CBO’s Consumer Protection Regulatory Framework Sets the Benchmark for Omani Banks

HE Tahir Al Amri, keynote speaker at digital banking event in Oman
His Excellency Tahir bin Salim bin Abdullah Al Amri, Executive President, Central Bank of Oman will be the Chief Guest and Keynote Speaker at New Age Banking Summit 2019

The Central Bank of Oman’s Consumer Protection Regulatory Framework is being implemented from July 2023, which sets an even higher bar on banks for transparency, business conduct, customer disclosure and financial education, says HE Tahir Salim Al Amri, Executive President, CBO in an interview with Oommen John P

Can you share highlights of the financial performance of banking and non-banking financial institutions in 2022 and the outlook for the remainder of 2023?
The performance of the Omani banking and non-banking sector remained strong during 2022 and Q1-2023, despite certain challenges as COVID-19 support measures were gradually withdrawn. All key financial soundness indicators showed improvement in terms of strong capital ratios, business and loan portfolio growth, healthy profitability and ample liquidity in the system. The Omani banking and non-banking sector is resilient based on strong footing and looks ahead to further consolidating its strengths during the remainder of 2023.
Capital: The banking sector continued to remain well capitalised during 2022 as seen by the total Capital Adequacy Ratio (CAR) for the sector, which improved to 19.7 per cent as of December 31, 2022 from 19.4 per cent in 2021. The ratio was well above the minimum requirement of 12.25 per cent including 1.25 per cent Capital Conservation Buffer (CCB). The excess CAR over the minimum requirement provides enough room for the banking sector to lend to the real economy in the future. Similarly, the leverage ratio of Finance and Leasing companies (FLCs) at 2.3 per cent was well below the maximum limit of 5 per cent.
Gross Loans: The gross loans of the banking sector have witnessed an increase by 4.9 per cent (i.e. RO1,356mn) to RO29,093mn as of December 31, 2022 on a YoY basis. The gross loans for FLCs also improved by 6.6 per cent to RO1,052mn on a YoY basis. Overall, it is expected that the growth rate of gross loans will continue on the same trajectory and thus further improvement is expected during 2023 given that the overall economy is on an upward move.
Asset Quality: Gross NPLs at 4.4 per cent and Net NPL at 1.4 per cent were within reasonable range with adequate loan loss coverage ratio at 68.7 per cent, as of December 31, 2022. The COVID-19 support measures now stand withdrawn and our banks have exhibited strong resilience in terms of health of asset quality post-COVID-19.
Earnings: The banking sector reported annual Net Profit Before Tax (NPBT) of RO464 mn for the year ended December 31, 2022 showing an increase of 21.3 per cent (RO81.5mn) compared to NPBT of RO382.4 mn posted for the year 2021. This increase was mainly induced by a 9.6 per cent YoY strong increase in gross income (RO112.8 mn). Earnings Indicators as of December 31, 2022; particularly Banks’ Net Interest Margin (NIM), Return on Assets (RoA) and Return on Equity (RoE) have been steady during 2022 and stood at 2.8 per cent, 1.2 per cent and 7.9 per cent respectively. Similarly, on a YoY basis, the NPAT of FLCs also increased by RO1.6mn or 9.4 per cent to RO19mn for the year 2022. The earning indicators are expected to remain strong during 2023 on the back of improved profitability of the sector owing to business growth.
Liquidity: Deposits of the banks have increased by RO277.5mn or 1.1 per cent on a YoY basis and stood at RO25,817mn as of December 31, 2022 from RO 24,540mn as of corresponding period of 2021. The Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) stood at 190.2 per cent and 115.1 per cent, respectively, as of December 31, 2022, both ratios are well above the regulatory requirement of 100 per cent.

