TBY talks to HE Hamood Sangour Al-Zadjali, Executive President of the Central Bank of Oman (CBO), on trends in the market, Islamic banking, and bank portfolios.

HE Hamood Sangour Al-Zadjali
HE Hamood Sangour Al- Zadjali was appointed by Royal Decree as Executive President of the Central Bank of Oman (CBO) in June 1991. He has continued to serve as Executive President of CBO since then. He is a renowned expert on financial and economic policy making in the GCC region. While serving as Executive President of CBO, he is widely recognized for nurturing and steering the banking sector in Oman into a stable, sound and resilient financial system, by developing not only the banking sector but also deepening and widening other segments of the financial markets. He continues to serve on the boards of several financial institutions. Al-Zadjali started his banking career with HSBC Bank in 1969. Before taking over as Executive President of CBO, he held executive positions in various capacities in the financial sector including CBO. He holds a degree in Management from Boston University’s School of Management, US.

What were the main trends and drivers in the Omani banking industry over the past year, and what are your projections for the coming year?

During 2014, the performance of commercial banks continued to remain favorable. The financial health of banks in terms of assets quality, provision coverage, capital adequacy, and profitability remained strong. Apart from the policy initiative of the CBO, the major drivers of growth in the banking sector have been strong levels of government expenditure, adequate liquidity, increasing domestic demand, and a favorable demography. The balance sheet of commercial banks further strengthened due to the robust growth in both deposits and credit. Though the current low oil price is posing a challenge to the Omani economy, given the resilience of the economy and prudent fiscal and monetary policies, it would be possible to maintain the trajectory of growth in the banking sector achieved in recent years. The government and the CBO seek to achieve this through intensifying efforts related to the development of SMEs, developing the financial sector, financing the private sector, improving the investment climate, and developing infrastructure. The State General Budget 2015 also endeavors to continue investment spending despite lower oil prices. It is expected that the demand for banking products will continue to increase even with lower oil prices. Banks are also efficiently and effectively building up their capacity in terms of higher capital, exposure, and leveraging abilities, technological capabilities, and foreign currency funding sources. The advent of Islamic banking is expected to further diversify banking services and expand financial inclusion. The CBO will continue to monitor the liquidity situation and ensure that adequate liquidity is available for banks to lend to growing sectors and meet the credit demand. Thus, with greater participation of commercial banks in the development process, together with large investments by the government, the balance sheet and profits of commercial banks are expected to remain healthy.

In the past two years, Islamic banking practices have dramatically expanded in Oman. Do you expect this trend to continue?

Islamic banking in the Sultanate is progressing well. There are already two fully fledged Islamic banks and six local banks have established windows for practicing Islamic banking. There has been a considerable increase in the number of branches and assets held by these banks. Islamic banking entities provided finance to the extent of $2.5 billion as at the end of December 2014 compared to $1.2 billion in December 2013. Total deposits held with Islamic banks and windows also registered a substantial increase to $1.78 billion by the end of 2014 from $444 million a year ago. It is too early to judge the performance of Islamic banks vis-à-vis other banks; however, Islamic banks are opening up new segments and players, and, thus, adding to the competitive environment not only in terms of efficiency and innovation, but by also providing the consumers the benefit of choosing between both conventional and Islamic banking products. Given the growing social and business needs of the country, Islamic banking is expected to assume an important position in the financial sector of the Sultanate by complementing the current conventional banking and will diversify banking services and augment financial inclusion.

What are some of the challenges associated with the bank's portfolio?

The CBO is fully aware of the need to increase credit to the productive sector, in particular for the SME segment, and has advised banks to formulate liberal lending policies, as well as mandated banks to allocate at least 5% of their total credit to SMEs by December 2015. Similarly, the quantitative ceiling on personal loans have been reduced and banks have to operate within a ceiling of 35%, while residential housing loans can be extended so that the quantitative ceiling on personal loans will help the corporate sector to avail more credit if genuine demand arises.