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Reforms boost banking resilience

 Staff Reporter

MUSCAT

The Central Bank of Oman (CBO) continued with its financial reforms agenda aimed at ensuring that the financial system became more resilient and stability was not undermined, according to the bank annual report for 2016.

As part of this, several regulatory and supervisory initiatives were taken by the CBO during 2016. The main focus of these remained on improving financial inclusion and strengthening risk-based supervision.

Additionally, the focus was on implementation of Basel norms and ensuring adequate liquidity and improvements in payment and settlement systems.

The report points out that lower growth in deposits as compared to credit growth resulted in some tightening of liquidity conditions, which, in turn, led to increased competition among banks for deposit mobilisation. Consequently, interest rates on deposits came under pressure and the weighted average interest rate on total deposits increased to 1.42 per cent in December 2016 from 0.93 during the previous year.

The reforms agenda helped in the banking sector remaining robust and meeting the credit needs of all segments of the economy and in turn, supported economic diversification initiatives, despite economic slowdown and lower hydrocarbon revenues.

Notwithstanding incipient delinquency due to economic slowdown, the core capital and reserves of conventional banks increased by 8 per cent to 4.1 billion rials and capital adequacy ratio further improved to 16.8 per cent as compared to 16.1 per cent at the end of 2015.

At the same time, some deterioration in assets quality was witnessed reflecting economic slowdown and gross non-performing loans (NPLs) increased by 17.8 per cent in 2016, the report says. The ratio of NPLs to total advances also moved upward to 2.1 per cent from 1.9 per cent.

Yet, the banking sector could weather the general economic slowdown to a large extent and maintained healthy profit levels with return on equity above 10 per cent during 2016,

The CBO allowed banks’ investment in unencumbered treasury bills, Government Development Bonds and Oman Government Sukuk to be a part of eligible reserves up to maximum of 2 per cent of deposits with effect from April 2016. This was to enhance liquidity with banks to meet the credit requirements.

Banks also started implementing the liquidity coverage ratio and associated disclosure requirements, as prescribed by Basel committee. The Net Stable Funding Ratio, established by the committee to address the funding risk in terms of maturity structure of assets and liabilities, will become effective from January 2018 with a minimum ratio of 100 per cent for banks, the report says.

In line with international best practices, a framework for Domestic Systemically Important Banks has been operationalised and such banks will have higher capital requirements and an enhanced supervisory regime.