Hamood Sangour Al Zadjali, Executive President, Central Bank of Oman (CBO): Interview

Interview: Hamood Sangour Al Zadjali

Given the current low oil prices, what monetary and fiscal policy changes is the CBO considering?

HAMOOD SANGOUR AL ZADJALI: Although the present low oil prices will pose some challenges to the Omani economy, it should be possible to maintain the trajectory of growth achieved in recent years. This is due to the resilience of the economy and prudent fiscal and monetary policies. In the present situation the main objective of both the government and the CBO is to avoid any slowdown in growth and to continue with the economic diversification process.

The government has shown its intentions in this regard with the state government budget 2015, which outlines continued spending on key economic sectors to maintain growth. Considerable resources have been allocated towards the completion of infrastructure projects such as airports, seaports, roads, industrial estates, electricity, water and wastewater projects. New high-priority projects that have been approved under the current five year plan will also be implemented. International partners and the private sector in Oman are also keen and expected to participate in various plans, which include power generation, desalination and transport projects, including railways. The government is now focusing on developing small and medium-sized enterprises (SMEs), encouraging public-private partnerships, improving the investment climate and building infrastructure. While the government will continue to spend on key economic sectors, it is keen to contain the fiscal deficit by implementing relevant policies in both revenue and expenditure. It is also expected that with a proper mix of financing options, funding the fiscal deficits envisaged under the various scenarios for lower oil prices will not be a significant problem.

For its part, the CBO will continue to follow an accommodative monetary policy and closely monitor the liquidity situation in the banking sector. The CBO is always prepared to inject liquidity into the banking system should any need arise in the future. The CBO will work to enhance the role of the banking sector in economic development by encouraging growth in the most productive sectors, including SMEs. By fine-tuning prudential regulations and strengthening the qualitative and quantitative aspects of capital – including liquidity and funding requirements – supervisory review processes will be given closer and greater attention. These moves will also help to address any potential financial stability issues.

Do you foresee the Basel III regulations conflicting with the roll-out of Islamic financing in Oman?

AL ZADJALI: The roadmap for implementing the Basel III guidelines was issued by the CBO in 2012, and the various other components of Basel III are being applied after duly considering the views of all the stakeholders, including the Islamic banks.

Islamic banks and conventional banks have similar roles in the economy, as both are primarily financial institutions. They provide funding to earn a potential return for their investors. Islamic banks are also exposed to risk just like the conventional banks.

So far we do not foresee any conflict with Basel III, although there can be some challenges in its implementation for Islamic banks. The financial structure of conventional and Islamic banks is quite different. Islamic banks operate in line with the principles of sharia, which prohibits payment and receipt of interest. In terms of their capital structure, Islamic banks would predominantly rely on Tier 1 capital rather than interest-bearing, Tier 2 financial instruments. So compliance with the stricter Basel III norms for capital would perhaps be more challenging for conventional banks, which have a mix of Tier 1 and Tier 2 capital.

The Basel committee framework for conventional banks does not take into account some specific features of Islamic Banks, such as the profit sharing investment accounts, but the CBO is addressing this.