Published: 23/08/2017 12:00 pm
Economic issues due to low oil prices and declining car sales had an adverse impact on non-banking financial companies, which was reflected in their net profit growth in 2016. Going forward there will be higher stress on the NBFCs to sustain the earnings and profitability
Last year proved to be one of the most difficult years for non-banking finance companies (NBFC) in Oman as depressed economic sentiments due to a prolonged softness in global crude prices and ever increasing competition from banks squeezed margins in the lending business and put tremendous pressure on them.
The year was also important as the market talks of mergers and acquisition dominated the sector the whole year but nothing concrete happened and talks failed in the end. Last year,
Bank Nizwa announced its intention to acquire United Finance Company. Later Al Omaniya Financial Services also jumped in the competition after which Alizz Islamic Bank also joined the bandwagon. The suspense continued for some months but later the deal fell apart and gradually everybody backed out.
Central Bank of Oman (CBO), in its annual report, revealed that during 2016 the total assets of FLCs (also known as NBFCs) rose by 4.8 per cent or RO49.3mn to reach 1,086.7mn as against RO 1,037.4mn in the previous year.
According to CBO, the total non-performing loans (NPL) at the end of 2016 constituted 5.4 per cent of the gross loan portfolio of NBFCs. The profitability of NBFCs after making provisions and taxes dropped slightly to RO31.3mn in 2016 compared to RO32mn in 2015. The weighted average rate of interest charged on lending by them also witnessed a marginal drop to 8.8 per cent per annum during 2016 compared to 8.9 per cent during the previous year
Declining car sales gave the biggest shock to NBFCs as vehicle finance accounts for a lion's share in their overall earnings. Due to this, most companies operating in the segment has reported a decline in net profit growth. The highest decline was reported by Al Omaniya Financial Services, whose net profit fell by over 20 per cent followed by United Finance, which declined by 14.04 per cent. Muscat Finance is the only company that has reported higher growth in net profit in 2016 compared to the previous year.
Another important development in 2016 was the rapid growth witnessed by almost all companies in their non performing loans. Highest growth in non-performing loan was reported by Oman Orix Leasing as its stressed assets grew by whooping 87.2 per cent to RO11.24mn in 2016 compared RO9.950mn in the previous year.
In terms of sheer size, Muscat Finance has the biggest NPL at RO15.68mn, followed by United Finance at RO11.56mn. According to industrycaptains, the sharp increase in NPAs happened due to a combination of various factors. They said the sector has witnessed a challenging year as the tightening of liquidity in the market has raised the cost of short-term funding for financial institutions and also raised the fears about steep hike in interest rates amidst prevailing depressed business sentiments. Against the backdrop of the challenging economic situation, the sector is facing a herculean task in maintaining abundant liquidity and a healthy asset quality.
Most believe that going forward in 2017, there will be higher stress on the NBFCs to sustain the earnings and profitability with the increase in non-performing assets, shortage of talent and increase in staffing costs. Companies with a sustainable business model with an emphasis on higher efficiency, risk diversification, prudence and innovation will succeed in the long run.