Oman’s banking sector, having experienced significant growth over the past decade, is now at a crossroads. Despite doubling its total assets from OMR21.2 billion in 2013 to OMR42.2 billion in 2023, concerns are mounting about the capacity of Omani banks to meet the nation’s burgeoning financing needs. Industry experts suggest that further mergers and consolidation may be imperative to bolster the sector’s ability to support large-scale state projects and economic diversification initiatives.
Growth Amidst Constraints
The expansion of Oman’s banking sector is evident in the asset sizes of its leading institutions. Bank Muscat stands as the largest, with assets totaling OMR13.7 billion ($35.6 billion) at the end of 2023. Following the 2023 merger of Bank Sohar and HSBC Oman, Sohar International Bank emerged as the second-largest, boasting assets of OMR6.9 billion. National Bank of Oman and Bank Dhofar occupy the third and fourth positions, with assets of OMR4.8 billion and OMR4.7 billion, respectively.
However, despite this growth, the relatively modest size of these banks poses challenges. Andrew Cunningham, managing director of London’s Darien Analytics, highlights that even the largest Omani banks may struggle to finance major national projects independently. He notes, “Omani banks are small, even Bank Muscat. That will make it challenging for them to finance Oman’s major projects, so it’s likely there will be further mergers among Omani banks.”
Loan-to-Deposit Ratios: A Tightrope Walk
A critical indicator of banking health, the loan-to-deposit ratio (LDR), reveals the sector’s current constraints. In 2023, Omani banks reported an LDR of 99.7%, indicating that for every rial received in deposits, 0.997 rials were lent out. This high ratio suggests limited room for additional lending under existing capital structures. Cunningham elaborates, “The room for more lending by some banks is limited. Omani banks are constrained by their size. They’re well capitalized, but they can only lend out a certain multiple of their capital. So, if you’re a small bank, your ability to lend is constrained.”
Strategic Mergers: A Path Forward
To enhance their lending capacities and better support national development projects, Omani banks may need to consider strategic mergers. Historically, Oman has effectively managed bank consolidations, absorbing struggling institutions more adeptly than some of its Gulf counterparts. This proactive approach has maintained stability within the sector and could serve as a model for future mergers.
Cunningham observes, “For decades, Oman has been good at merging banks and absorbing those who are struggling in a way that other Gulf banking systems have not done.” The capacity to integrate smaller, struggling banks without significant disruptions has protected the sector from instability, making it a more resilient market compared to some neighboring economies.
Economic Diversification and Future Prospects
Oman’s Vision 2040 outlines an ambitious economic diversification program aimed at reducing reliance on oil revenues and fostering growth in sectors such as construction and manufacturing. Achieving these goals will require substantial financing, placing additional demands on the banking sector.
Neetika Gupta, vice-president and head of research at Ubhar Capital in Muscat, anticipates that once Oman reduces its debts to more sustainable levels, the government will redirect spending toward large-scale projects aligned with Vision 2040. She asserts, “This will drive credit growth and will be reflected in the banking sector’s performance eventually. Government spending will be directed towards construction and manufacturing.”
Credit Ratings and International Borrowing
The ability of Omani banks to raise funds on international markets is closely tied to the nation’s credit rating. On September 27, 2024, S&P Global upgraded Oman’s credit rating, acknowledging the sultanate’s efforts to reduce the borrowings of government-related entities (GREs). The ratio of GREs’ debt to Oman’s GDP decreased to 30% in June 2024 from a peak of 41% in 2021.
Further improvements in credit ratings could lower borrowing costs for Omani banks on international bond markets, providing an alternative avenue to bolster their lending capacities. Cunningham notes, “If Oman becomes investment grade again, it becomes cheaper and easier for banks to raise money on the international bond markets.”
Navigating Regulatory Challenges
The Central Bank of Oman (CBO) plays a crucial role in maintaining the stability of the financial system. Striking a balance between regulating the banking sector and encouraging its expansion remains a challenge. The CBO has implemented measures to ensure compliance, capital adequacy, and effective risk management. However, to enable further growth and support larger-scale lending, it may need to consider more flexible policies or facilitate greater access to foreign investments.
A Way Forward: Potential Scenarios
Should Oman achieve higher credit ratings and enhanced economic stability, local banks could explore collaborations with international financial institutions. Joint ventures and partnerships could bring in not only capital but also technological advancements, expanding digital banking and innovative financial services. Such transformations could position Oman’s banking sector as a regional leader, ready to finance projects that align with Vision 2040.
Conclusion
As Oman charts its course toward economic diversification and development, the banking sector’s ability to support large-scale projects is paramount. While significant growth has been achieved over the past decade, the current scale of Omani banks may be insufficient to meet future financing demands. Strategic mergers, improved credit ratings, and prudent international borrowing emerge as viable strategies to enhance the sector’s capacity, ensuring it can effectively contribute to Oman’s Vision 2040 and beyond.
