million a year ago (see Table 5.6) On the liabilities side, currency issued by CBO remained more or less at the same level of RO 328 million. The net worth of the Central Bank increased from RO 509.6 million in 1999 to RO 531.9 million in the year 2000, a rise of 4.4 percent. The capital of CBO remained unchanged at RO 250 million while general reserves were augmented by RO 30.5 million to RO 89.6 million. General reserves constituted 27 percent of currency issued as at the end of year 2000. Various other reserves were also augmented in 2000 from profit appropriations such as Reserve against Currency Fluctuation by RO 4 million and

The history of modern economic development reveals that the growth of the financial sector could lead the economic development of a country and act as an engine of growth. By and large, the most important class of financial intermediaries in Oman are the commercial banks. Banks in Oman have relatively strong capital base, strict provisioning requirements against bad and doubtful debts as well as for diminution in value of investments and a safety net in the form of deposit insurance scheme. The focus of bank financing is gradually shifting from the predominance of personal loans to industrial financing and in the development of the services sector. All the segments of the financial market namely, money market, capital market and foreign exchange market have grown significantly over the years. Besides, the quality and range of

products have also improved. In the process of growth of banking institutions, there were a series of mergers commencing the 1990’s in line with the trend in international banking. Such consolidation led to the emergence of bigger and stronger commercial banks. A comparative position of the combined balance sheet of commercial banks for the five year period (1996 to 2000) is given in Table 5.7. It can be seen that the main balance sheet aggregates, i.e. assets, credit, deposits and capital have grown steadily over the years. During the year 2000, total assets of commercial banks rose by 3.1 percent to RO 3963.6 million. Total credit increased by 2.8 percent to RO 2980.7 million. Credit to the private sector stood at RO 2885.1 million, compared to RO 2830.1 million a year ago, registering a growth of 1.9 percent. The increase in credit was seen mainly under the categories of import trade, services and financial institutions. Further details on credit growth are separately dealt in the section on sectoral flows of credit. Aggregate claims on Government including treasury bills, development bonds as well as investments

by banks in other Government paper stood at RO 323 million as at the end of the year 2000 compared to RO 334.6 million a year ago. Commercial banks holdings of treasury bills declined to RO 40 million from RO 127.8 million in 1999 while their holdings of development bonds rose marginally to RO 120.9 million from RO 117.3 million a year ago. Investments in shares and securities in the domestic market reduced to RO 33.3 million as at the end of year 2000 from RO 36 million as at 1999 end. Investment in foreign securities and treasury bills declined to RO 78.8 million from RO 89.6 million a year ago. Total deposits held with commercial banks rose by 6.7 percent during the year to reach RO 2507.4 million. Private sector deposits grew by 5.1 percent and the increase was reflected under all categories, demand savings and time deposits. While savings and demand deposits registered annual growth of 14.6 percent and 10.3 percent respectively, the element of time deposits increased by 1.5 percent.

foreign liabilities increased from 60 percent in 1999 to 74 percent in 2000. The core capital and reserves of commercial banks stood at RO 433.3 million as at the end of December 2000. It constituted 17.3 percent of total deposits and 11 percent of total assets as at the end of the year 2000.

Within private sector deposits, Rial Omani deposits accounted for 89 percent and foreign currency deposits 11 percent. Balances due to banks abroad after increasing from RO 237.7 million in 1996 to RO 572.8 million in 1999, declined to RO 534.7 million in the year 2000. As a result, the ratio of banks’ foreign assets to

Sectoral Flow of Bank Credit

Table 5.7 Combined Balance Sheet of Commercial Banks Amount in Million RO 1996

1997

1998

1999

Percentage Change 2000

2000/99

Cash and deposits with CBO Due from banks abroad

88.7 323.9

117.8 633.1

134.8 283.0

101.6 205.9

132.2 275.8

30.1 33.9

Total Credit a) Credit to Private Sector

1663.8 1591.3

2242.4 2194.3

2629.8 2590.0

2898.9 2830.1

2980.7 2885.1

2.8 1.9

b) Credit to public enterprises

4.8

0.6

-

4.1

16.3

297.6

c) Credit to Government

67.7

47.5

39.8

64.7

79.3

22.6

Securities a) Treasury Bills (at cost)

