Please comment on the latest developments in Oman’s financial sector and the significant role that the non-banking finance companies (NBFCs) play in economic development and diversification?
Oman is a relatively young country. Similarly, the financial sector started in 1974, when we only had rudimentary financial systems and processes. Since then it has been a long journey, during which we have achieved many milestones. This country had the opportunity to learn from various other countries and avoid their mistakes, which is very well reflected in the development philosophy of His Majesty.
Today, there are seven local banks in Oman with a total bank lending figure of about 12 to 15 billion OMR, so it is not very large industry. Within this system there are also six very well organized NBFCs, which are licensed by the Central Bank of Oman (CBO) under the same Banking Regulation Act. They provide similar services to the banks except for some limitations, for example they cannot have deposits or savings bank accounts, and they do not do remittances or issue credit cards. Baring this, by and large, there are lots of similarities between what the NBFCs do, and what the banking system does.
The Central Bank licensed these institutions in 1987-88, so they have developed in a very disciplined and organized way. They are well regulated with a good capital adequacy ratio and regular inspections, and as a result, they have grown and become well entrenched in the financial system of the country. Today, the NBFCs play an important role in the economy of Oman, as the major part of their business comes from financing small and medium enterprises (SMEs), which are major generators of wealth, employment and innovation. The SME sector is a very strong global sector and any country with a developed SME industry will experience growth, innovation and employment, like in the case of Germany, Canada or India. As the major financer of SMEs, NBFCs contribute to employment and wealth generation in Oman in a very productive manner. Total assets of the six NBFCs in Oman are approximately $1.5 billion.
Al Omaniya Financial Services (AOFS) was incorporated in 1996 and today we are the largest player in the NBFC segment with about 22% market share out of the total assets. We have been at the forefront of innovation in financial product offerings and providing a real value proposition to our customers. We started by buying out the retail asset finance business from Bank Muscat. The idea to promote a specialized NBFC was conceived by me in 1995/96 and I put together the business model, the strategy and business plan including arranging the initial investors, with the help of Bank Muscat whose shareholders along with myself were the promoters of Al Omaniya. After we were licensed by the Central Bank, we bought out the business from Bank Muscat. At that time, it was worth about $20 million in assets, and today we are close to $450 million. We started with $7.5 million of capital, and today our net worth is about $140 million.
The past 15 years have been an eventful, profitable and exciting journey for our shareholders, our board of directors and the entire AOFS team. We have reached many milestones and won many awards along the way (“Best SME” by OCIPED, E&Y, Business Today, etc). This company is also unique in that it has paid a dividend every single year of its existence. It has been a profitable and enriching journey for all our stakeholders among which I include our customers. We have customers that are happy with us and they find value in engaging with us. So we strive to continuously innovate and create that value for all of our stakeholders. Since our establishment, every single year has been a brilliant year. I think we have paid about 278% dividends so far.
Another important achievement that should be pointed out is that, out of all the banking and non-banking financial institutions, you have the lowest number of non-performing loans.
Absolutely. That means we not only compete, but at the same time we also ensure that we lend to quality businesses. In lending, it is very easy to give out money. If you start lending money without having a circle of parameters that you draw around yourself, you will have a never-ending queue of people outside your office. We have seen that happening in many countries and eventually triggering a global financial crisis. So we do not follow a loose credit policy.
We are not only the largest NBFC, but we also have the best asset quality amongst the banking and the non-banking financial institutions in Oman. We have the best assets because we attract the best customers. A good customer has many choices as different institutions are willing to lend to him and they compete to get his business, so he will chose the institution that provides the best value, competence and service. It is a very deliberate decision and if you do not have these three qualities, the customer will not come to you. Those customers who do not have the choice will finally go to the institutions that are willing to accept them anyways. We attract the best customers despite the fact that they have a choice and that is the main reason why the quality of our assets has been consistently the best.
In line with CBO’s guideline, the paid-up capital of the NBFCs has to rise up to OMR20 million by June 2012, and from 2012 to 2016, it has to increase by 1 million per year reaching OMR25 million by 2016. Please comment on the recent OMR10 million bond issue and your strategy to meet the CBO targets?
