Abstract

The Central Bank of Oman was established in 1974 to manage monetary policies of Oman and ensure economic activities in the entire country expands. The bank is responsible for balancing the money supply and demand for money. This balance is achieved by changing the prices of money and adjusting interest rates. The financial system in Oman is made up of Islamic and conventional banks, leasing and finance companies, investment companies, pension funds, insurance firms and money exchange entities. Under the supervisory framework created by the CBO, the bank is involved in the on-site and off-site examination. On-site examination entails evaluation of Oman-based banks. While Off-site examination includes scrutinizing audited reports of licensed banks, among other duties..

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This paper will cover two major instruments, including development bonds and treasury bills during the management of money market operations in Oman. The National Payment Systems in Oman is regulated by the CBO with the Royal Decree No 8 of 2018 giving the bank more power to manage the payment systems. The Banking Law of 2000 revised the Banking Law of 1974 in Oman, whereby new law empowered the CBO to supervise the banking sector and ensuring that the domestic currency retains its value.

A Study on Central Bank of Oman

Introduction

The Central Bank of Oman (CBO) was established in 1974. The changes that were experienced in the monetary policies of the country and the expansion of economic activities in the entire country were some of the key reasons for the establishment of CBO. The CBO is mandated to maintain and promote fiscal and monetary stability within the Sultanate of Oman. In addition, the bank fosters a progressive and sound financial and banking system in Oman and to ensure economic growth in the country remains sustainable. While monetary stability refers to the confidence in the Oman rial and stable prices, fiscal stability involves the detection of threats and reducing them to avoid the financial and banking services in Oman. The Banking Laws that were established in 1974 mandates any form of negative impacts on the country’s financial system. CBO is the major regulator of the CBO to perform its roles. The focus of this paper is on the primary functions of the CBO including creating monetary policies, ensuring financial stability in the country, management of money market, streamlining the payment systems, and enacting laws regulations that other banks in the country should follow.

Creation of Monetary Policies

The monetary authority or central bank is mandated to find a balance between supply and demand for money. This balance is achieved through various strategies, including changing the prices of money and adjusting interest rates (Favaretto & Masciandaro, 2016). By attaining the required balance, the economy is protected from having an excess money supply that can result in inflation and also tighten liquidity conditions that act as constraints to economic expansion.

During the establishment of monetary policies, liquidity management is one of the key responsibility of the CBO. In Oman, the regime of a fixed exchange rate is used to manage liquidity since the conduct of monetary policies is limited by the fixed peg. In any financial market, Open Market Operations are important since they are used to control the surplus or deficit of liquidity (Devereux & Engel, 2003). During the time when liquidity is high, the government issues debt instruments, for instance, bonds and treasury bills to absorb the excess money supply. On the other hand, when the liquidity is low, the government increases it by using Repurchase agreement and development bonds and treasury bills. As one of its core responsibility, CBO regulates the liquidity using these strategies, an indication that the bank is effective in regulating the country’s economy.

The economy of Oman is open and depends on oil. Based on the structure of the economy, developed financial markets, and a high level of openness, the CBO implements the fixed peg approach. This entails pegging the Oman rial against the US Dollar. The strategy of the CBO to peg home currency with the world’s strongest currency has led to positive outcomes. For example, Oman has created an environment for trade promotion, high level of investment and economic growth besides the establishment of an orderly monetary system in the country.

Financial Stability in Oman

The Banking Law of 1974 and precisely Article 1 (a) mandated the CBO to ensure Oman is financially stable. The financial system in the country is made up of Islamic and conventional banks, leasing and finance companies, investment companies, pension funds, insurance firms and money exchange entities. In 2012, Islamic Banking was authorized, and that was a significant move by the CBO since Oman huge population is Islamic. During the control of the financial institutions in the country, the CBO is also mandated to issue them with licenses as stipulated by the Banking Law. According to Article 5 of the law, banking refers to businesses that receive deposits, allows individuals to operate a current account, extend credit and allow for investments. Article 54 indicates that each application should be reviewed before the CBO allows the organization to perform the banking roles.

The CBO has established a regulatory framework, a primary goal of any central bank. The indicative regulatory approaches and principles that the CBO adopts include setting internationally accepted rules and wide prudential limitations instead of just focusing on micro-level prescription. The bank stresses moderation, risk management, prudence and consumer protection by all the financial organizations that are under its jurisdiction. The CBO maintains that the shareholding in a holding company should be 35 per cent of the bank’s capital while individuals should own 15 per cent or less. In addition, the bank ensures that any investor who has 10 per cent or more capital in a certain bank, he or she should not have more than 15 per cent in another bank.