122.5 66.7

132.3 52.8

314.4 87.6

396.3 127.8

356.4 40.0

-10.1 -68.7

b) Government Bonds

41.5

57.1

70.6

117.3

120.9

3.1

c) Other domestic securities

8.0

19.6

31.6

36.0

33.3

-7.5

d) Foreign securities

1.3

2.8

124.6

89.6

78.8

-12.1

e) Others Fixed assets Other assets

5.0 32.8 125.3

32.8 208.1

34.4 183.3

25.6 38.1 201.9

83.4 39.3 179.2

225.8 3.2 -11.2

Total assets / liabilities Government deposits Deposits of public enterprises

2357.0 211.3 74.1

3366.5 289.8 90.8

3579.7 292.4 98.8

3842.7 316.1 121.7

3963.6 306.0 191.5

3.1 -3.2 57.4

Deposits of private sector a) Demand

1330.2 281.9

1715.3 332.9

1802.7 283.8

1911.7 257.4

2009.9 283.8

5.1 10.3

b) Savings

355.8

366.2

375.1

355.5

407.3

14.6

c) Time

692.5

1016.2

1143.8

1298.8

1318.8

1.5

(of which in foreign currency)

(192.1)

(247.4)

(277.4)

(240.3)

(220.5)

(-8.2)

Due to banks abroad

237.7

480.5

551.1

572.8

534.7

-6.7

Core Capital and Reserves

193.8

304.2

425.6

454.2

433.3

-4.6

Provisions and reserved interest

132.8

132.9

117.0

130.4

157.9

21.1

Other liabilities

177.1

353.0

292.1

335.8

330.3

-1.6

Source : Central Bank of Oman

The distribution of credit among important economic sectors in the economy is given in Table 5.8. It may be useful to note here that the grouping or classification of credit by banks based on industry or occupation of borrowers cannot be that precise, especially in the case of clients who are engaged in multiple activities spread across several industrial or occupational groups. Allocation of single credit facility for some borrowers among multiple uses of this facility could also lead to some distortion in analysis. The interpretation difficulty is further compounded as certain degree of diversification of uses is to be expected in the case of overdraft facility. Besides, in situations where proprietorship or partnership function, the borderline between business and personal transactions tends to get blurred leading to misclassification. These limitations will have to be borne in mind while interpreting the data on sectoral flow of credit. From the data relating to the sectoral distribution of bank credit outstanding as at the end of the year 2000, it can be seen that the major areas are personal loans

(32.8%), import trade (12.8%), manufacturing (8.1%), financial institutions (8.1%) and construction activities (6.9%). The share of credit granted for personal loans fell to 32.8 percent from 34.7 percent in the previous year as banks exercised restraint in line with public policies. The patterns of credit flow become more clear from incremental bank credit during the year. During 2000, for instance, the additional credit flow for import trade stood at 14.4 million while for construction activities it rose by RO 17.3 million. A marked increase in bank credit was seen under the services sector and in the area of financial institutions, the former absorbing an increase of 19.7 million and the latter RO 41.7 million. Agriculture and allied activities, though small in magnitude registered an incremental growth of RO 9.3 million to reach RO 29.6 million. While credit for manufacturing remained more or less the same, credit towards wholesale and retail trade declined by 10.9 percent during the year.

Table 5.8 Distribution of Commercial Bank Credit by Economic Sectors (In Million RO) 1998

1999

2000

Import Trade Export Trade Wholesale & Retail Trade Mining and Quarrying Construction Manufacturing Electricity, gas and water Transport and Communication Financial Institutions Services Personal Loans Agriculture and allied activities Government All Others

300.2 12.8 176.8 47.2 164.9 173.5 13.5 36.4 168.6 165.4 948.7 15.6 39.8 366.4

367.0 8.8 188.6 66.6 187.4 244.5 16.6 45.2 199.2 149.8 1005.7 20.3 64.7 334.5

381.4 9.6 168.1 73.8 204.7 242.2 14.7 42.4 240.9 169.5 977.8 29.6 79.3 346.7

Total Credit

2629.8

2898.9

2980.7

Source : Central Bank of Oman.

