The Executive President of the Central Bank of Oman, His Excellency Hamoud Sangour Al Zadjali, gave an exclusive interview to BUISNESS LIFE speaking about the latest banking conference in Oman and described some of the effects of the global financial crisis on Oman
and the region, explaining that for the major part the Omani banks were not affected. He also gave his opinion on the reasons why Oman is not interested in Islamic banking as a separate branch.
BL: How did the latest conference in Oman go?
Al Zadjali: The conference that was held yesterday was the second conference in a row held by the capital market authority with the association of the GCC secretary General and the GCC Federation of Chambers of Commerce. Additionally, as the central bank of Oman we have organized several other conferences on this subject. We have been issuing many circulars and directives to the banks, advising them to set up proper governance methods in their own institutions as well as in large companies that they have a share in. We have been the pioneers in the region concerning governance management, which we started in the early 1990’s. Meanwhile, as the governance issue is gaining prominence, especially with the current crisis we are updating our systems and procedures and advising our financial institutions to be more focused on this issue. We have set guidelines form the central bank of Oman and the capital market authorities on how governance should be implemented. For example, there should be a clear division between the board of directors and the executive management, additionally the executive management should be on the board committee and we have to make sure that the board of directors does not take the role of the executive management, and vice-versa. In other words, there should be a clear and transparent demarcation between the roles of these two administration entities.
BL: We feel that Oman does not want to get involved in Islamic banking, is that true?
Al Zadjali: That is true. It is our country’s policy not to mix religion and business. We believe that banking is banking, whether it is commercial or Islamic, and its objective is to ensure credit for the various sectors of the economy. As long as conventional banking covers the needs of the economy there is no need to differentiate between Islamic and non Islamic.
BL: As a distinguished Governor who led the Central Bank of Oman to safe haven, what are your plans to safeguard the interests of the Omani banking sector during this severe recession?
Al Zadjali: The global financial crisis which started in mid 2007, has magnified into a global systemic crisis and several countries in the world are either directly or indirectly facing the challenges of contagion. Given the generally adverse outlook of a significant slowdown in global growth in 2009, every country is trying to figure out what could be the magnitude of impact on their national economy. Oman as an open economy, could be expected to be affected, though moderately, with the international developments on certain fronts. Sharp corrections in stock markets all around the world have also seen some corrections taking place in the MSM. The large decline in oil prices from USD 147 per barrel in July 2008 to about USD 50 currently will result in a corresponding decline in the country’s oil revenue, exports and GDP. With an international credit freeze, access to credit from global markets will be limited to banks and corporates. Different channels as outlined above suggest that a country like Oman, despite having strong fundamentals, a sound banking system, and an appropriate policy environment, cannot be fully shielded from the effects of the ongoing financial and growth crisis. At the same time there is nothing alarming and certain preemptive steps have already been put in place by the authorities. The Government revised the assumed oil price for the 2009 budget to a conservative figure of USD 45 per barrel, in contrast to the earlier assumed price of USD 55 per barrel and intends to keep the development projects fully ongoing and on track. Oman’s financial system, which is largely bank dominated, remains insulated from the direct effects of the global financial crisis, since our banks are neither exposed to the toxic financial assets nor to the distressed global financial institutions. The global financial crisis, and its manifestation in the form of a global credit squeeze, has however some indirect effects on liquidity, which the CBO has recognized and responded to proactively with appropriate liquidity enhancing policy measures. On receiving feedback from some of the commercial banks about possible tightening access to US dollar liquidity in international markets, and the associated concerns about rollover of short term US dollar liabilities, the CBO opened two windows in consultation with the government ensuring access to USD liquidity of up to USD 2 billion to the local banks. While the first window is in the form of a swap, the second window is in the form of direct lending against eligible promissory notes. Furthermore, to ensure greater flexibility for banks in their liquidity management and credit deployment, the Central Bank of Oman also reduced the reserve requirement for banks from 8 percent of deposit liabilities to 5 percent. The CBO decided to also ease the lending ratio limitation for banks from 85% to 87.5% with effect as of the 1st January 2009 to avoid the possibility of any credit contraction, in particular towards the productive sector, so that economic growth will continue unhampered. The liquidity situation in the market is being constantly monitored and necessary measures, both prudential and regulatory, will be taken by the CBO as and when needed, depending on development in the overall economic conditions.
