MONEY BANKING AND RISK

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The monetary and financial system of the Central Bank of Oman (CBO)

The Central Bank of Oman was legally established under the law and adopted sound regulations and licensing policies to provide stable and reliable monetary and financial stability that contribute to the economic growth and reputation of the Sultanate. The Central Bank of Oman studies macroeconomics, including sectoral dynamics that relate to the organization’s financial soundness indicators to establish the linkage and, more importantly, design suitable models for economic systems’ behaviours. The monetary approach undertaken by the Central Bank of Oman undergoes reviews necessary for improvement where crucial requirements are set or reset depending on the changes in the needs. The Oman financial system entails both conventional and Islamic banks, finance and leasing institutions, brokerage companies, pension funds, and insurance institutions (Central Bank of Oman, 2016).

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Entities of institutions that fall under the Central Bank of Oman jurisdiction include banks, leasing companies, finance, and money exchange companies licensed by the Central Bank of Oman. According to the Central Bank of Oman (2016), by December 2016, the banking system segment consisted of seven local commercial banks and nine other foreign banks. There are two specialized banks with four hundred and seventy branches locally and five branches overseas, six finance and leasing institutions with forty-three branches. Sixteen funds exchange establishments consist of three hundred and seventeen branches and thirty-six money changers dealing with only changing money (Central Bank of Oman, 2016). Central Bank of Oman began licensing the Islamic Banking entity since its authorization in 2012 to carry out Islamic Banking on dedicated terms. Since then, there has been an establishment of two local Islamic Banks while also having six Islamic Banking windows of six local commercial banks, all of which are dedicated Islamic banking enterprises

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Importance of financial market for the country

According to the Bank of England, financial markets exist to bring people together so that funds can flow to places where it is needed the most. That is, the financial market matches buyers and sellers to set prices for financial assets (Bank of England, nd). Financial markets are essential to the country because they allow people to invest money in shares to build for the future. When correctly done, financial markets over a long time provide better returns for the investors than opening a savings account. Secondly, financial markets are important because they help in the determination of prices. The prices of assets in an economy are determined by the assets’ demands and supply in a financial market (Mosteanu, 2017). Here, the investors are the suppliers of funds, while the industries require these funds. Therefore, the interactions between the two players and other market forces help to determine the prices of assets in the economy.  

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Thirdly, financial markets help to mobilize savings. The financial market makes it possible for banks to borrow funds, allowing them to make loans to individuals and institutions that wish to borrow (Bank of England, nd). The borrowed money may inform students’ loans needed for attending universities or even buying hoses with mortgage loans—the financial market helps connect those with money to those who need money. Also, financial markets help to ensure liquidity. The assets that traders trade contribute to high liquidity. This means that the investors can easily convert their assets to cash by selling their assets if need be. Liquidity is essential for people to participate in trade (Mosteanu, 2017).

Growth of investments in securities in the financial market

The annual growth of 4.4 percent in the total credit disbursement of the conventional banks in 2019 is attributed to the development of market relations closely related to the formation of a financial market, which is an attractive option to bank deposits investing savings. The Oman income tax laws allow for providing a uniform tax rate of twelve percent for all business institutions. This is irrespective of the business’s taxable income, the company’s nature, or its shareholders’ nationality. According to (Boldyreva et al., 2019), Oman laws on tax provide for five years of tax exemption, which under certain conditions can be extended by a further five years (Salnazaryan & Aramyan, 2017). This tax exemption allows businesses to borrow large amounts of funds from both conventional and private sectors to invest in their companies. The borrowers use the funds to buy shares, stocks, bonds, and treasury bills.

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As a result of increased funds in the economy, traders’ investments with conventional banks increased by 4.7 percent in 2019. The government deposits with the traditional banks increased by 10.3 percent, and deposits from pubic enterprises registered an increase of 23.8 percent during the same time. Traders’ sale of their shares, stocks, and bonds provided them with massive resources and liquid money to invest in the conventional banking system. The traditional banking system provided a savers system to deposit their money for the borrowers to access them. This system ensured that there is an adequate transformation of mobilized funds into productive capital. 

How does investment improve economic growth?

