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البنــك المركــــزي العمـــاني Central Bank of Oman
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Annual Bankers Meeting 2016 8:00:00 PMAnnual Bankers Meeting 2016<p>Ladies and gentlemen, </p><p>Let me welcome you all to the Annual Bankers' Meeting - 2016. This meeting is not just an annual ritual. It is an extremely significant forum for collective introspection of the challenges faced by the banking sector, and for laying the road map for the future. </p><p>The memory of the last global financial crisis is still fresh in our mind. The process of transition to growth and stability has not been easy. Emergence of new challenges and unconventional ways to handle them are becoming the order of the day. Faltering global growth, prolonged low oil prices and escalating geo-political tensions in the Middle-East have cast their shadow on us. We need to deliberate on some of the important issues affecting our banking sector and contribute to our collective wisdom in finding solutions to them. </p><p>During the last year's Annual Bankers' Meeting, we had set out a course for ourselves and I am happy to say that we have largely succeeded in our endeavor. Our banks in general have posted good profits for the year 2015. They have met the minimum Basel III capital standards and are high on the quality of capital as the core capital CET-1 stood at impressive 13.1%. Asset quality continued to be good though some strains are becoming visible. I take this opportunity to congratulate you all for your determined efforts in this regard. </p><p>Stress tests conducted at the Central Bank on macro basis continue to show the resilience of our banking system. However, each bank must carry out stress tests of its portfolios based on assumptions reflecting its own idiosyncrasies as part of ICAAP process, and such tests should not be limited to CBO prescribed assumptions/ scenarios. It is better that each bank identifies its vulnerabilities and takes proactive steps to mitigate them. </p><p>I also urge upon you to rejig the process of risk management in your bank and dovetail it to a well thought-out capital plan. Risk underwritten must be well-calibrated against the approved risk appetite, and it should be appropriately priced. While regulatory limits and guidelines set an upper boundary for risks, banks must follow a conservative approach consistent with their business plans and risk appetite. Prudent caution should precede commercial compulsions in all business decisions. </p><p>You may be aware that Bank Muscat has been identified as the Domestic Systemically Important Bank (D-SIB) in the Sultanate. We have set in motion an enhanced supervisory framework for the bank. The first biannual meeting with the bank's management was convened in November 2015. We are engaged with the bank for finalization of the Recovery and Resolution Plan in line with the D-SIB guidelines. I have the pleasure of announcing that the CBO has been designated as the Resolution Authority for banks in Oman. </p><p>As part of our ongoing implementation of Basel III, we have issued a Concept Paper on capital buffers in December 2015. Guidelines on Net Stable Funding Ratio will be issued sometime this year. A Task Force has also started working to facilitate the smooth implementation of IFRS 9 in the Sultanate. Regulatory prescriptions aside, I call upon banks to build up capital to meet the future uncertainties. Banks should take care to follow the international standards in matters of compensation as set out by the Financial Stability Board. </p><p>Financing of SMEs continue to engage our attention due to their importance to the economy. Progress in this regard will not only strengthen the economy, but also lower the concentration risk in the banks' balance sheets. After a meeting with the Authority for SME Development, CBO has also issued a revised guideline in January 2016 and I urge all the bankers present today to take proactive measures in extension of credit to SME sector in this critical period. </p><p>The Central Bank continues to receive reports of inadequacy of banking services from various parts of Oman. I request all of you to bestow your personal attention to enhance financial inclusion which was discussed during the last year's meeting. I may add that financial inclusion should be viewed by banks with a long-term opportunity in mind, not by short-term commercial consideration alone. </p><p>Restructuring of credit facilities may go up in the months ahead as the macroeconomic environment may require. Restructuring of credit facilities is an early sign of stress, irrespective of whether it is for a corporate or a SME borrower. Banks must take proactive measures to address the same. Comprehensive Guidelines on Restructuring of Credit Facilities have been issued recently to strengthen the banks and the banking sector stability. The prudential safeguards must be followed in letter and spirit for all kinds of borrowers and the benefit of restructuring extended only to the deserving cases. </p><p>Persisting low oil price is a matter of concern. Falling Government revenues not only affect the economic growth but also reduce the flow of government deposits to our banks thereby tightening the liquidity conditions. Recent rating downgrade of Omani banks would also add to the funding cost worries. To reduce the risks associated with the overseas exposures and also to ease the liquidity conditions, we have reduced the aggregate overseas exposure limits to 50% of local net worth of the banks. Banks are advised to actively explore opportunities to deploy funds in the local market and avoid extensive exposure to overseas markets. </p><p>Management of liquidity risk is very important to the banks. While banks have reported reasonably high levels of liquidity coverage in terms of LCR, stress tests have highlighted rising vulnerabilities in banks' liquidity risk profile. In view of the topicality of the issue, we would discuss the management of liquidity today as we move on to the agenda items. </p><p>Pushing credit to productive sectors is a priority for us. However, prudent credit underwriting standards should never be diluted in our eagerness to gain market share. Similarly availability of government guarantee should not be at the cost of due diligence while lending to Government related entities. There is also a need for the banks to remain cautious in their exposures to the stock markets, considering the sluggish performance of Muscat Securities Market in the recent times. </p><p>Further, while no prudential limit is set against lending to real estate sector, any rise in the same engages supervisory attention. It is observed that real estate exposure accounts for over 30% of the total lending of the banking system, which is considered large. We have scheduled this as a topic of discussion today in view of the risks associated with the real estate sector. </p><p>Islamic banking has made considerable progress in the Sultanate since its launch in 2012. We have got two full-fledged Islamic banks and six Islamic windows floated by our local banks. Total assets and gross financing by our Islamic Banking Entities (IBEs) increased by 63.6% and 69.9% and stood at RO 2.2 billion and RO 1.7 billion respectively as at the end of December 31, 2015. We have, however, noted the issues like high concentration of exposure to real estate sectors, shortage of experienced professionals in this field and lack of innovative products to suit the needs of customers which are affecting the growth of the IBEs. I request all of you to deliberate on these issues when we take up today's agenda for discussion. </p><p>I take this opportunity to record my deep appreciation to the Oman Banking Forum, which has provided a platform to bankers for open debates on issues of significance. I request the forum to evolve a practice of thematic discussions on emerging issues at regular intervals. </p><p>In conclusion, I need to emphasize that the banking sector in the Sultanate must live up to its reputation of being a well-regulated and resilient. We must strive to achieve growth with stability while conforming to best international standards. With these remarks I formally declare today’s deliberations as open.</p>