The banking sector in Oman has performed well with the combined balance sheet of conventional banks showing a YoY growth of 5.6 per cent as of the end of March 2023. How is the CBO responding to the challenges to curb inflation?
The exchange rate peg has served Oman well. It continues to provide a credible nominal anchor for the Sultanate, reducing uncertainty and contributing to maintaining low and stable inflation in the country. Headline inflation in Oman averaged 2.8 per cent in 2022 and 1.8 per cent for the period January-March 2023. Inflation in Oman is determined by both domestic and external factors, with external factors playing a dominant role. The impact of global inflationary pressures was to some extent contained by the appreciation in the nominal effective exchange rate (NEER) of the Omani Rial, strategic supply chain management through logistics and changes in imports of origin, and government caps on certain products and subsidies. Notwithstanding the commitment of the Government to the medium-term fiscal plan, the oil windfall has afforded some fiscal space for need-based intervention to mitigate the impact of higher global prices on the welfare of households.
Restoring price stability remains a key policy challenge for central banks across the globe. Throughout 2022 and the first half of 2023, central banks from all regions continued to tighten monetary policy in response to persistently high inflation. Central banks in the GCC countries also followed suit, hiking policy rates in line with the Federal Reserve of the US, thereby safeguarding the peg and discouraging capital outflows.
The pass-through of monetary policy tightening to bank lending and deposit rates appears to operate with sizable lags in Oman. The weighted average interest rate on OMR deposits with conventional banks increased marginally from 1.923 per cent at the end of March 2022 to 2.124 per cent at the end of March 2023. While the weighted average lending rate decreased from 5.485 per cent to 5.381 per cent over the same period, liquidity in the banking system remains adequate thus far owing to higher government oil revenues.
The Central Bank of Oman promotes and maintains financial stability whilst ensuring funding liquidity is adequate to support the flow of credit to the economy. Total outstanding credit extended by conventional banks grew by 5.6 per cent to RO24.3bn at the end of March 2023. On the flip side, total deposits held with conventional banks increased by 3.4 per cent on a year-on-year basis to RO22.2bn during the same period.
As we look ahead, we will continue to effectively manage inflation in Oman through closer coordination between the Central Bank of Oman (CBO) and the Ministry of Finance (MoF), the development of deeper financial markets, implementation of improved liquidity management tools, and enhancement of monetary policy transmission channels.

The total assets of Islamic banks and windows increased by 10 per cent on a YoY basis to RO6.6bnn and constituted about 16.4 per cent of the banking system assets at the end of March 2023. How has Islamic banking performed in Oman?
Islamic banking sector has exhibited robust growth in Oman since promulgation through Royal Decree in December 2012. Currently, the sector comprises two full-fledged Islamic banks and five Islamic banking windows. The share of Islamic banking assets, deposits and financing increased to 16.4 per cent, 18.1 per cent and 18.7 per cent of the total banking sector, respectively, as of March 31, 2023.
The Capital Adequacy Ratio (CAR) of the sector at 15.7 per cent as of March 31, 2023, was well above the minimum capital requirement of 12.25 per cent for Islamic banks and 11 per cent for Islamic banking windows, showing strong resilience.
Gross financing of the sector increased to RO 5,510 mn as of March 31, 2023. Stage 3 (impaired financing) to gross financing ratio (NPF ratio) of the sector remained low at 2.1 per cent as of March 31, 2023. The NPF ratio of the Islamic banking sector is still much lower than the entire banking sector of Oman at the end of March 2023, showing their strong asset quality standards and asset-backed financing.
The Islamic banking sector reported an overall ‘Net Profit before Taxation (NPBT) of RO16.8 mn during Q1-2023, in comparison to NPBT of RO11.3 mn during Q4-2022, showing an increase of RO5.5mn or 48.8 per cent. On a year-on-year comparison, the annual Islamic banking sector profit increased by RO3.3 mn or 6.1 per cent to RO58.0 mn for the year ended on December 31, 2022 in comparison to RO54.3 mn for 2021.
The total deposit base of the Islamic banking system, at the end of March 2023, aggregated to RO 4,890.7mn. On a YoY basis, Islamic banking deposits increased by 10.2 per cent in March 2023. The liquidity ratios of the Islamic banking sector remained strong with LCR and NSFR at 182.9 per cent and 113.4 per cent, as of March 31, 2023. Islamic banking is expected to grow at the same pace in future on the back of strong market demand and economic growth.

