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H E Hamood Sangour al-Zadjali, executive president, CBO, shares his thoughts on banking with BusinessToday
BusinessToday Reports

BusinessToday: How is CBO ensuring that banks in Oman are moving towards Basel II norms?

H E Zadjali: The adoption of Basel II requires compliance with certain pre-defined parameters – good baseline supervisory system, adoption of international best practices in supervision, sound legal and regulatory architecture, accounting and provisioning standards, transparency and corporate governance practices, skilled human resources and robust risk management systems.

The supervisory system in the sultanate is sound and the practices followed by the central bank are compatible with international standards. The system has been fine-tuned with the early warning system, supported by the financial soundness indicators and the prompt corrective action (PCA) framework. The central bank is also planning to shortly switch over to risk-based supervision. The sultanate has achieved significant progress in complying with the requirements of the Basel committee’s core principles for effective banking supervision and other international standards and codes. The banking law and the supporting regulations are explicit. The central bank has been empowered to formulate appropriate policies and standards, including rules for adequate capital in line with the developments in international best practices, standards and codes. The institutional framework for good governance is already in place. The fine-tuning of the practices is an ongoing process. The accounting and provisioning practices are in substantial compliance with the Basel II requirements.

In this background, the central bank had constituted an implementation group on Basel II, with representation from the local and foreign banks to roll out a country specific implementation plan, render technical assistance to the central bank and the local banks and to evaluate the implementation of Basel II. The group has already drawn up plans to implement Basel II from January 1, 2007 with parallel calculation of regulatory capital from January 1, 2006. The implementation group has recommended the standardised approach for credit and market risks and basic indicator approach for operational risk for determining regulatory capital. Based on the recommendations of the group, detailed guidelines have already been issued for comments, which will soon be finalised after taking into account the views and suggestions of banks.

BusinessToday: The last year has seen CBO bringing about numerous new norms for banks. Can you highlight some of the significant ones and the rationale behind them?

H E Zadjali: The supervisory developments in 2005 have been dictated by the central bank’s commitment to adopt international best practices, recommendations of the Financial Sector Assessment Mission and the country specific issues and developments in the banking sector. In the interest of promoting greater transparency and involvement of banks as well in the policy formulations and better compliance thereof, the practice of prior consultation with the financial institutions has been institutionalised. The practice of releasing master circulars, capturing all regulatory provisions on a particular subject in a single document, has also been initiated to ensure greater transparency in the operations of the central bank.

A system of annual meetings with the chief executives of banks was revived to review the developments in the monetary and banking sector, the challenges and plan ahead for maintaining financial stability, sharing systemic issues and concerns, seeking views on major policy issues, etc. Further, with the objective of reinforcing the relationship between the central bank and the external auditors of licensed financial institutions, the systems of trilateral and multilateral meetings has been institutionalised.

PCA has been put in place to supplement the supervisory mechanism. The framework is designed to identify weaknesses in the operations and financial health of banks at the early stages. A schedule of corrective measures, based on two significant indicators of vulnerability – asset quality and capital adequacy – has also been put in place. A blend of mandatory and discretionary actions, on the basis of severity of the vulnerability, is being applied to banks, which have been placed under the PCA framework. Corrective measures, in the event of slippages in relation to the package of measures are also being envisaged.

To enhance the quality of loans granted to non-resident borrowers, local banks have been directed to lend over US$5mn to such borrowers only through the route of syndication. The routing of large exposures through syndication could enhance the risk assessment and monitoring and administration of loan books.

BusinessToday: How would you rate the strength of the banking sector in Oman? Are the banks in Oman strong enough to make a mark outside the sultanate and take on competition from international banks?

H E Zadjali: The banks in the sultanate have achieved significant progress in strengthening their financials, marked by robust growth in balance sheets, higher capital adequacy, better asset quality, good corporate governance practices, higher profitability, etc. The local banks have also made substantial impro-vements in technology, risk management practices and have achieved efficiency in financial intermediation.

The minimum capital of the local banks is being enhanced to RO50mn to enable them to compete with regional banks. As the strength of the capital improves over a period of time, and given the level of efficiency and strong financials, Omani banks would be in a position to compete with internationally active banks in the region.

BusinessToday: How do you see the banking sector shaping up in the years to come?

H E Zadjali: Omani banks have made significant progress in critical areas and the regulatory and supervisory practices are comparable to international standards. In the context of the integration and globalisation and increasing competition, the local banks are required to substantially upgrade their risk management practices and achieve greater diversification of activities to remain competitive. Consolidation and re-engineering of the management practices, and greater efficiency are necessary to meet the challenges and competition ahead. The convergence of regulatory and supervisory standards within the GCC region could enable the local banks to grow and expand beyond national boundaries.