Interest Rate Structure Interest rates in Oman are determined by market forces except for a ceiling on personal loans and domestic interest rates broadly followed the movements of the US dollar interest rates. To the extent that interest rates are out of alignment with those in international markets, they tend to converge, as capital flows in and out of the country. At times, however, there may be differences between the domestic interest rates and international rates. This is either because of risk premium or conscious policy choice in order to encourage local deposit mobilisation and lending in domestic currency. Further, considerations such as the rate of return to capital in domestic economic activity and mobilisation of domestic savings, level and state of bank liqudity are of relevance in determining the

interest rates. Notwithstanding the above, it may be added that with fixed exchange rate, the monetary authorities have little control over interest rates and money supply. Until 1993, the Central Bank of Oman had a long standing policy of imposing interest rate ceilings on commercial bank deposits and lending. Commencing October 1993, as a first move towards deregulation of interest rates, the Central Bank freed the Rial Omani deposit rate ceiling and followed it up in June 1994 by deregulating lending rates barring consumer loans of RO 9000 or less for which a ceiling applied. In January 1999, the interest rate ceiling on consumer loans was also lifted and interest rates were allowed to be determined by the interplay of market forces. However, side by side a quantitative ceiling on personal loans

Table 5.9 (a) Weighted average Interest Rate on Rial Omani Time deposits (Percent per annum) Rate of Interest (% per annum)

December 1998 Amt in RO. Mln.

December 1999

% share

Amt in RO. Mln.

% share

December 2000 Amt in RO. Mln.

% share

Upto 5%

17.8

1.5

9.8

0.7

10.5

0.7

Over 5% to 6%

32.5

2.7

20.4

1.5

30.3

2.7

Over 6% to 7%

79.3

6.7

135.9

9.8

275.8

18.8

Over 7% to 8%

210.1

17.8

390.1

28.1

590.9

40.3

Over 8% to 9%

369.0

31.2

585.2

42.1

522.5

35.6

Over 9% to 10%

450.5

38.1

246.9

17.8

28.1

1.9

Over 10% to 11%

23.9

2.0

0.0

0.0

0.2

0.0

Total

1183.1

100.0

1388.3

100.0

1467.3

100.0

Weighted average interest rates on time deposits

8.459%

was imposed and which continues to be in force. Having observed a disturbing rise in interest rates charged on personal loans to totally unreasonable levels, the Central Bank in October 1999 reimposed the ceiling of 13 percent per annum on interest rates for personal loans and made such rate applicable to all existing and new personal loans. Before proceeding to examine the interest rate spreads, it may be useful to examine the distribution of Rial Omani time deposits and lending by interest rate class intervals. The relevant interest rate distributions are given in Tables 5.9(a) and 5.9 (b). It can be clearly seen that there had been a shift from higher interest rate brackets in 1998 to lower class intervals in subsequent years for Rial Omani time deposits. A case in point is the ‘over 9% to 10%’ interest bracket, where the relative share from a high of 38.1 percent in 1998 declined to 17.8% in 1999 and fell drastically to 1.9% in the year

8.123%

7.625%

2000. Even in the interest rate bracket of ‘over 8% to 9%’ the relative share fell from 42.1 percent in 1999 to 35.6 percent in 2000. As a consequence of the downward shift into lower interest rate brackets, the weighted average interest rate on Rial Omani time deposits fell from 8.123 percent in 1999 to 7.625 percent in 2000. This fall may be attributed to the easy liquidity conditions that commercial banks generally seem to have experienced during the year. Another interesting point that is borne out from the data is that almost 76 percent of total time deposits in local currency earned interest ranging between ‘over 7% to 9%’ per annum in the year 2000. With regard to lending in Rial Omani, the largest share continued to be in the interest rate interval of ‘over 12% to 13%’ per annum. From a share of 23.8 percent in total Rial Omani lending it went up to 36.5 percent in 1999 and

Table 5.9 (b) Weighted average Interest Rate on Rial Omani Lending (Percent per annum) December 1998

Rate of Interest (% per annum)

December 1999 % share

December 2000

Amt in RO. Mln.

% share

Amt in RO. Mln.

Upto 5% Over 5% to 7% Over 7% to 8% Over 8% to 9% Over 9% to 10% Over 10% to 11% Over 11% to 12% Over 12% to 13% Over 13%

124.0 39.2 87.8 221.4 458.2 318.2 218.6 510.6 168.0

5.8 1.8 4.1 10.3 21.4 14.8 10.2 23.8 7.8

114.0 57.8 99.9 161.0 405.5 348.9 212.6 821.2 28.1

5.1 2.6 4.4 7.2 18.0 15.5 9.5 36.5 1.2

124.9 103.0 191.6 225.4 427.5 321.2 180.6 814.1 45.4

5.1 4.2 7.9 9.3 17.6 13.2 7.4 33.5 1.8

Total

2146.0

100.0

2249.0

100.0

2433.7

100.0

Weighted average interest rates on Rial Omani Lending

10.089%

10.318%

Amt in RO. Mln.

