As Muscat turns to debt financing to fund its record 2015 budget, the Central Bank of Oman (CBO) has a vital role to play in the sultanate’s economy. Hamood Sangour al-Zadjali has been executive president of the bank since June 1991, guiding it through fluctuating oil prices and international financial market highs and lows, and ensuring a stable, tightly regulated banking system in Oman.

The success of the RO200m ($520m) government development bond auction in February, which was oversubscribed by RO74.9m, puts Oman on course to manage lower oil revenues. This is the first of several tranches planned to cover a projected RO2.5bn deficit in 2015, equivalent to 8 per cent of GDP.

Tightening regulations

Meanwhile, Oman is tightening already strict banking regulations in two areas. First, to improve the stability of the banking system following the global financial crisis, the CBO has drawn up domestic systematically important bank (D-SIB) regulations. Second, is a planned upgrade of anti-money laundering and anti-terror financing measures.

For Al-Zadjali and the central bank, the first priority is the stability of Oman’s financial system.

Financing deficit

“The government proposes to finance the budget deficit by issuing long-term sukuk [Islamic bonds] and other instruments so as to activate the domestic capital market,” Al-Zadjali tells MEED. “Borrowing domestically would also help financial deepening, developing a yield curve and making lending and borrowing more efficient.”

The average price paid for the RO100 bonds in the 23 February issuance was RO108.3, with a yield of 3.5 per cent, compared with a coupon rate of 4.5 per cent a year. This shows investor appetite for Omani government debt remains strong.

The CBO plans to issue RO400m of government bonds on the domestic market in 2015, and another RO200m on international markets. The sultanate still has an A rating from US ratings agencies Standard & Poor’s and Moody’s Investors Service, despite both agencies downgrading the country’s outlook to negative due to falling oil prices.

Temporary glitch

“The rating is just a temporary phenomenon due to the fall in oil prices, and there have been some improvements in that recently,” says Al-Zadjali. “We hope the oil price will adjust itself to normal levels in a quicker period. The government based the budget on $75 a barrel, so we would be comfortable with $80- $100 a barrel, although we would still run a deficit.”

Oman is also preparing to issue its first Islamic government bond in 2015, once its structure is clarified.

Following the introduction of sharia-compliant banking in the sultanate in late 2012, an aggressive expansion through the establishment of two pure Islamic banks and the opening of six windows saw the sector’s market share reach 5.2 per cent by the end of 2014. This represents lending of more than RO1bn, mainly in the retail sector, and assets of RO1.4bn.

“Growth will be more reasonable once the sector reaches a certain level, so I expect Islamic banking to double its market share to about 10 per cent by 2020,” says Al-Zadjali. “The sector should diversify into corporate loans, project finance and sukuk to draw in savings.”

D-SIB capitalisation

The CBO has issued an enhanced regulatory framework for D-SIBs, which will come into force in 2016 or 2017. It requires higher capitalisation levels for banks deemed too big or complex to fail, in accordance with Basel III international banking guidelines.

“Only one bank, which controls about 40 per cent of the market, will be considered a D-SIB and requested to increase its capital buffer,” says Al-Zadjali. “Omani banks are capitalised well above both Basel III’s and the CBO’s requirements. We expect our rigorous stress-testing exercises to improve the confidence and safety of the financial system.”

The central bank has long put limits on lenders’ loan portfolios and interest rates in the interest of stability, which reduces profit margins. Banks must limit personal loans to 35 per cent, mortgages to 15 per cent and their exposure to any single client to 15 per cent of capitalisation and net worth.

Suspicious transactions

The CBO is taking a leading role in upgrading and updating the sultanate’s anti-money laundering and anti-terror financing regulations in accordance with international Financial Action Task Force recommendations.

“I chair a higher national committee, with representatives of all the concerned ministries, which is studying a new, more comprehensive draft law,” says Al-Zadjali. “As well as [establishing] a financial crimes unit within the Royal Omani Police, we have requested banks to set up a special department to detect money laundering and compliance methods. We hold conferences and seminars to raise awareness in the industry, and banks are responding well as it is a matter of protecting their own reputations.”

Under Al-Zadjali’s leadership, CBO is maintaining a strong regulatory role in Oman’s banking sector, while encouraging competition and a deepening of the market. It is focusing on reducing risk, managing one of the most stable banking markets in the GCC and maintaining the necessary liquidity in the banking sector to guarantee this.