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MENAFN - Oxford Business Group - 23/09/2008

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(MENAFN - Oxford Business Group) As Oman's vibrant economy continues to surge due to sustained high oil prices and a concerted effort by the government to invest its fiscal surpluses in capital formation, finance and leasing companies (FLCs) operating in the sultanate are experiencing an unprecedented boom.

According to the most recent figures from the Central Bank of Oman (CBO), the total combined assets of the country's FLCs surged from OR277.6m in 2006 to OR413.8m in 2007, constituting a rise of 49.1%. Similarly, net profits went from OR8.61m to OR13.13m during the same period, reflecting an increase of 52.5%.

The six FLCs currently under licence of the CBO are Muscat Finance Co., National Finance Co., Oman Orix Leasing Co., Al Omaniya Financial Services, United Finance Co. and Taageer Finance Co. They are permitted to operate in three market segments, namely, retail financing for individual customers for the purchase of automobiles; equipment leasing for small and medium sized enterprises (SMEs) for expansion and replacement requirements; and factoring and working capital for SMEs for cross-border or domestic trade.

According to Sanjeev Kumar Chadha, CEO of Taageer Finance Co., the various infrastructure projects currently under implementation by the government and private sector will result in even greater opportunities for the country's FLCs.

"The continued push for economic diversification by the government through the development of infrastructure, manufacturing, tourism, commercial and residential projects will expand the need for credit from FLCs, not to mention the tremendous increase in automobile purchases that the sultanate is witnessing," he told OBG on September 8.

As FLCs do not have the advantage of scale that banks do, they have carved out a niche for themselves, particularly in the SME segment, where they are better able to compete.

Robert Pancras, CEO of National Finance Co., told OBG, "the way the financial sector is structured in Oman, the large infrastructure projects are primarily financed by international and local banks. The SME segment, which is both large and arguably growing faster than the corporate sector, is mainly financed by FLCs."

He added, "Finance companies occupy a niche in the marketplace which is very much between banks and informal finance. I don't foresee banks coming in and competing in our SME space."

According to Raghavan K. Murthi, CEO of United Finance Co. - the sultanate's largest FLC with OR23.345m in paid-up capital and a 28% market share - the banking approach toward financing SMEs is different from that of FLCs.

"The banks look at a borrower's ability to repay a loan; FLCs look at the economics of the assets. ... For example, we would look at what a 100-tonne crane can produce in terms of economic value. So we are operating on a different model from the banks," Murthi told OBG.

The CBO has recognised the value FLCs play in supporting a growing SME market and has mandated the companies to raise their minimum paid-up capital to OR10m by the end of June 2009 and to OR20m by the end of June 2011.

"The government is pouring money into infrastructure projects and the CBO is empowering FLCs to exploit the potential in the market by increasing our equity," said Murthi.

Despite predicted growth for Oman's FLCs over the coming years, there are concerns that need to be addressed and risks that need to be mitigated.

Chadha conceded that credit risks are inherent in any lending businesses, as well as interest rate and liquidity risks. "Interest rate volatility arising from duration mismatches between interest rate-sensitive assets and liabilities are always a concern, but we try to offset this by incorporating an interest rate variation clause in our lending instruments. We also try to mitigate the liquidity risk arising from the inability of a company to meet its liabilities when they fall due by diversifying our source of funds and the tenure of funds borrowed," he told OBG.

Other inherent risks to the FLC sector are economic, such as inflation, policy risks related to changes in business regulations and natural calamities.

Nevertheless, the outlook for Oman's FLCs remains strong.

"FLCs are currently in a sweet spot, as we are servicing that part of the economy which is growing faster than the overall economy. I do expect that this growth will be sustained for at least the next three years," said Pancras.


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