Generally, investment impacts economic growth as it is a component of aggregate demand and more so because it influences the economy’s productive capacity in question (Pauceanu, 2016). Thus an increase in assets investment qualifies as a boost to the nation’s economic growth. By investment, we mean expenditure on capital spending, including building factories or purchasing machines to assist in automation. But does not mean saving funds in the bank. Since investments are aggregate demand, an increase in investments boosts the nation’s economic growth. The Sultanate economic growth has experienced an upward trajectory in its development due to the government’s external assets in its State General Reserve Fund (Pauceanu, 2016). Oman’s colossal wealth funds also provide the required buffer in the economy of the nation. The Sultanate has also adopted significant reforms that address the issues of commercial laws and licensing approaches. For example, Oman’s vision of 2040 focuses on the fiscal sustainability of the rule of law and governance.

More efforts to strengthen Oman’s business environment by engaging in reducing obstacles to foreign investments that foster competition between businesses both locally and internationally and easing trade barriers through tax exemptions have helped strengthen external competitiveness (Buckley & Rynhart, 2014). The tax exemption has attracted many local and foreign investors who engage in trade activity in the Sultanate nation, increasing its investments. Over the last couple of years, the Sultanate government has been committed to developing non-oil sectors. To diversify the economy, the government started projects such as Salalah Port Expansion and the Khazaen Economic City project (Pauceanu, 2016). The government plan to facilitate diversification of economic activities in Oman leads to the establishment of several facilities tasked with manufacturing pharmaceuticals and steel. 

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During the past period, some economic-related projects have been implemented by either the government or private sectors. For example, the tourism sector witnessed the Madinat Irfan City project’s development that has received some positive commencement. All these investment projects rely on both public and private sectors providing financial assistance while also taking the necessary steps to ensure the improvement of business environments and provide the support that facilitates these economic sectors’ development. 

Roles and functions of conventional banks in managing primary business risks arising from the financial market

Liquidity risks. The primary role of any financial entity is to provide liquidity to the economy while also allowing for an improved level of various economic activities (McDonald, 2017). According to MacDonald, conventional banks accomplish this function by issuing credit to traders and other institutions, managing markets, and pooling risks among customers. Banks and any other financial institutions’ most crucial risks include credit, needs, operational and liquidity risks. As a result of all these risks associated with banks, financial institutions have designed a well-thought risk management plan designed to follow all the government requirements and regulations.  By understanding these risks, banks set better, functional, and reliable rules informing their decision-making and management. The ability of financial institutions to manage risks has a direct implication on the decisions of investors. A Muscat review of the conventional banks’ activities indicated a massive growth in total credit disbursement- 4.4 percent in 2019. This shows that the government has provided financial liquidity to the traders while also providing them with a favourable business environment that facilitates their complete involvement in business activities both locally and internationally. 

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The saving function. Generally, even if the banks can provide huge revenue without the proper risk management infrastructures in position, institutions will experience lower profits on loans (McDonald, 2017). The most valuable investors will invest in banks that are more likely to guarantee gains on investments and cannot lose funds. The stocks and bonds sold on the financial market by these banks provide a more profitable and low risks approach for savings. The State Bank of Oman and other similar financial institutions, including Islamic Banking, acquire financial assets to forgo their consumption to increase and improve their consumption in the future. This kind of flow from financial markets to investments helps the economy increase its production, hence improving the people’s living standards in the process. 

Capital Controls. These are defined as measures that the government put in place to manage the cash flow of foreign currency in and out of the Sultanate nation in this case. These control measures or incentives can range from taxes and applications of limitations or even prohibition of certain financial transactions in various extreme financial situations. All banks in Oman carry out widespread international banking that is subject to explicit banking. The banking laws and regulations facilitate authorization, giving directions, and overseeing Islamic Banking; there are a few other laws designed to combat money laundering ( ). These laws are designed based on practices of industry practices and universally certified principles. These directions and guidelines are regularly reviewed and refreshed based on needs and models that include reasonable economic and financial practices instead of encouraging certain differentiated developments. 