% share

10.060%

Table 5.9 © Weighted average Interest Rates (Percent per annum) Deposits

Lending

Private Sector R.O. Time Deposits

Total R.O. Deposits

Total Deposits (RO+FCY)

Private Sector RO Lending

Total RO Lending

Total lending (RO+FCY)

Spread

Spread

(1)

(2)

(3)

(4)

(5)

(6)

(4)-(1)

(6)-(3)

Mar-98

7.192

4.755

4.736

9.401

9.388

9.066

2.209

4.330

Jun-98

7.440

4.915

4.897

9.594

9.581

9.174

2.154

4.277

Sep-98

7.792

5.309

5.196

9.913

9.892

9.446

2.121

4.250

Dec-98

8.290

5.771

5.574

10.124

10.089

9.503

1.834

3.929

Mar-99

7.957

5.509

5.337

10.358

10.323

9.619

2.401

4.283

Jun-99

8.008

5.575

5.390

10.787

10.727

9.900

2.779

4.510

Sep-99

8.252

5.982

5.798

10.842

10.788

9.912

2.590

4.114

Dec-99

8.049

5.890

5.794

10.352

10.318

9.645

2.303

3.851

Mar-00

7.685

5.498

5.421

10.302

10.277

9.696

2.617

4.275

Jun-00

7.580

5.345

5.336

10.112

10.072

9.677

2.532

4.340

Sep-00

7.602

5.478

5.460

10.102

10.063

9.699

2.500

4.239

Dec-00

7.672

5.455

5.434

10.108

10.060

9.678

2.436

4.245

marginally dropped to 33.5 percent in year 2000. Amount wise this represented RO 814.1 million lending, in the range over 12% to 13% in 2000. A somewhat higher concentration of credit is also seen in respect of the interest ranges of over 9% to 10% and 10% to 11%, together accounting for about 31 percent of total Rial Omani credit. As in the case of Rial Omani time deposits, the weighted average interest rate on Rial Omani lending too registered a decline from 10.318 percent in 1999 to 10.060 percent in 2000. Table 5.9© analysis the interest rate spreads defined as the difference between the weighted average rates of lending and deposits. It may be noted that all interest rates generally softened during the year in line with the prevalent liquidity situation of banks. The weighted average interest rate on Rial Omani time deposits of the private sector softened to 7.672% in December 2000 compared to 8.049% in December 1999. A similar trend is witnessed in Rial Omani lending rates to the private sector which declined from 10.352% to 10.108%. Despite the fall in interest rates on both Rial Omani time deposits and lending, banks have managed to keep up their spread which marginally went up from 2.303% to 2.436%. The weighted average interest rate on all deposits (RO and F.cy combined) fell by 360 basis points from 5.794% in December 1999 to 5.434% in December 2000. The weighted average lending rate (RO and F.cy combined) remained unchanged at 9.6% resulting in an improvement in overall spread from 3.851% in December 1999 to 4.245% in December 2000.

Domestic Inter-bank Omani Interest Rates

Rial

The interbank rate in the domestic market reflects the residual demand and supply of funds by banks when adjusting their liquidity positions. Its particular advantage is that it helps instant monitoring and assessment of liquidity during the course of the day. The use of interbank rates as a guide to liquidity management by the monetary authority, presupposes however, that the market is sufficiently active to be representative of market conditions. The market should be competitive, with a large number of banks participating in it both as lenders and borrowers, failing which, its efficacy as a liquidity indicator would remain limited. The Central Bank has taken steps to activate the market by introducing repos facilities between banks for government securities such as treasury bills and development bonds, so that the market is based on secured transactions. The bulk of interbank transactions in Rial Omani takes place in the form of overnight lending. Lendings between banks for extended tenors are of negligible order. The overnight interbank rate (for six select banks) averaged 4.8 percent during the first quarter of 2000 with average daily amounts of RO 16.3 million. The second quarter saw the interbank rate move up to 5.5 percent with an average daily amount of RO 19.3 million. The interbank rate continued to inch upwards to 5.9 percent during the third quarter. Commencing the beginning of the fourth quarter, the domestic interbank rate started to decline and the average rate stood at 3.7 percent with the position for the month of December 2000 at 2.4 percent. The fall in interest rates is mainly attributed to the liquidity position of

commercial banks which remained fairly in ease.

