Monday, March 24, 2008

CBO - Between a rock and a hard place…

As the Central Bank suffers from the dollar peg (effectively handing control of Oman's monetary policy to the Federal Reserve of the USA), they are thus being forced to act on a micro-scale wherever possible. Today they moved to lower the cap on personal loan interest rates to 'ease the plight of borrowers' (according to the radio report this morning). I'm not sure a 5% cut in the interest rate (from 9% to 8.5%) will have much of an effect, but I guess every bit helps. Especially as it seems, talking to friends and colleagues that many ‘middle class’ Omanis are in debt up to their eyeballs, with loans for cars, houses, weddings, school fees, holidays, credit cards, etc.

Unfortunately, cutting loan rates will just act to further boost liquidity, which is the last thing Oman needs right now. Excess cash, peg to weak dollar fuel Gulf inflation
CBO board cuts interest rates on personal loans
Sunday, March 23, 2008 11:07:52 PM Oman Time
MUSCAT — The Central Bank of Oman’s board of governors yesterday held its first meeting of the year chaired by Dr Ali bin Mohammed bin Moosa, health minister and deputy chairman of CBO’s board of governors.

The board has reduced the interest rate ceiling on new personal loans offered by commercial banks operating in the Sultanate from 9 per cent to 8.5 per cent per annum starting from April 1.
Times Of Oman article

It will also serve to slightly reduce the profitability of banks operating in Oman. Although given their stellar share prices lately, that doesn't seem a huge issue. Being able to borrow in dollars at circa 4% with zero (or even negative) exchange rate risk, and loan it out in rials at 9% (+ a multiplier) seems like a license to print money indeed. Although I assume, while the default rate is never publicized here, it must be relatively high. Oman is also still a country where people are expected to actually pay a fee to own a credit card, something I'm still not used to.
At the same time as its boosting liquidity via rates, the CBO is trying to mop up some liquidity via certificates of Deposit, aka Government bonds. CBO raises RO215m through CDs. They have also lately raised the amount of cash that banks have to hold, again to try and reduce liquidity somewhat.
The CBO seem to be doing everything they can, which is certainly better than nothing, but its unlikely to be enough, as it's all on the margin when compared to a domestic money supply racing away at ~30%+ growth. It's like bailing a leaky boat with a teaspoon.


  1. "Being able to borrow in dollars at circa 4% with zero (or even negative) exchange rate risk, and loan it out in rials at 9% (+ a multiplier) seems like a license to print money indeed."

    I wish things were that easy. For one thing, the repeated deep cuts by the Fed have resulted in the evaporation of dollar liquidity available to banks. Banks in the GCC are simply not able to source dollars. Project finance deals are in trouble. Banks are finding it difficult to continue funding the large projects which they are committed to in dollars, let alone to approve new dollar deals.

    Secondly, Omani banks have very large cost to income ratio due to large number of branches and other factors. Until recently the CBO was forcing banks to open branches in the interior regions. Most banks have cost ratios of at around 40%.

    The reduction of interest rate is yet another symbolic move by the government. The fact is most people have been availing personal loans below 9% because of the competition from the new banks. Bank Sohar had been giving loans as low as 6.8% to lure middle and high income customers.

  2. Oman is also still a country where people are expected to actually pay a fee to own a credit card, something I'm still not used to.

    Australia also has fees on credit cards (card issuance and annual renewal fees), although students are exempt from them. Card fees in Oman are OK...(i think a Visa Gold is OMR 40 per yr) Australia the fees range from A$59 for standard, A$48 for low-rate (no incentives/awards), and up to A$275 for platinum cards from AmEx...

  3. dear dragon,
    i just spent the past hour reading your blog. I was born and brought up in Oman (I am not Omani) and lived there for 18 years. I cannot tell you how refreshing it has been to read your blog, get inside scoop on corruption or other issues nobody ever talks about and also appreciate your sarcastic humor (hard-hitting journalistic triumph that is The Times of Oman hehehe i damn nearly choked on that one). I have lived in the US/UK now for the past 10 years but i still visit oman once a year, and your blog and some of the things I have seen over the past couple of years give me hope for change in the region. Keep the conversations going! thanks!

  4. Muscati,

    Thanks for clarifying - although it is really hard to 'feel' for the banks in Oman! What sort of default rates do you see in Oman, and do you agree that many Omanis seem to be in deep debt?

    Twister - ouch. When I was in the UK companies were almost paying you to take a credit card. 6 months free interest, etc etc. And interest rates are super high in Aussie too. Paying those school fees in rials can't have been much fun lately!

    Anon - glad you like it. I've got some more good stuff coming on corruption, so keep reading. Biggest problem is getting past the hearsay and down to some real evidence.

  5. UD - Default rates vary from bank to bank. I think internationally a good default rate is considered to be less than 3% of total loans. In Oman, I'm not sure any bank meets that. You have to remember that although Omani banks' profits appear to be huge in comparison to other industries, they are still low in comparison to other banks in the region. Oman's most profitable bank makes about half or a third of the profit of the UAE's no. 2 or 3 bank. 7 years ago banks almost went bankrupt because of a single large borrower's default!

    re: credit cards - I remember when I was in college in the US, my friends who were in the UK couldn't get credit cards and when they do both the fees and the interest rates were very high. This was just 13 years ago. No-fee credit cards are a relatively concept thing for the UK. It will eventually get here to Oman. It' a question of volumes. Right now in Oman credit card penetration is very low. Many banks still outsource their card issuance to companies in Bahrain and the UAE. The annual fee is important to cover the overheads of having a card department until such time that monthly usage and interest income is significant enough to allow no-fee cards.

  6. Thanks Muscati.

    That makes sense. I would imagine credit cards would be great here, except for what I imagine would be the likely high default rate problem...


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