Financial institutions in Oman combat operational risks. These are losses resulting from errors, damages caused by individuals, processes, systems, or interruptions. Errors that may occur due to human mistakes include fraud or mistakes that mostly happen during business transactions. For example, a bank teller can give a $ 100 bill to a customer by mistake. In a more severe and delicate scenario, fraud may occur where the banks’ cyber-securities are breached, and hackers get an opportunity to steal customers’ bank and personal information that aid in their quest to steal their money from their bank accounts. They even blackmail the institutions to extort more money from them, leading to customers losing trust in these financial institutions. 

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Conclusion

The Central Bank of Oman was legally established under the law and adopted sound regulations and licensing policies to provide stable and reliable monetary and financial stability that contribute to the economic growth and reputation of the Sultanate. Entities of institutions that fall under the Central Bank of Oman jurisdiction include banks, leasing companies, finance, and money exchange companies licensed by the Central Bank of Oman. These financial institutions’ importance has matching sellers with buyers to set prices for various assets while also providing individuals with an opportunity to invest their money in shares. Financial markets also help in the mobilization of savings. Investment impacts the economic growth of a country as it is a component of aggregate demand and influences the productive capacity of the economy. The tourism sector witnessed the development of the Madinat Irfan City project that has received some positive commencement. All these investment projects rely on both public and private sectors providing financial assistance while also taking the necessary steps to ensure the improvement of business environments and provide the support that facilitates these economic sectors’ development. As discussed above, the roles and functions of conventional banks include liquidity risk, market risk, operational risk, and derivative risk. As a result of all these risks associated with banks, financial institutions have designed a well-thought risk management plan designed to follow all the government requirements and regulations. 

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References

Abel, S. 2020. Revisiting Rationale for Increased Bank Deposits. Viewed [online] at https://www.herald.co.zw/revisiting-rationale-for-increased-bank-deposits/ on 15/11/2020.

Bank of England (nd). What are Financial Markets and why are they Important? Viewed [online] at https://www.bankofengland.co.uk/knowledgebank/what-are-financial-markets-and-why-are-they-important on 15/11/2020.

Boldyreva, N., Reshetnikova, L & Cheymetova, V. 2019. Personal Financial Investment: Leading trnds and Growth Factors. Conference Proceeding of the 3rd International Conference on Social, Economic and Academic Leadership. Viewed [online] at https://www.researchgate.net/publication/333572302_Personal_financial_investments_leading_trends_and_growth_factors on 15/11/2020.

Buckley, G & Ryanhart, G. 2011. The Sultanate of Oman, the Enabling Environment for Sustainable Enterprises: An “EESE” Assessment. Employment Report No. 4. Viewed [online] at http://ilo.org/wcmsp5/groups/public/—ed_emp/—emp_ent/—ifp_seed/documents/publication/wcms_167007.pdf on 15/11/2020.

Central Bank of Oman 2016. Oman’s Financial Systems. Viewed [online] at https://cbo.gov.om/Pages/OmanFinancialSystem.aspx on 15/11/2020.

MacDonald, D. 2017. What is the Role of the Financial Institution in an Economy? Viewed [online] at https://globalmillennial.org/2017/06/14/role-of-financial-institutions/ on 15/11/2020.

Munteanu, R. N. 2017. The Influence of Financial Markets on Countries’ Economic Life. Viewed [online] at https://www.davidpublisher.org/Public/uploads/Contribute/58a267c3dcac3.pdf on 15/11/2020.

Pauceanu, M. A. 2016. Foreign Investment Promotion Analysis in Sultanate of Oman: The Case of Dhofar Governorate. International Journal of Economics and Financial Issues, pp. 392-401. Viewed [online] at https://www.researchgate.net/publication/306177685_Foreign_Investment_Promotion_Analysis_in_Sultanate_of_Oman_The_Case_of_Dhofar_Governorate on 15/11/2020.

Salnazaryan, A & Aramyan, H. 2017. Evolving Importance of Securities Market to ensure Economic Growth: Evidence from Amenia. Scientific Annals of Economics and Business, pp. 473-485. Viewed [online] at https://www.researchgate.net/publication/322264917_Evolving_Importance_of_Securities_Market_to_Ensure_Economic_Growth_Evidence_from_Armenia on 15/11/2020.

STA Law Firm 2019. Overview: Omani Banking Regulations. Viewed [online] at https://www.mondaq.com/financial-services/865294/omani-banking-regulations on 15/11/2020.

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