The June 2012 deadline was set by the Central Bank a few years ago, so that the companies could plan ahead and program their businesses and balance sheets. We were the only company to plan our capital structure in a very systematic and efficient manner, in order to maximize and optimize the value for our shareholders. When you increase the capital of the company it is like increasing the capacity of a factory – you have to ensure that you have systems, processes, resources, people, and above all the market. We planned much in advance and we structured our capital base in such a way that there was an automatic and gradual increase to 20 million by the year 2012.
This planning started in 2009 and we issued a series of convertible bonds which allowed us to build revenues, business, and balance sheet capacity. When we issue a convertible bond, it allows us servicing capacity without having to pay the servicing costs and dividend. As it gradually converts into equity, so you have to build up your volumes and business in order to be able to service that capital. That requires a lot of discipline, planning and foresight which is one of the important strategic roles of a CEO. Capital build up and capital structure is one of the most critical aspects in a financial institution, as you cannot change it, so you have to plan ahead and get things right. A direct issue of equity capital severely increases your Capital Servicing cost as equity is the most expensive instrument of financing, it inhibits future dividends, reduces EPS and therefore diminishes shareholder value.
We are the only company that currently has a net worth of OMR52 million, but our paid-up capital is less than OMR17 million. This allows us a tremendous amount of borrowing capacity and free leverage, as well as a lot of flexibility when planning competitive strategies and alternative pricing methodologies.
In what segments of the market do you anticipate major growth?
We operate in four sectors basically. We started off in the retail car financing business.
The second vertical that we operate is what we call the equipment finance business, which is basically the SME segment of the business. These are mainly mid-size institutions and contractors of different sizes.
The third segment is a micro-product program that we branded as a ‘lifestyle program’, and it has taken off very well. It is a small ticket, large volume business, and we have significant market share. We understood what customers require, and once we understood that and knew about the value that customers required, we managed to automate this business so we can deliver this service at a much lower cost. Consequently there is hardly any competition. Everybody has this product in their brochures, but when it comes to actually having a product that works, probably only one or two companies have this.
The fourth vertical we operate is corporate finance where we deal with large and medium-sized companies, listed companies etc. Here we cater to their comprehensive financial requirements, like Trade Finance, Term Financing, Bill Discounting, Project Loans financing for warehouses and factories. In terms of growth, the corporate finance sector has seen the highest growth. We compete with the banks in this segment. Unless we are able to compete and meet clients’ requirements, we cannot be in this segment. Our core competency lies in delivering stakeholder value in a smart and innovative manner
Oman was the last to join the Islamic finance network in the GCC. As the largest NBFC, what are your ambitions with Islamic finance?
The Central Bank is already working on the guidelines and we expect most of the banks to set up Islamic Finance windows and the new specialized Islamic banks will be able to start operations before the end of this year. As this is the first time Islamic finance is being introduced in Oman, I think the CBO will first wait and see how everything works within the banking system, and then they will start giving licenses to the NBFCs, so we are probably looking at two to three years from now.
Having said that, Al Omaniya has a large capital and asset base, so we will continue to work with the CBO to fulfill all the regulatory requirements and obtain the license to create an Islamic window as soon as they become available. The minimum capital requirement for NBFC is OMR25 million, and we have a large capital base and network so we can open an Islamic window for about OMR10 million quite easily, unlike the other NBFCs. But we have to wait and work with the regulators, and when they start issuing the licenses, we will get into that line of business.
In the meantime, we could also work with Islamic banking windows and Islamic banks on a partnership basis. We have the ability, the reach, the client base, and the infrastructure, which is something the new banks will not have in the initial years. So this could be an opportunity to create a fantastic partnership, as we can provide them with the resources, the ability, the means, the market and the systems, but we do not have Islamic money; Islamic money will come from Islamic banks. So there are various ways for us to leverage ourselves and run a profitable partnership and will look into all the opportunities.
What are the main strengths of your team? How do you train and retain qualified human resources?