Commercial Banks Profitability Commercial banks profitability has come under some pressure in recent years. The growth rate of gross profits (before provisions and taxes) slowed from an unsustainable 56.4 percent in 1997 to 13.4 percent in 1998 and further to 11.3 percent in 1999. In the year 2000, gross profits declined by 4.1 percent. Provisions provided for doubtful loans, investment losses, trust account losses (bail out of brokerage companies) had an adverse impact on net profits which fell by 15.4 percent in 1999 and further by 13.6 percent in the year 2000. An obstacle to higher bank profitability in 1998 and 1999 was the need to mobilise deposits in order to conform with the amended lending ratio regulation, which required banks to net out their “borrowings from banks abroad”. This led to an increase in interbank and offshore borrowing. The netting concept also brought about a decline in interest earned on placements with banks abroad which fell by 55.5 percent in 1999 on its 1998 level. Increase in interest expenses and administrative costs coupled with lower level of interest income earned on loans and advances weighed down the gross profits of commercial banks during 2000. Overall, banks average return on equity declined from 16.7 percent in 1998 to 13.2 percent in 1999 and further to 12 percent in 2000. Return on assets declined to 1.6 percent in 1999 from 1.9 percent in 1998 and to 1.3 percent by the end of 2000. Gross profits, from RO 111 million in 1999 declined to R O106.5 million in 2000, a fall of 4.1 percent. Net profits after provisions and taxes, on the other hand, declined by

13.6 percent in 2000 to RO 51.9 million from RO 60.1 million in 1999. Net profits of local banks fell by 12.8 percent from RO 55.6 million in 1999 to RO 48.5 million in 2000 while that of foreign banks declined by 24.4 percent from RO 4.5 million in 1999 to RO 3.4 million in 2000. Total interest income during the year rose by 6.4 percent from RO 324.1 million in 1999 to RO 344.8 million in 2000. The major constituent under interest income which comprises interest earned on loans and advances registered a marginal growth of 3.9 percent to RO 289 million as against growth rates of 35.3 percent in 1998 and 18.5 percent in 1999. Sluggish growth of credit and a fall in the weighted average interest rate on lending contributed to the lower growth of interest earnings in the year 2000. Interest earned on placements with banks registered an increase of 15.8 percent after having witnessed a sharp fall of 55.5 percent in 1999 following the netting concept introduced under the revised Lending Ratio regulation. Foreign exchange income comprising revenue earned on the purchase, sale and exchange of foreign currencies and valuation changes, declined by RO 0.8 million to RO 8.5 million in 2000. Fee based income such as commissions received on letters of credit and guarantees and on draft business involving mail and telegraphic transfers also registered a decline of RO 1.4 million (9.5%). Other income which mainly includes recoveries, gains from sale of assets, service charges and other miscellaneous income stood at RO 22.5 million in 2000, a rise of 8 percent over the previous year.

Table 5.10 Profitability of Commercial Banks (In Million RO)

1. Interest Income 2. (Interest Expenses) 3. Net Interest 4. Foreign Exchange 5. Fees and Commissions 6. Other Income 7. Gross Income (3+4+5+6) 8. Operating Expenses a) Administrative Costs b) Depreciation c) Others 9. Gross Profits (7-8) 10. Provision for doubtful debts * 11. Profits after provisions (9-10) 12. Provision for Taxes 13. Net Profit after Provisions & Taxes (11-12)

1998

1999

2000

% Change 99/98

% Change 2000/99

295.3 (159.5) 135.8 9.7 14.4 23.6 183.5 83.8 74.5 8.9 0.4 99.7 19.1 80.6 9.6 71.0

324.1 (172.2) 151.9 9.3 14.7 20.9 196.8 85.8 76.0 9.7 0.1 111.0 37.1 73.9 13.8 60.1

344.8 (189.1) 155.7 8.5 13.3 22.6 200.1 93.6 83.0 10.4 0.2 106.5 41.9 64.6 12.7 51.9

9.8 (8.0) 11.9 -4.1 2.1 -11.4 7.2 2.4 2.0 9.0 -75.0 11.3 94.2 -8.3 43.8 -15.4

6.4 (9.8) 2.5 -8.6 -9.5 8.1 1.7 9.1 9.2 7.2 100.0 -4.1 12.9 -12.5 -8.0 -13.6

* includes provision for decline in investment value. Source : Central Bank of Oman

Gross income of commercial banks (net interest income plus foreign exchange income, fees and commission and other income) marginally improved by 1.7 percent as against an increase of 7.2 percent in 1999.

percent (RO 2.9 million). Rents and other occupancy costs including payment for utilities, maintenance etc., increased by 11.4 percent from RO 8.8 million in 1999 to RO 9.8 million in 2000. Depreciation on banks property and equipment rose from 9.7 million to RO 10.4 million in 2000.

