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Banking on regulations

Oman can pride itself on having one of the most thorough and respected banking regulators in the region
Charles Schofield

The banking industry in the sultanate is now flourishing, with strong profits and a healthy reduction in non-performing loans. While this reflects the general strength of Oman's economic performance, credit also must be given to the regulatory oversight of the banking sector that has encouraged fundamentally strong institutions. Oman can now pride itself on having one of the most thorough and respected banking regulators in the region, the Central Bank of Oman (CBO).

Early beginnings
Until 1970, there was no national authority responsible for the supervision of the banking system. The number of banks was small and banking activities were limited. Prior to the establishment of CBO there were two regulatory bodies with only limited oversight of banking activities, the Muscat Currency Authority established in 1970 and Oman Currency Board set up in 1972.  These two institutions were primarily focused on currency control and management of Oman's fiscal policy.  They initiated the regulation of banks in the sultanate and undertook limited banking activity, paving the way for the creation of CBO.

The key development in banking law in Oman at that time was the Banking Law promulgated in 1974. This law established CBO and provided it with a mandate to issue currency and supervise all aspects of banking business in Oman.  This included advising the government of the sultanate on international and domestic fiscal policies.

CBO was given extensive powers under the 1974 Banking Law.  This allowed it to make a significant contribution to the development of a free market economy in the sultanate, by creating appropriate banking institutions.  It also contributed to the fiscal and monetary development of Oman through active participation in the international monetary community and membership of international monetary organisations, such as the IMF.

Rapid progress
Since the establishment of CBO in 1974, development of the banking sector in Oman has been rapid. At that time, there were just a few banks in the sultanate  and their activities were limited.  In the 33 years that have since passed, there has been a proliferation of banks undertaking more and more sophisticated transactions. The sector is now very competitive, comprising commercial banks, specialised banks as well as other financial institutions. There are now 14 commercial banks, five are locally incorporated and nine are the local branches of foreign banks.

Consolidating the banking laws
In 2000, the powers of the CBO were consolidated and enhanced. By early 2000, it had been recognised for some years that the Banking Law issued in 1974 had become dated and, due to the enactment of a large number of supplementary laws, there was an urgent need for consolidation. Accordingly, after much consultation within the broader banking community, a new banking law was passed during the course of 2000, under Royal Decree 114 of 2000. While primarily a consolidating law, the Banking Law of 2000 continued the trend of increasing the CBO's powers so that it could better oversee the banking sector in Oman. 
The new law increased the scope of CBO's supervisory powers in a number of new areas.  For example, under the Banking Law 2000, the CBO now has to ratify any appointment to a key bank position and bank directors have to satisfy a 'fit and proper' test. The management of CBO is entrusted to a board of governors, each of whom is appointed by His Majesty. 
To fulfil its monitoring role, the CBO regularly audits both financial and operational aspects of all banks in Oman. This is to ensure on an ongoing basis that banks are adopting appropriate practices that do not leave them overly exposed to risk of failure.

The CBO's wide ranging functions now include:

* Acting as the depository agency for the government

* Making advance payments to the gov ernment in respect of temporary deficiencies in recurrent revenues

* Managing loans on behalf of the government

* Maintaining a part of the sultanate's foreign assets as cover for the currency in circulation at prescribed ratios

* Accepting deposits from banks operating in the sultanate and from other foreign central banks, IMF and other international financial institutions

* Advancing credit to local banks and engaging in investment activities through purchase and sale of financial instruments

* Providing clearing house services for all member banks, and

* Issuing the national currency, supervising its circulation, preserving its value and managing foreign assets

The minimum capital of Omani banks has also been increased from RO10mn to RO20mn, and branches of foreign banks require RO3mn. These capital requirements are due to increase again, to an announced figure of RO50mn. The central bank’s role in advising the government on matters of domestic and international affairs has also been enhanced.

Licensing of banks
Any bank wishing to set up in Oman must obtain a licence from the CBO. The licence specifies the banking activities which individual banks may undertake.

As per the law, all banks in Oman must be joint stock companies. They may, however, be a closed joint stock company (SAOC), which does not offer its shares for public subscription, or an open joint stock company (SAOG), which does.  Most banks in Oman have been established as SAOCs, but many of them have since converted to the latter to take advantage of the additional funds which public subscription generates.

Foreign banks may, with CBO approval, establish operations in the sultanate. CBO maintains the same regulatory functions over foreign banks as it does over domestic banks. This includes, but is not limited to, imposing lending ratios and capital adequacy requirements on these banks. 

A foreign bank wishing to set up in Oman must establish its credentials as a suitable bank for Oman to CBO's satisfaction. This will require proof of the banking business it undertakes in its own jurisdiction.

Basel II Accord
The progressive tendency of CBO is also demonstrated by its commitment to implement the Basel II Accord. This is a set of guidelines, released by the Basel Committee in 2004.  It aims to ensure that banks have strong risk management practices to provide a buffer against economic downturns.  Basel II sets out detailed measures to assist banks in improving risk assessment techniques.

CBO has constituted an implementation group on Basel II, and has already introduced an early warning system, supported by financial soundness indicators and the Prompt Corrective Action framework. The increased stability that such measures will bring to the economy in the long term can only continue to facilitate the growth of the banking industry in the sultanate.

Due to the forces of globalisation, integration and increasing competition, local banks are constantly being challenged to update their risk management practises and achieve greater diversification in order to compete with foreign banks. They are meeting that challenge, due in no small part to the vigilant oversight of CBO. Oman has demonstrated how a country can transform itself into a modern nation in just over three decades, and the banking industry is, and will continue to be, at the forefront of that transformation.