We have been very fortunate with our human capital. Currently we have about 135 staff out of which about 75% are Omanis and we plan to increase to 80% by the end of 2012. We have a multi-pronged strategy in this regard. We hire people at the grass root level. As a policy, we do not generally hire senior people, because we believe that we should hire people at a grass root level and train them within and outside the company. We have an induction program where they go through the various departments and sit down with the heads of each department, and we also send them elsewhere for short-term training courses. Gradually, we build them up to take on higher levels of responsibility. In the top management, we already have Omanis and the number keeps increasing as we are developing many multi-disciplinary skills in our staff.
We have a very open policy in the company. If you look at the organizational structure you will see that there are no barriers and everyone is free to talk to everyone else. We are creating a very open and flat organization which allows formal and informal communication. In my opinion, that is the key in managing people as it empowers the employees and makes them feel engaged and committed. They are interested and well informed, so they do not feel frustrated or uncertain. As a result, our employee turnover is one of the lowest in the industry and probably in the country as a whole.
We have also built up a fantastic rewards system in the company. Not only do we pay very well, but we also have a performance and target-based rewards structure. We apply a comprehensive and open assessment of the employee’s performance, where first they evaluate themselves and then discuss things with their supervisors, managers, heads of departments, etc., and get the feedback.
As the CEO of the company, I have a philosophy where I see my staff as my internal customers, so we, as the institution, market ourselves to them all the time. They have to know that they are valued and required, and they have enough present and future incentives in terms of growth, career opportunities and increased responsibilities. Managing people is always a challenge, especially in a sector like ours where there is stiff competition. But I am proud to say that we have been successful in creating a very well motivated and committed team.
In light of the major changes that are taking place in the region, in your opinion, why is Oman an interesting value proposition for investment?
You have to look at the bigger picture, not only the microeconomic parameters. If you look at the big picture you will see that many developed nations are missing out on responsible fiscal policies. How we manage our public finances is an art, and I am afraid that many economists around the world have got it wrong. They have created the burden of heavy borrowing, which is used to fund welfare and infrastructure. But this has proved to be a bad policy and as a result, many countries are struggling with heavy inflation.
In Oman we have been fortunate in that there are hardly any government borrowings. On top of that, most years we have a surplus budget so we are not leaving debt for our future generations, and we are not consuming the resources of our future generations. We are leaving them a much better country with more infrastructure and more assets. Only a few countries within the GCC (and maybe Brunei in Southeast Asia) can say that, but it is not the case with the rest of the world. Oman truly has great fiscal policies, which combined with surplus budgets and low taxation helped the country to become financially very solid, strong, and robust.
Another important fiscal policy that the government of Oman follows is what we call the “anti-cyclical fiscal policy”. This basically means that in times when oil prices are low, revenues are low, or when the sentiment is very bad like it happened in 2008-09 with the global economic crisis, or in 2011 with the European sovereign debt crisis, so the influx of FDI decreases, or domestic investment decreases due to low oil prices, during those times the government pumps in additional revenues from resources from the surplus budgets and the resources that the country has, so they do not have to resort to borrowing or cutting down on infrastructure projects. When the oil prices are robust, the sentiment is good and there is a lot of foreign direct investment, they do not have to draw on their resources so they pump more resources into the sovereign funds and investments. So there is always a contingency plan. In bad times the government will pump in more money, in good times they will save more money so that the fiscal discipline is maintained. This kind of approach allows for a long-term strategy and planning.
That is why nothing happened in Oman in 2008-09. Our banks were safe and sound: we did not have any toxic assets, we did not have exposure to toxic assets abroad, the government of Oman did not have any exposure to sovereign funds’ toxic assets, and they did not have to guarantee any deposits of the banks. The same thing happened in 2011 with the sovereign debt crisis in Europe, but there was no sovereign debt crisis in Oman because we do not borrow unnecessarily. We have wise fiscal policies. Pragmatism and foresight are the key things that distinguish Oman from any other country. We are very proud and happy to be part of this wonderful financial system. Also, we must give a lot of credit to the Central Bank of Oman and His Majesty the Sultan for his wise, conservative and pragmatic policies.