Interest payments on customer deposits increased by 8.2 percent (RO 11.1 million) as compared to an increase of 14.4 percent in 1999. The increase was the result of a rise in the deposit base but partly tempered by a decline in the weighted average interest rate paid on deposits. Administrative costs rose during the year by 9.2 percent to RO 83 million. The major item under administrative expenses constituting salaries and other staff costs went up by 6.1

Operating expenses as a percentage of gross income declined from 45.7 percent in 1998 to 43.6 percent in 1999 but subsequently rose to 46.8 percent in the year 2000. The main reason for the increase in 2000 seems to be the rise in the staff expense ratio, where total staff costs as a percentage of gross income rose to 24.7 percent from 23.7 percent in 1999.

With regard to the appropriation accounts, of the gross profits of RO 106.5 million in 2000, 39.3 percent (RO 41.9 million) had been earmarked towards provisions for doubtful debts and investment related provisions. In the previous year such provisions stood at 33.4 percent (RO 37.1 million). Payment of taxes marginally declined from RO 13.8 million to RO 12.7 million in 2000. Cash dividends paid out by local banks declined by 17.1 percent from RO 41.1 million in 1999 to RO 34.1 million in 2000. Stock dividends stood at RO 3.6 million during the year. Profit remittances by foreign banks stood at RO 8.5 million of which RO 3.6 million relate to remittances out of profits earned during year 2000. Banks augmented their legal, general and other reserves by RO 9.6 million in 2000.

credit outstanding stood at RO 162.1 million. The share capital of the Bank remained at RO 30 million at the end of the year. Oman Development Bank (ODB) Oman Development Bank provides loans to development projects, including activities directly related to agriculture and fisheries in the Sultanate of Oman by granting loans, administering grants and subsidies, participating in share capital and providing technical assistance to companies. In accordance with its objectives, interest on loans and advances is charged to the customers at a rate which is subsidised by the Government. In addition the Bank also acts as agent on behalf of the Government for

Specialised Banking Institutions As at the end of 2000, there were four specialised banks. Two are public sector banks, the Oman Housing Bank and the Oman Development Bank, that provide soft financing (subsidized by the government) to mainly low and middle-income Omanis to build or purchase residential property and to private sector investors to finance projects. The other two specialized banks are in the private sector - Alliance Housing Bank and Industrial Bank of Oman - and were established in 1998 to provide mortgage loans and lending to industrial and infrastructure activities.

a) the disbursement and collection of Government soft loans b) the operations of the Export Credit Guarantee Agency c) the disbursement of amounts from the Fisheries Research Fund As at the end of the year 2000 the total loans and advances to customers stood at RO 53.4 million. The interest rates charged varied from 2% to 6% per annum, with a corresponding subsidy from the Government ranging from 3% to 6% per annum. The share capital of the ODB stood at RO 20 million.

Oman Housing Bank (OHB)

Alliance Housing Bank (AHB)

The Oman Housing Bank provides finance by way of long term soft housing loans to all the segments of Omani society in various regions to enable them to construct suitable houses. Total assets of the Bank stood at RO 165 million as at the end of 2000 while

The primary objective of Alliance Housing Bank which commenced operations in 1998 is to help the local housing market by providing Omanis with long term loans to buy, build or improve housing. The Bank operated through a network of seven

branches. The bank performed well in 2000 with its mortgage loan portfolio expanding by 40.8 percent from RO 14.7 million in 1999 to RO 20.7 million in 2000. Total share capital stood at RO 21 million as at the end of the year. Industrial Bank of Oman (IBO) The Industrial bank of Oman commenced operations on 1st September 1998. The Bank lends both to new projects as well as to several existing units. Customers are provided with a full range of fund based and non-fund based products from short-term working capital to loans with longer tenors. The total customer loans and advances of the Bank stood at RO 33.6 million at the end of year 2000 compared to RO 24.1 million at the end of the previous year. The share capital of the Bank stood at RO 25 million as at the end of the year.

