Strongest competition and persistent low profits should mean only one thing in Oman for the banking industry: Mergers. Only four financial institutions in Oman are doing well in terms of growth but the rest lag behind. The merging of the smaller banks with the bigger ones should be in consideration.
Alizz Bank talks with Oman Arab Bank to form a merger make a lot of sense but both banks must show commitment to go through it.
There is already a fallout of a much talked merger between Bank Dhofar and Bank Sohar that hit the ground because of red tape and financial settlements.
Currently in Oman, too many banks are chasing fewer customers for the same limited products. But critics of the mergers are trying to put off bank consolidation. They say it is simply a matter of a strong bank trying to take over a smaller bank in a hostile way.
However, that may be so, but the fact remains that too many banks are struggling to shore up their businesses.
Mergers can give their shareholders a chance to remain in business or simply face liquidation.
Two struggling banks can join hands to consolidate their businesses to form a stronger financial institution instead of waiting for a bigger bank to step in.
The other solution is cross-border consolidation or even international banks. Most of the money lenders have already automated their financial services and where banks are located is not important anymore.
The biggest challenges of local banks are interest rates, litigation, loss absorbing capital and regulation.
Smaller banks also struggle to cut costs, improving their products, attract new customers, controlling underperforming assets and embracing in new technologies.
There is no banking crisis in Oman but the financial sector may well head towards that direction if the banks are not on the right footing in a long-term base.
At the moment, this industry has lower capacity and too much costs. The biggest burden for smaller banks in Oman is the non-performing loans.
Big banks can absorb this easily but the rest just buckle under the pressure.
Non-performing loans are part of costs that can easily force weaker lenders out of the market. The only way forward for them is merging with big banks to stay in the business.
It is the only positive approach in an oversized banking sector we have now.
Statistics at the Central Bank of Oman show that deposits of smaller banks are not enough to shore up their business portfolio, compared to the four strong banks.
The biggest bank merger in the history of Oman took place when Bank Muscat merged with Commercial Bank of Oman to create a RO 1.3 billion banking consolidation.
It has revolutionised the financial sector in Oman and made Bank Muscat the biggest bank in the country.
If Bank Sohar and Bank Dhofar merger went ahead, the move would have eclipsed the Bank Muscat and Commercial Bank of Oman’s consolidation.
The later would have created a new bank with assets worth RO 6 billion. But Bank Dhofar is no stranger to a merger. It merged with Majan Bank to consolidate its present position. But the most recent merger between Oman International Bank (OIB) and HSBC Oman changed the rule of play.
Many saw it as one bank acquiring the other and not exactly a merger in truest sense of the word.
However, It solved the problem of trimming the number of banks in the country.
OIB was simply struggling and the merger protected the interest of its shareholders to give a better deal to thousands of its customers as well.
But the big picture about bank consolidation is to strengthen the country’s economy.
Oman needs solid banks to continue financing projects and local businesses. Currently, these two tasks are left to only four banks since they have the capacity to do it.