The CBO also engages in establishing a supervisory framework in terms of on-site and off-site examination. Through the department of examination, on-site examination entails evaluating whether the banks operate in a safe atmosphere and minimum prudential requirements as stipulated by the CBO are followed. The off-site examination includes scrutinizing audited reports of licensed banks, evaluating strategies taken by banks in relation to risk management, liquidity, overseas exposure, and capital adequacy. Additionally, the CBO monitors the degree of Omanisation within the industry sector, compliance with lending ratio, the performance of banks’ branches, and monitoring mortgage and personal loans.

Management of Money Market Operations

Debt management is a critical aspect of any country. During the management of debts, two major instruments, including development bonds and treasury bills, are used. Given the significance of treasury bills especially in financing the daily recurrent expenditures of the Oman government, the CBO is mandated by the government to act as the manager, receiving and paying agent, and planning agent in reference to all issues of treasury bills. On its part, the CBO provides liquidity to other banks using repurchase facilities and discounting (Calabria, 2016). A competitive auction procedure is used by the government to issue treasury bills using the maturity duration of 28 days, 91 days and 182 days.

Reserve management is a crucial role of a central bank since it determines the value of the home currency in relation to foreign currencies. The CBO holds foreign assets using foreign currencies with the key objective of safeguarding the stability of Oman rial, providing necessary liquidity and assisting exchange rate policies. The CBO classifies the foreign reserves into three categories including bridge tranche that cautions the bank when the level of liquidity falls beyond certain levels, liquidity trance that is focused on meeting the liquidity demands of commercial banks and income tranche that aims at optimizing capital reservations and increase return on investments (Kimberly, 2020).

Streamlining of Payment Systems

The entire economic development in Oman has significantly relied upon the expansion of the National Payment System. In any developing economy, efficient and orderly functioning of payment systems makes significant contribution o economic and financial stability besides creating a platform to the performing activities related to monetary policy. This is based on the fact that payment systems that are well-managed provide avenues for efficient and effective transmission of funds in addition, cost effective payment of liabilities and claims.

The CBO is the regulator, owner and operator of the National Payment Systems. In this regard, the bank embarks on establishing the vital regulatory framework using a consultative approach to ensure various types of payment methods in Oman meet the needs of all segment of the markets and society. In many countries, a regulation must be implemented to ensure that payment systems are in line with the economic policies established by central banks. In Oman, the Royal Decree Number 114 of 2000 empowered the CBO to issue currencies and act as the clearinghouse of licensed banks. Likewise, the Royal Decree No 8 of 2018 expanded the responsibilities of the CBO to ensure that all payment systems are efficient, safe and effective. The bank was also required to have a supervisory authority, including supervising all payment systems and improving the integrity of the systems to avoid any possible risk that may compromise the financial stability of Oman.

Establishing and Enacting Laws and Regulations

The Banking Law of 1974 in Oman was revised by the Banking Law of 2000. The new law empowered the CBO to supervise the banking sector and ensuring that the domestic currency remains valuable. Recently, the amendments have expanded the activities of the Board of Governors. For example, the governors were required to act as per the requirements of supra-national organizations besides supervising and regulating Islamic Banking in the country. As a country that is dominated by the Islamic religion, it was seen as a prudent strategy to consider their investment needs by the Oman government. In December 2012, the Islamic Banking Regulatory Framework was adopted that allowed the activities of Islamic banking.

Conclusion

In Oman, the CBO plays very important roles in creating monetary policy, ensuring financial stability, money market management, controlling payment systems, and enacting laws and regulations in the banking sector. Monetary policies, including money supply and demand, can have adverse effects on Oman’s economy if they are poorly-managed. The CBO ensures that these policies are effective to achieve economic and financial stability in the country. Money market operations are important since they regulate the liquidity in any economy. In Oman, the CBO regulates these operations using government-owned bonds and treasury bills. As the regulator, owner and operator of the National Payment Systems, the CBO is responsible for ensuring all payment systems in Oman are effective and safe. The Banking Law of 2000, gave the CBO more powers in the supervision of the banking sector and ensure that the domestic currency remains valuable.

References

Calabria, A. (2016). Behavioral Economics and Fed Policymaking. Cato Journal. 36 (3): 53–87.

Central Bank of Oman. https://cbo.gov.om/Pages/AboutCBO.aspx

Devereux, B., & Engel, C. (2003). Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility. Review of Economic Studies. 70(4): 65–83.

Favaretto, F., & Masciandaro, D. (2016). Doves, hawks and pigeons: Behavioral monetary policy and interest rate inertia. Journal of Financial Stability. 27: 5–8.

Kimberly, A. (2020). Open Market Operations. Retrieved from https://www.thebalance.com/open-market-operations-3306121

A STUDY ON CENTRAL BANK OF OMAN

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