BL: Was the Omani financial sector affected by the global recession? Why? What about the financial figures?
Al Zadjali: The banking system in Oman, so far, has been able to stay away from the spreading contagion of the crisis in the global financial markets. While a well functioning surveillance framework, sound regulatory structure and prudent banking practices have limited the concern relating to financial stability, the Omani economy has to contend with the challenges associated with global and regional slowdown in economic activity, and the associated developments manifested in lower oil prices, contraction in world demand and trade, and greater risk aversion influencing capital flows. Domestic economic activity, however, continues to be resilient, drawing necessary support from appropriate fiscal policy and supportive domestic liquidity conditions. More importantly, it is very gratifying that none of our banks were exposed to the toxic financial assets or to the distressed global financial institutions. The performance of the banking sector during 2008 witnessed major strides in all banking aggregates. On a year-on-year basis, total assets of the commercial banks increased by 33.3 percent to reach RO 13.8 billion as at the end of December 2008. The fast expansion in assets was driven by 42.3 percent growth in credit seen predominantly under construction, manufacturing and the services sector. Aggregate deposits increased by 32.2 percent to RO 8.6 billion as at the end of the year. Commercial banks core capital and reserves improved by 23.5 percent to reach RO 1.8 billion with the Basel II capital adequacy ratio at 14.7 percent as against the mandated ratio of 10 percent. The net profits of commercial banks in Oman for the year 2008 stood at RO 234.1 million, a rise of nearly 10 percent over the profit level in the previous year.
BL: What drove Oman to award $1.55bn of construction projects at a critical era where the globe is suffering from recession (new projects include civil engineering work at Muscat Int’l Airport and 1st phase of construction of Sohar Airport)?
Al Zadjali: Countries in general are adopting fiscal expansionary policies to contest the impact of the global slowdown. Since the current level of foreign assets of the Government are very comfortable and as a counter cyclical stance in fiscal expenditure, the Government of Oman intends to continue in full earnest with all the ongoing projects and embark on nationally important projects as deemed necessary.
BL: Some people claim that the GCC economies are vulnerable to world recession, what are your comments?
Al Zadjali: The international perception is that in the face of the world recession and the global financial crisis, the Gulf region remains relatively strong, and it could rather help other regions to manage the crisis. Since the world is facing a liquidity crisis, there are also voices which feel that the GCC countries could actually be suppliers of USD liquidity to the world markets. Some even suggest that GCC countries have the leeway to continue to expand demand, so that it could have some stabilizing effect on the recessionary forces driving the world economy at present.
BL: Why do Gulf shares advance on higher oil prices?
Al Zadjali: Since the main source of revenue for the Gulf nations accrue from oil exports and government expenditure being a driving force in the overall economic activity, there is a close relationship and correlation between oil prices and the stock markets.
BL: What are the investment opportunities during this recession?
Al Zadjali: Oman has a very attractive foreign investment policy, and under the WTO commitments, foreign ownership in a locally incorporated business entity is allowed up to 70 percent. Moreover, local operations through 100 percent foreign branches are also permitted. There are no restrictions on repatriation of profits or capital since Oman has an open capital account. Tax rates have been harmonized and there is scope for tax holidays upto the first five years. Oman offers a sound banking and financial system, which represents strong pull factors for foreign investment. The privatization law promulgated in 2004, with a clear emphasis on privatization of areas such as electricity and power, telecommunications, postal services, ports etc. has brightened the prospects for private and foreign investments. With tourism given prime importance in recent years, tourism related projects have opened up a wide array of opportunities for foreign direct investment.
