The Omani banking sector is largely the product of a November 1974 banking law that established the Central Bank of Oman (CBO), effective April 1975. The law also facilitated the entry of foreign-owned banks and permitted an increase in the number of local banks in the sultanate. As of September 1992, there were twentÍÍÍÍy-one commercial banks in comparison with three registered in 1972. In addition, there were three specialized development banks: the Oman Development Bank (1977) the Oman Housing Bank (1977) and the Oman Bank for Agriculture and Fisheries (1981). However, the Omani banking market is the smallest in the GCC. Of the twenty-one commercial banks, eleven are foreign owned and concentrate primarily on financing trade. Ten are local banks operating in an increasingly competitive market. Because of competition, the government seeks to encourage consolidation. The expectation is that five or six local banks will emerge as the core, with those facing financial difficulties ceasing operations or merging with more profitable institutions. A similar pattern may apply to foreign banks, of which only five or six would continue to undertake significant business.

The CBO effectively replaces the Oman Currency Board, which was created in 1972 to issue currency, manage government accounts, and execute banking transactions with commercial banks and international institutions. A board of governors appointed by the sultan manages the CBO. The board's responsibilities include management of the government's foreign assets. The CBO is empowered to make advances to the government to cover temporary deficiencies in current revenues to purchase government treasury notes and securities with a maximum maturity of ten years to make advances to commercial banks and to buy, sell, discount, and rediscount commercial paper. In 1991 the banking law was amended to empower the CBO to withdraw the license or suspend the activities of banks under its jurisdiction, allowing the CBO to liquidate, reorganize, or manage a bank directly.

The CBO exercised these expanded powers with regard to the takeover of the Bank of Credit and Commerce International (BCCI) branches in the sultanate. BCCI was incorporated in Luxembourg in 1972 and established a presence in Oman in July 1974. Since 1974 it expanded its local operations to include twelve branches having total assets of RO67 million (US$174 million) as against total deposit liabilities of RO57 million (US$148 million). Gross mismanagement of assets resulted in a decision by central banks of various countries to freeze BCCI operations on July 5, 1991. Accordingly, the CBO suspended BCCI operations in the sultanate on July 6, 1991, and its board of governors offered BCCI branches for sale to locally incorporated banks. An agreement was signed with Bank Dhofar al Omani al Fransi, effective February 15, 1992, to assume all assets and liabilities of BCCI Oman. Bank Dhofar al Omani al Fransi received a grant of RO15 million to cover BCCI's frozen assets abroad and a guarantee of RO4 million against future claims. The arrangement made Bank Dhofar al Omani al Fransi the secon 10ed largergest capitalized bank in the sultanate. The saleÍÍÍÍ did not affect the National Bank of Oman, the largest bank in the sultanate, in which BCCI was a 40 percent shareholder.

In 1992 this sale was the most recent in a series of restructuring arrangements of the Omani banking market. The Union Bank of Oman was restructured in June 1990 and thereafter was called the Omani European Bank. Kuwaiti institutions lost their shares in the bank, the shares of France's Banque Indosuez increased, and several Omani groups held the remaining shares: Zubair Enterprises, Royal Oman Police Pension Trust, Oman International Development and Investment Company, Oman Aviation Services, and the Port Services Corporation. In January 1989, the Bank of Muscat purchased the assets and liabilities of the Oman Banking Corporation, which itself was a product of the restructuring of the Bank of Oman and the Gulf.

Consumer loans rose to 31.3 percent of total loans in 1990 from 18.8 percent in 1985. There was an accompanying decline in the share of construction and trade to 44.8 percent from 57.3 percent in the same period, reflecting the shift in commercial bank lending from commerce and real estate to personal loans. The decline also indicated the different development needs within the sultanate. During the early 1980s, large-scale infrastructural growth prompted banks to extend loan facilities for construction and real estate. The 1986 oil price collapse and the subsequent economic retrenchment contributed to repayment difficulties, and nonperforming loans diminished the net profits of banks.

In its declared interest in promoting mergers in the banking industry, in 1991 the government placed a ceiling on the amount banks could lend to their directors. Banks could lend up to 15 percent of their net capital to related individuals or their business interests, in comparison with the previous ceiling of 20 percent. An amendment to the 1974 banking law announced in May 1992, increasing the minimum required capitalization for banks to RO10 million for local banks and RO3 million for branches of foreign banks, was similarly designed to encourage mergers and rationalization of the banking sector.

The three specialized development banks serve as mechanisms to promote government policies of economic diversification, private-sector development, and indigenization of the work force. The Oman Housing Bank is a joint venture developed by the government, Kuwait's Ministry of Finance, and the Oman Development Bank. In 1991 the Oman Housing Bank recorded a net profit of RO4.1 million (US$10.7 million), as compared with RO3.4 million (US$8.8 million) the previous year.

The Oman Development Bank extends loans to industrial development projects. The government holds 40 percent of the shares, regional and foreign institutions 40 percent, and 20 percent is open for private Omani subscription. In March 1991, the bank offered five- to six-year interest-free loans of up to RO50,000 (US$131,600) for establishing small businesses if all employees were Omanis. Businesses employing foreigners were to be levied 3 percent interest.

The government holds 98 percent of the capital of the Oman Bank for Agriculture and Fisheries, which, as its name implies, is authorized to extend loans to individuals or enterprises to finance activities in agriculture and fishing. By March 31, 1992, the bank had thirteen operating branches.

Data as of January 1993