Muscat: Traditionally bustling with cash flow and ever increasing credit demand, the Omani banking sector needs a more ‘customer focused’ approach to sustain days of tightening liquidity and profit crunch.
A recent report entitled “GCC listed bank results” released by the audit firm KPMG, highlighted that although profits increased by 0.2 per cent for banks in the Sultanate, the sector faced mounting pressure from lowering deposits, narrowing margins and increasing regulatory requirements.
While Omani banks have begun to address these challenges with a pragmatic drive towards digitisation and improved Cost to Income Ratios (CIRs), there is need for a focused approach towards the customer through efficiency and innovation. Experts suggest playing to one’s strength is crucial.
Banks need to look closely at customer requirements and then figure out the segment they can operate most efficiently. They must carve out a niche market strategy where revenues broadly exceed operational costs instead of functioning in all segments. As long as everyone is doing everything, they aren’t making enough profits, Emilio Pera, head of financial services at KPMG, said in an interview with the Times of Oman.
Pera’s suggestion would require a shift from a transactional mindset to one that is more focused on the relationship with a customer. “Having unnecessary branches or services will only add to costs with little value added,” he said.
Technology has been a major driver in enhancing customer experience in the financial sector around the globe. From online transactions to mobile apps, it has greatly fast-tracked and simplified banking processes. Omani banks have pushed towards digital transformation to an extent that tech savvy users would only need to physically approach a branch for very specific needs.
“The push towards digitisation by Omani banks is commendable and is a step towards consumer focused and cost effective strategies. As a result, apart from a possibility of less physical branches in the future, we will witness banking staff scheduled for more specific duties as a digital platform will perform the generic ones executed by them currently,” Pera added.
“I believe moving forward, customer experience will define bank performance. We have seen in other parts of the world how technology has helped banks enhance this experience. The Omani market may yet not be ready for a complete digital transformation of banking transactions, but a gradual shift is inevitable so there has to be a continuous push for digital transformation,” Paul Callaghan, partner at KPMG, said.
According to Callaghan, similar to the Gulf Cooperation Council (GCC) markets, the Omani banking sector is saturated with players and consolidation can be another efficiency boosting move.
“The central infrastructure in Omani banks can accommodate larger operations and transactions and Omani banks are comparatively smaller than their peers in the GCC, which increases CIRs. Consolidation can be a good move to improve margins and a step towards controlling costs,” Callaghan explained.
With the rising cost of funds, interest rates to lenders have been increasing in banks over the past year from an average of 4.8 per cent to 5.8 per cent. However, as the Central Bank of Oman has very prudently capped retail sector lending, margins are likely to narrow and growth in this sector may remain subdued. Corporate lending rates, however, are expected to rise and can be an area of higher margins for banks, especially the growing Small and Medium Enterprise (SME) sector that is tipped to lead Oman’s drive to diversify away from oil and gas.
“The growth in the SME sector lending is expected to be high and an area of high profits for banks. They will remain a high risk high return investment for banks. The key here is management of SMEs. Banks need to educate SMEs in financial matters and hold meetings to understand the business. With such measures risks will be minimized to a great extent,” Pera said.
The report also showed healthy results of the Omani banking sector in 2016 with a rise in total assets and increase in profits. The Omani banks were comparatively competitive with their GCC counterparts, producing the best return on assets in the region. As of December 31, 2016, the total outstanding credit extended by Omani banks stood at $57.2 billion, up by 10.1 per cent over the previous year. Private sector credit totalled $51.0 billion, up from $46.3 billion in 2015.