Quite a few banks in Oman have placed requests for a merger after CBO approved the merger between HSBC Oman and Sohar International Bank. How will bank mergers address the challenges of the banking industry?
Yes, in Oman’s banking sector, some merger transactions are currently in process (In principle approvals given to Sohar International Bank and HSBC Oman; and Sohar International Bank and Bank Nizwa). Similarly, we have received initial information on merger proposals for another bank (Ahli Bank).
• As a central bank, in principle, consolidation of the banking industry brings a range of benefits to the banking and financial sector, which include, among others, strong and more competitive banks, contribution to financial stability and reduced operational risks. Similarly, mergers generally bring greater cost efficiency, which is achieved on the back of a larger distribution channel and higher scope for technology upgradation. From a business perspective, a larger merged entity also enjoys larger exposure entitlements and access to a wider customer base.
• While evaluating such merger requests, we also carefully analyse reduced competition aspects, system integration challenges and cultural affinity issues. Therefore, while approving any bank mergers, we closely watch management and mitigation of these issues to ensure a smooth and successful deal for the benefit of the financial sector and individual customers.
• Considering the market size and financial sector customer base of the Sultanate of Oman, we are of the view that the existing number of conventional as well as Islamic banks are adequate while ensuring that the sector remains competitive, efficient and well-served.
• For any merger/acquisition proposals, CBO, while maintaining the policy of non-interference, approves mergers on its merits and looks at such proposals, weighing relevant considerations and assessing the impact and perception of the proposed transaction.

Can you elaborate on the agreement to link GCC systems?
Cross-border payment systems are major facilitators for international financial transactions by the citizens and residents of any country. Hence, cross-border transactions are placed of the highest importance by different countries. The Central Bank of Oman, being the regulator of the payment systems and international transactions, has a major role in setting up the payment systems for cross-border transactions.
The Arabian Gulf System for Financial Automated Quick Payment Transfer (AFAQ) is a cross-border payment system that was adopted as part of an initiative by GCC-Central Banks which is aimed to provide a regional payment infrastructure that will contribute to the financial integration, stability, and economic growth in the region. A royal decree (No.6 / 2023) ratifying the agreement on the linkage of the payment systems between GCC countries has been enacted. This agreement aims to link the local RTGS payment systems between GCC countries into a centralised system (GCC-RTGS) to carry out their operations smoothly and safely by providing a regional infrastructure for the regional payment and settlement systems among the GCC countries. Further, it will establish the supervisory and oversight powers of the central banks over the payment systems between the GCC countries. Moreover, it will support for using the local currencies of the GCC countries for cross-border payments in the GCC. All of that will help in promoting the integration between financial markets in the GCC region.