Investment Banking Institutions As at the end of 2000, eleven commercial banks - six local banks and five branches of foreign banks, as well as a specialised bank had been licensed to engage in specific investment banking activities, on a tiered licensing system. There are broadly seven tiers, namely, Corporate finance, Project finance, Investment brokerage and investment advisory service, Portfolio management, Underwriting both lead and sub, Investment management and custodian and fiduciary Services. Of these twelve banks, eight had been issued with comprehensive licences covering all tiers of activity, two had obtained restricted licenses to engage in the activity of “Investment brokerage and investment advisory services” only, while the remaining commercial bank had been

issued with a restricted license covering project finance and investment brokerage and advisory services. The specialised bank viz., Industrial Bank of Oman had been issued a restricted license to engage in project finance, corporate finance and underwriting of securities (both Lead and Sub).

Money Exchange Companies Money Exchange Business is carried out by two types of institutions in the Sultanate, namely, those who are engaged in money exchange and sale of drafts and the others who are exclusively engaged in money exchange. As at the end of December 2000, twelve establishments were engaged in money exchange and issuance of drafts business. A new entrant viz. Ruwi Exchange Co. LLC was licensed during the year. During the year under review, 3 new branches of these companies were also opened. In addition to the above exchange companies there were 45 firms who engaged in the business of money changing only. The exchange houses engaged in the activity of draft issuance are annually inspected by the Central Bank to ensure that they keep proper books and records, comply with the regulations and that they are solvent. The total assets of the eleven institutions engaged in money exchange and draft issuance amounted to RO 12.1 million as at the end of 2000. Nearly 90 percent was held in the form of cash, balances with banks and short term investments. The total equity of these companies as at the end of 2000 amounted to RO 7 million as against RO 6.3 million in the previous year.

Consumer Finance and Leasing Companies

There are a number of firms licensed by Central Bank to engage in consumer financing on hire-purchase basis, leasing, provision of composite loans and bridging finance to local industry and businesses etc. The performance of these licensed institutions has been summarised individually hereunder. Muscat Finance Co. (SAOG) The Company was initially granted a license in 1988 to finance the acquisition of motor vehicles and other consumer durables on a hire-purchase basis. The scope of the license was, subsequently, expanded to include the activity of lease financing and factoring or receivables financing. During 1999 “Financing of Immovable Assets” (limited to certain specific areas such as Industrial estates, factory buildings and commercial ware houses, tourism facilities and mining installations) was added. The financial results of the company for the year 2000 indicated that it had continued to maintain the growth trend. The total assets of the company which stood at RO 23.4 million in 1999 increased to RO 27.9 million by the end of 2000. The issued share capital which stood at RO 4.9 million increased to RO 5.25 million by the end of December 2000. Debtors arising from financing activities increased by RO 4.5 million or 11.9 percent to reach RO 27.9 million during 2000.

branch in the South in Salalah in 1997 opened its fourth branch in Nizwa during 2000. Net investment in finance leases by the company amounted to RO 34.5 million as at the end of 2000, up from RO 27.1 million as at the end of the previous year. Total assets registered an increase of 16.5 percent (as against 8.2 percent in 1999) to reach RO 36.1 million. By the end of 2000 the Company had been making formal arrangements to change its name to National Finance Co. SAOG. Oman Orix Leasing Co. (SAOG) The above company was issued with a restricted Hire-Purchase and Lease Company licence under the Banking Law provisions, in January, 1994. It increased its net investment in finance leases during the year under review by RO 13.4 million or 66.7 percent over the total of such leases financed and outstanding (net of unearned lease income and provisions) as at the end of 1999. Total investments in such lease financing, at RO 33.5 million, accounted for 95 percent of the total assets of the company as at the end of the year under review (the highest percentage in their category). Consequent upon the Rights Issue of shares in the year 1999, the company was able to effect an increase in its Paid-up capital from RO 3.95 million to reach RO 5 million during 2000.

Oman Leasing Co. (SAOG) Oman Leasing Company was the first institution to be granted a restricted banking license by the Central Bank in November, 1987. The company which opened its first

Al Omaniya Financial Services (SAOG)

The Company was licensed by CBO in April, 1997 to take over the then existing Auto Loans Division of Bank Muscat. It provides hire-purchase and lease finance for vehicles and other assets.

