Competition between Oman’s middle-sized banks is getting tougher, due to a constrictive regulatory environment that forces banks to maintain a domestic focus and vie for the same clients and asset classes, says a new report from US-based rating agency Moody’s Investor Services.

Legislation set by the Central Bank of Oman ensures mid-sized banks have very similar market shares. The CBO places limits on retail exposure by capping total lending to retail customers at 50 per cent of a bank’s loan book. It also caps banks’ exposure to corporates and mid-sized banks have limits on lending to single obligors set at 15 per cent of their equity base.

In April this year the Central Bank introduced new rules that limit banks’ plans to expand outside Oman by placing a cap on credit exposures to overseas borrowers at 100 per cent of equity and 120 per cent inclusive of interbank placements.

This results in middle-sized banks chasing the same domestic borrowers and ending up with similar concentrations in their loan books. This is a scenario worsened by the fact Oman’s economy is already very narrow and dominated by a few large companies.

The bank market is set to get tougher with the emergence of two new Islamic finance banks, Bank Nizwa and Bank Allizz, which both opened last year. Oman introduced a new Islamic banking framework in 2012.

The acute competition will place pressure on Omani banks’ margins as they compete to win customers, which could ultimately affect their profitability.

Against this backdrop, it is not surprising that banks are considering mergers and acquisitions to carve out greater market share. On 2 June, Bank Dhofar put forward a merger proposition to fellow middle-sized financial institution Bank Sohar. Dhofar outlined a plan for a preliminary share swap ratio. The merger proposition is subject to Bank Sohar’s approval.

Out of the Oman’s other middle-sized banks, Moody’s Investors Services rates Oman Arab Bank as one of the strongest players, with a rating of A2 long-term deposit rating with a stable outlook. Bank Dhofar has a rating of A3 stable as does HSBC Bank Oman and National Bank of Oman.

Despite the challenges of the highly competitive environment, Omani banks will continue to benefit from Oman’s diversification of its economy away from oil, with rising government spending on infrastructure and social programmes set to provide lending opportunities for the country’s banks.

Lending activity, which is anticipated to grow at between 10 and 20 per cent this year, is likely to counteract some of the negative constraints on the sector.