Competition in Oman’s crowded banking sector is set to increase as foreign banks seek to capitalise on large-scale industrial projects backed by the government and funded by record oil revenues.

They are being attracted by the rapid development in areas such as the industrial zone at Sohar in the northwest.

Muscat has also outlined wide-ranging plans to invest heavily in transport infrastructure, including roads, ports and airports, in its recent budget (MEED 4:1:08).

Expansion of the banking sector will lead to 20 institutions oper-ating in the sultanate in the first quarter of 2008, according to Hamoud Sagour al-Zadjali, governor of the Central Bank of Oman ( 6:1:08).

“We think that is a good number for the market here, but we are receiving more requests,” he says. “We will assess each one on its individual merits.”

However, with a population of little more than 3 million, the size of the market is limited, and rivalry between banks is fierce.

“Intense competition in Oman is evident in the reduction in banks’ margins over the past three years,” says Elena Panayiotou, banking analyst at Moody’s Investors Service. “The Omani banking sector is already concentrated.”

However, this has not deterred more foreign banks from entering the market, which Panayiotou says is healthy.

“There are business opportunities created by projects driven by the government,” she says. “Large foreign banks are able to participate in financing these projects.”

“Investments in infrastructure and industry will help economic activity and the banking sector,” she adds, pointing to rising liquidity levels among banks in the country. “These have improved, although they remain at a lower level than international standards.”

Among the major projects being planned, Oman Refineries & Petrochemicals Company is expanding its 116,000-barrel-a-day refinery with a $100m bitumen facility. Plans to build a $234m sugar refinery are also under way, and in December 2007, Brazilian mining giant CVRD announced plans to build an iron pellet manufacturing facility with a capacity of 9 million tonnes a year.

The Central Bank licensed four banks in 2007. The most recent to be granted approval was Oman Merchant Bank, which will start operating in early 2008. Ahead of its launch, it is selling 40 per cent of its shares through an initial public offering.

On 30 December, Qatar National Bank launched its operations in Muscat.

In March 2007, the Central Bank doubled the minimum capital requirement for local banks to RO100m ($260m). At the same time, the minimum capital requirement for foreign and international bank branches was increased to RO20m.