The Central Bank of Oman’s statistics show that local financial institutions rely heavily on personal loans to stay afloat but the easy credit they extend to customers is fuelling inflation and hardship to borrowers.
The official statistics show that the total bank lending amounted to RO 5.41 billion in the first nine months of this year compared to the first nine months of 2017, an increase of nearly 8 per cent.
Currently, interest rates in Oman is at an average of 5 per cent depending on the banks, from the ceiling of 6 per cent set up by the Central Bank of Oman.
With increasing employment for graduates, young employees normally go straight to the banks to buy their first cars or borrow to go on holiday. Reasonable interest rates also inspire overdrafts.
In the period up to September 2018, overdrafts increased by over 27 per cent compared to the same period last year. Customers also stretch themselves by buying furniture in instalments, funding for their weddings or buying their first homes.
Easy loans have a direct connection with inflation. According to the statistics, the consumers loans make up over 70 per cent of the local banks’ profitability.
It clearly shows that the financial institutions depend heavily on loans as the anchor of their business.
More money available to customers end up in the retail business as well. According to the official statistics, the inflation recorded in the country up to September this year is 2.4 per cent, which is 6 per cent more than the same period the year before. It also proves that Oman is a debt society. But apart from the loans, ordinary people in Oman already feel the pinch from the steep hike of fuel prices that went up from 120 baisa per litre to an average of 205 baisa per litre so far this year.
It is expected that Oman will be free of subsidies by year 2020. The government is expected to remove electricity and water subsidies by that time. By then, consumers will be faced by higher bills to light up their houses and for their domestic water. But there might be good news coming in the way as far as inflation is concerned.
Next year, the government plans to introduce the value added tax (VAT) by 5 per cent.
The inflationary pressure temporarily boosts the retail businesses in terms of profitability but it is putting too many people in debt they cannot really afford. Though the financial impact on consumers’ pockets will be minimum, but coupled by a sharp rise in the domestic utility bills, consumers may be forced to trim down their expenses.
Once that happens, a deflationary trend will start to bite in and take away a large chunk of the retail businesses profitability. It happened in the mid-1980s when inflation rates could not sustain the economic growth and many retail trades went under.
There are no statistics available on how many Omanis owned their homes but recent figures from the banks showed that the applications for mortgages have declined. There is no research connecting spending trends and mortgages.
However, it clearly indicates that Omanis cannot afford another debt. If a marriage pattern is any indication, most newly weds stay with their parents.
They cannot afford to pay rent to set up a home of their own and parents invite their married sons to live with them. It is already bringing the residential rental business down.
When the Central Bank of Oman decided to put an interest rate ceiling of 6 per cent, it was a clear sign to try to control excessive loan applications. Some banks now are urging the apex bank to reduce the interest rent as they see the loan appetite is slowing down.
What would happen in the next 12 months will be interesting in terms of inflation and profitability of the retail businesses as well as the banks. But it all depends on whether consumers are willing to cut down on their unnecessary expenses or not.