The day when Oman can boast a billion dollar bank may not be so far away. If the sector keeps expanding as it has in recent years several local banks could soon have assets approaching $1,000 million. After a wave of mergers there are now only seven local commercial banks with a sounder structure and an appetite for expansion. Their great hope for the long term is the next phase of economic development, to be triggered by the gas export programme, while the more immediate concern is to digest any difficulties created by the recent recession.

Oman's bank mergers mark it out from other Gulf states which are typified by an excess of banks chasing a dearth of quality lending opportunities. The string of mergers achieved since 1991 in the wake of the closure of the Bank of International Credit & Commerce (BCCI) leaves Oman with only seven local banks; there are 11 foreign banks. The local banks have assets of around $3,500 million but may still be too numerous for a market of 2 million people, with an average per capita income of about $6,450.

Targeting savers

The counter argument is that Oman's size and scattered population justify a varied banking sector. Oman International Bank (OIB) has made a virtue of the opportunity and is busy adding branches around the country. The bank will open at least five branches in the course of this year and is targeting savers. OIB's retail savings deposits grew by 10 per cent in 1994 to RO 108 million ($208 million) which represented 38.3 per cent of total Omani savings deposits.

The business of Omani banks is dominated by personal lending and trade finance. Central Bank of Oman figures for 1993 show personal loans extended by the commercial banks at RO 440.6 million ($1,114 million) which is 40.3 per cent of all private sector credit. The next biggest area of credit was RO 213.4 million ($554 million) to the import trade, or 19.5 per cent of all lending. Competition for quality corporate lending is intense due to the limited opportunities available. The market is dominated by no more than a dozen large trading groups which can borrow at rates of 5- 6 per cent.

Imprudence

Personal lending has been the most active sector by far since the end of the Kuwait crisis in 1991. At OIB, personal and consumer loans accounted for 44.6 per cent of all loans and advances in 1994. 'The consumer loan portfolio is the best on our books, is well diversified and contains an insignificant level of delinquency. Also, it has provided a substantial portion of our earnings over the last two years,' National Bank of Oman (NBO) chairman Khalfan Bin Nasser al-Wohaibi said in his 1994 chairman's report.

The relatively easy lending practices of recent years have come to an abrupt end this year in the face of tighter regulation and growing worries about repayments. Consumer loans for car purchases, often financed with post-dated cheques, are a particular cause for concern. 'They are borrowed up to the neck and the banks are partly responsible. There is a problem of banks leapfrogging each other in imprudence,' says one bank chief executive.

Central bank regulations which link the growth in consumer lending to the size of a bank's corporate portfolio should curtail growth in this sector quite dramatically in the course of 1995. NBO chairman Al-Wohaibi highlighted this in his report: 'Due to the rapid growth in this section of our portfolio in the recent past and given the relative dearth of demand for good corporate loans, NBO will suffer a squeeze on this important revenue stream because the new rules prohibit us from booking new consumer loans below the RO 9,000 ($23,376 million) limit. We are already beyond the 25 per cent limit and growth in good creditworthy corporate advances will be hard to secure in the present economic conditions.'

The banks are pinning their hopes on future conditions in the economy which they hope to see stimulated by state sell-offs, independent infrastructure projects and the gas development plans of Oman LNG, Oman Oil Company and others (Oman, MEED Special Report, 5:5:95). The Muscat Securities Market is also becoming more active and several of the banks participated in the financing for the Manah power station, the first independent power project to come to fruition in the Gulf. NBO recently acquired an investment banking licence; Commercial Bank of Oman launched its investment banking unit in 1994 and acted as the banker to six public issues.

Several banks are increasing their capital. OIB launched a month-long share sale on 5 June which will boost the bank's capital to RO 20.25 million ($52.6 million). In March, the Commercial Bank of Oman approved plans for a rights issue to raise capital from RO 11 million ($28.57 million) to RO 20 million ($51.9 million) during the course of this year.

The government's privatisation plans have aroused international interest in Oman and the banks have a key role to play if the desired investment is to flow in to the country. They hope to exploit the evident investor enthusiasm. 'State finances are seen as being very effectively managed,' says the foreign chief executive officer of a leading local bank. A RO 30 million ($77.9 million) government bond issue in April, paying 8.25 per cent interest over two years, was heavily oversubscribed and European banks were keen to buy, local bankers say.

Adapting to the new demands will present a major challenge and could stimulate more consolidation in the sector. 'Privatisation requires a major change in financial markets. Bank assets and liabilities are mostly short term but now we have to become investors,' says one bank general manager. 'Our long term resources are shareholders funds that will end very quickly. We have to create long term financial instruments or else the private projects will not work. It may require further local restructuring.'

New instruments

Oman may require up to $3,000 million in equity over the next three to five years if all the investment projects come to fruition. Says the general manager, 'They will get the funds if they pay an attractive premium but if local banks are to participate they will have to develop the instruments and the capital markets.'

The most active development over the past five years has been in the steady expansion of electronic services for customers and the modernisation of backroom operations. Several banks have over 50 automated teller machine (ATM) outlets and the electronic funds transfer at the point of sale (EFTPOS) system is expanding rapidly. At OIB about half the bank's 250,000 customers are holders of ATM cards which can be upgraded for use in EFTPOS terminals and for use abroad through the Visa network. The bank has about 8,000 clients for its telephone banking service, which was created in 1988. It is a similar story at the other institutions.

The changes that have taken place in the sector since 1991, which were triggered by BCCI's demise as a local player, have created a more rational structure for Oman's banking sector. The next challenge is to steer a way through any problems thrown up by the recent recession and to prepare for the funding requirements created by Oman's new economic strategy. The competition could one day lead to further consolidation.