Oman Observer - Business

Banking and monetary system resilient to financial crisis
MUSCAT — The banking system in Oman has to a very great extent been shielded from the adverse effects of the crisis in the global financial markets, thanks to a wise fiscal policy and supportive domestic liquidity conditions. The combined balance sheet of commercial banks continued to register growth in assets/liabilities at the end of May 2009. On a year-on- year basis, total assets increased by 15.4 percent in May 2009 to RO 13740.5 million in comparison to its level a year ago, driven by the growth in credit of 23.6 percent.

Total credit stood at RO 9523.7 million as at the end of May 2009 compared to RO 7705.9 million at the end of May 2008. It may, however, be relevant to note that the pace of credit growth has been registering a slowdown in the current year from 38.4 percent annual growth in January 2009 to 29.7 percent in March 2009 and 23.6 percent in May 2009. Investments in securities (both domestic and foreign), which accounted for 11 percent of total assets in May 2009, increased by 14.3 percent to RO 1518 million in comparison to its level in May 2008.

Commercial banks’ outstanding investments in CDs issued by CBO increased from RO 968 million as at the end of May 2008 to RO 1032 million at the end of May 2009. Investments in foreign securities also increased from RO 142.6 million to RO 234.5 million during the same period under reference. Assets held in the form of cash and deposits with the CBO stood at RO 857.9 million at the end of May 2009) which was significantly higher than the required reserves to be held with CBO, indicative of the excess liquidity with commercial banks at the short end of the market.

On the liabilities side, commercial banks) aggregate deposits (Rial Omani plus foreign currency) increased by 14.4 percent to RO 8676.1 million at the end of May 2009. Government deposits rose by 37.4 percent to RO 1651 million, representing 19 percent of total deposits, whereas public enterprises’ deposits increased by RO 296.4 million to RO 580.7 million, and private sector deposits increased by 5.6 percent to reach RO 6444.4 million, representing 74.3 percent of total deposits. Just as in the case of credit, growth in aggregate deposits held with commercial banks has been declining at a progressive rate during 2009.

On a year on year basis, annual growth in total deposits moderated from 27 percent in January 2009 to 19 percent in March 2009 and 14.4 percent in May 2009. Core capital and reserves increased by 15.2 percent to RO 1640.3 million and accounted for about 12 percent of total commercial banks; assets at the end of May 2009. Broad money supply (M2) increased by 10.5 percent to RO 7716 million in May 2009 over the same period in 2008 mainly on account of the significant increase in quasi money (13.3 percent) and a marginal increase (4.5 percent) in narrow money comprising currency held by the public and local currency demand deposits.

As regards to sources of broad money supply (M2), the primary source of monetary expansion during the period was the accretion in bank credit to the private sector with domestic claims on the private sector increasing by RO 1635.5 million. Monetary expansion was also to a lesser extent driven by the increase in net foreign assets of the banking system (CBO plus commercial banks) by RO 63.5 million. The accretion in net foreign assets was solely on account of the expansion in CBO’s net foreign assets by RO 396.7 million, which was partly offset by the reduction in commercial banks’ net foreign assets by RO 333.2 million.

Policy interest rates of the CBO moderated significantly over the 12 month period ending May 2009. While CBO’s policy interest rate for management of surplus liquidity in the form of CBO CDs of 28 days maturity fell from 0.757 percent in May 2008 to 0.062 percent in May 2009, CBO’s policy rate for injection of liquidity -the average rate for repos with CBG- declined to 2 percent from 3.594 percent during the same period under reference.

Similarly, the overnight RO domestic inter-bank lending rates declined sharply to 0.080 percent in May 2009 from 0.879 percent in May 2008. With respect to the behavior of commercial banks’ domestic interest rate structure, interest rates on RO deposits (demand, savings & time deposits of all sectors) increased from 1.731 percent in May 2008 to 2.350 percent in May 2009 while interest rates on RO lending increased from 6.791 percent to 7.211 percent during the same corresponding period.
— ONA