What are the latest digital transformation initiatives in place to meet the customers evolving expectations?
● E-KYC initiative to establish a National electronic Know Your Customer and customer Digital onboarding to enable a safe, reliable and secure system to onboard new customers and meet the KYC compliance requirement digitally.
● Initiate a feasibility study on Digital Currency for Central Banks (CBDC) to explore and evaluate the new form of currency and its possible benefits to the financial system and markets, including enhanced efficiency and the introduction of new tools for monetary and fiscal policies alike. Based on the outcomes and established benefits only, a decision of adoption will be made.
● Open Banking API initiative aims at developing an open banking regulatory framework which enables access to customer data which can be used in drawing insights and creating innovative products tailored to consumers, market and regulatory needs.
● Fintech Regulatory Sandbox and Fintech Innovation Hub to test-bed fintech ideas and applications to facilitate investment for them and to facilitate their entry into the Omani market. This has a cascading effect on job creation and capitalisation on local talent which eventually contributes to economic growth and job creation that attracts venture capital investment to the country.
● Operationalisation of the retail payment systems that allows the customers through the licensed banks and payment service providers in the Sultanate of Oman to make quick and instant payments, available 24 hours, 7 days a week.
● Retail customers can transfer funds instantly within 24 hours and on all 7 days a week, using the Mobile Number, Alias Name, or QR code in Mobile Payment Clearing and Settlement System (MPCSS) and using the account number in ACH.
● To provide the finality of settlement on a 24X7 basis, the RTGS system this month has been made operational round the clock throughout the year. This will enable the banks and their customers to send urgent and critical transactions at any time of the day and are settled in RTGS instantly.
● CBO has published a policy to be followed by banks and Payment Service Providers, to deploy SoftPoS in their acquiring network to support the adoption of the latest technology-based innovation in the form of SoftPoS, which is converting the traditional Mobile Device into a POS. We believe having such technology in the market will reduce the cost of adopting digital payments, especially for Small and Medium merchants.
● The direct debit system allows the processing of repetitive future payments electronically based on the one-time mandate. The e-mandate or the digital mandate will be introduced to enhance the DD and MMS system very soon.
● We are collaborating with government departments/entities to use digital modes in their payments and receipts and also support spreading digital payments. As an example this year, we have worked with Muscat Book Fair organisers to ensure electronic payment channels are available during the event.
● The use of digital payments in the Sultanate is highlighted in the following:
o The Automated Clearing House (ACH) transactions, both volume and value have experienced consistent growth. In the last five years, the volume has grown over 2.5 times from 7.2 mn transactions in 2018 to 18.5 mn transactions during 2022 and the value of ACH transactions also saw a similar trend of 2.5 times growth, increasing from RO4.7bn in 2018 to RO11.5bn during 2022.
o The use of OmanNet during the last five years is also experiencing exponential growth. The OmanNet includes transactions made through ATMs, POS and e-commerce. Between 2018 and 2022, OmanNet volume has increased over three times (300 per cent) from 82.4 mn transactions to 252.9 mn transactions. This tremendous expansion has been mainly achieved in POS and e-commerce transactions, showing a trend which got a further boost during the Covid-19 pandemic.
o The e-commerce transactions, there is over thirteen-fold (i.e. 1300 per cent) increase during the last five years i.e. from about 3.1 mn transactions in 2018 to about 43 mn transactions in 2022. As regards the POS transactions, there is over four times (i.e. 400 per cent) increase during the last five years i.e. from about 42.6 mn transactions in 2018 to over 172.6 mn transactions in 2022.
o On the other hand, the volume of cheques in Oman decreased by 20 per cent from 2018 to 2022. The volume decreased from 4.6 mn in 2017 to 3.7 mn in 2022, whereas the value has seen a steep decrease from about RO16.6 trillion in 2017 to RO9.9 trillion in 2022.
o CBO has issued instructions, permitting licensed Finance and Leasing Companies (FLCs) to carry out additional business activities, including relaxing certain conditions for existing activities. The scope of lending by FLCs has been expanded to include real estate financing, working capital facilities, personal loans, and lending against their deposits. Also, relaxations were extended to FLCs on conditions to accept corporate deposits, and investments including the discretion to change its business hours as per the needs of the market.
o CBO has issued the Licensing Policy for Payment Service Providers (PSPs) and Ancillary Payment Service Activities in the Sultanate of Oman. This policy broadly categorises the activities falling under payment services into core services and ancillary services. CBO by adopting a liberalised licensing approach, Fintechs and entities carrying out ancillary services are exempted from obtaining licenses from CBO. However, those entities shall register themselves with CBO, through a licensed bank in the Sultanate of Oman and shall remain in compliance with other related requirements. The policy includes amongst others, activities under payment services and ancillary payment services, governance, licensing, capital, operations, trust accounts, AML/CFT requirements, risk management and cybersecurity, consumer protection, and data protection.

What are the key challenges facing the banking sector in Oman?
Banks are consistently adapting to the rapidly changing digital transformation landscape, facing the challenges of embracing new technologies and improving customer experiences.
● The rise of Fintech companies poses a challenge to traditional banking systems. However, we are noticing that instead of seeing them as competitors, banks are collaborating with many Fintech firms, providing value to both.
● Banks are consistently expected to navigate regulatory frameworks (for example, CBO is planning to launch its Open Banking Framework) which can pose a challenge to traditional banking in the context of sharing financial consumer data with Fintechs and Third Party Providers.
● Full implementation of CBO Consumer Protection Regulatory Framework from July 2023, which sets an even higher bar on banks for transparency, business conduct, customer disclosure and financial education.

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