During the year the provisions in the company’s licence were expanded to incorporate Debt factoring or receivables financing. Muscat Securities Market

The company commenced commercial activities in September 1997. Total assets of the company grew by RO 5.8 million or 28.9 percent during 2000 and had registered an outstanding balance of RO 25.8 million by the year-end. Of the total assets, 83.4 percent consists of Installment finance debtors. Such Debtors outstanding also increased by a comparative RO 5.1 million or 31 percent and totaled RO 21.5 million at the end of the year. During the year under review the company opened its first branch office in Sohar. The mainstay of the company’s business continues to be auto financing. United Finance Company (SAOG) The company which commenced operations in January 1998 was issued with a Restricted Finance Company license which enabled it to lend, in addition to the then permitted general activities of hirepurchase and lease financing, composite and bridge loans also to trade, industry and the construction sector in the Sultanate. The company was incorporated with an initial paid up capital of RO 5 million. During 2000, total assets of the company increased by RO 5.1 million or 67.1 percent to reach RO 21.8 million at the end of the year. Total installment finance debtors of the company reached RO 12.5 million by the end of 2000, an increase of RO 7.1 million or 57 percent over the previous year.

Since its establishment in 1989 the objectives of MSM had focused on the proper organisation and regulation of the securities industry in the Sultanate. With the promulgation of the relevant Royal Decree the legal framework was set in place for the establishment of the MSM, primarily, as an independent organisation. By the end of 1989, when trading began, there were only 50 publicly listed companies in the Regular Market and 2 in the Parallel Market and the total market capitalization for the Secondary Market stood at RO 414.7 Million which took into consideration the then existing 23 closed companies as well. The total number of companies which stood at 220 as at the end of 1999 had increased to 222 (out of which 72 are closed jointstock companies) by the end of the year 2000. During the year, however, the market capitalization continued its slide and reached RO 1,947.8 million by end December, 2000. The MSM Index which reached its peak of 509.84 on 3 February, 1998 and began to falter, thereafter, continued its downward trend throughout the year 2000. Only noticeable improvements were in March, 2000 (when it reached 244.35) and in November, 2000 (when the index improved to 208.69 from 180.66 in the previous month, which,

incidentally, was the lowest point recorded since end December, 1995).

RO3,000 were traded in the Market during the year 2000.

Despite the best efforts and investor friendly measures adopted, the overall market sentiments were not encouraging and the General Index ended the year at 201.20 (indicating a loss of 19.6 percent as against a comparative gain of 9.5 percent for the previous year). The Index for the Banking sector obviously continued to remain the strongest among the three sectors constituting the Index, although it too dipped by 18.2 percent during the year to reach 262.7 (against 321.05 as at end December 1999).

As regards the Secondary Market, the number of publicly held Joint-Stock Companies, listed on MSM, was reduced to 131 at the close of 2000 (from a high of 140 as at end 1999) with 9 Companies mostly from the Industrial Sector (7 in all) being de-listed. The Investment Funds approved by MSM and listed remained at 6, same as in 1999.

The total amount raised during the year by way of new Share issues (including Rights Issues) and Development Bonds stood at RO 69.4 million as against RO 189.3 million in 1999 indicating a 63.3 percent drop. The two Bond issues of a total value of RO 45 million accounted for the bulk of the capital raised; accounting for 64.8 percent of the total so raised. Trading value of shares in the Secondary market reversed its downward slide and reached RO 449.7 million by the year end (against RO 253 million as at end December, 1999). As against Bonds of a total value of RO 25.6 million traded in 1999 only an insignificant value of

The aggregate paid-up capital of the publicly held Omani Joint Stock Companies listed in the Regular and Parallel Markets stood at RO 905.8 million at the close of year 2000. The non-Omani shareholdings accounted for 14.44 percent of their total share ownership (against 14.77 percent as at end 1999). Ownership by GCC Nationals and entities accounted for 5.17 percent as against 6.21 percent recorded as at end of 1999. The following Table sets out a few comparative stock market indicators, including those for both the Primary and Secondary market activities, during past several years, a period in which it’s growth potential had a marked impact on the Sultanate’s economy.

Stock Market Indicators

1993

1994

1995

1996

1997

1998

1999

2000

Number of issues in the Primary Market

12

27

24

27

37

47

20

15

Value of issues in RO Millions

155

209

169

128

373

440

189

69

Number of listed companies and funds

64

68

82

98

120

138

142

133

Value of trading on the Secondary Market in RO Million

83

126

109

268

1,615

915

253

450

Shares Traded

34,418

60,827

55,743

128,322

410,261

283,702

142,773

151,435

Average volume of trading per day in RO Million

0.341

0.517

0.440

1.088

6.567

3.662

1.033

1.858

Market capitalisation for the Secondary Market in RO Millions

904

1,161

1,316

1,628

3,364

2,206

2,262

1,948

The general price index at the end of the year (points).

113.71

146.16

158.13

199.36

480.58

228.47

250.26

201.20

Source : MSM Reports up to December, 2000.