## 1. Underpinned by Vision 2040, Oman aims to reduce its economic reliance on the hydrocarbon

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---

### Overview and Purpose
- Oman’s reforms aim to develop a well-diversified, private-led, sustainable, and inclusive economy where innovation and knowledge play a more prominent role, under Vision 2040.
- A well-developed, inclusive, and stable financial sector is required to navigate the country’s transformation and fund the new economy.
- This note assesses the development of Oman’s financial sector, identifies areas for potential improvement, and proposes policy actions to foster further financial development and inclusion.

### Stylized Facts
- The Omani financial system is dominated by banks; the NBFI sector is still nascent and primarily represented by pension funds and some insurance companies.
- Credit to the private sector stood at 55.4 percent of GDP in 2022.
- Oman’s private credit ratio has been among the lowest in the GCC in the past 5 years and lags emerging markets (63 percent of GDP, on average).
- Recent consolidation of pension funds into one unified entity may scale up NBFIs and the size of their investments.
- Omani capital markets are comparatively small and illiquid; primary government bond market shows healthy activity but the secondary market is mostly inactive.
- Non-resident participation in local markets remains low due to illiquidity and regulatory barriers such as the absence of OTC trading and lack of a link with Euroclear.
- Oman’s financial development index rose from 0.36 to 0.38 since the 2010 FSAP.
- Structural challenges identified in the 2010 FSAP persist: low capital market liquidity, absence of a well-established yield curve, and barriers to SME funding.

### Challenges and Avenues for Development (High-Level Recommendations)
- Remove structural regulations that limit banking sector development, including, once the credit registry is fully developed to ensure adequate risk scoring, the interest rate cap on personal loans.
- Develop capital markets, particularly for debt and equity funding of larger corporations, to enable banks to re-allocate funding towards SMEs.
- Over the medium term, develop other capital market instruments such as exchange traded funds, derivatives, and futures contracts.

### A. Banking — Key Findings and Policy Directions

Findings:
- Banking activity is concentrated in 6 domestic banks and two Islamic banks; there are also 9 foreign banks which typically operate one branch.
- The largest bank, the only domestic systemically important bank (DSIB) as of now, accounts for about 40 percent of total banking assets.
- After the merger of Sohar International Bank and HSBC Oman, the newly merged bank is a potential candidate for being classified as second DSIB in the country.
- Since 2015, the share of loans in total assets rose from 66 percent to 75 percent while the share of securities remains low at about 13 percent due to a cap on government bond holdings.
- Omani banks have the highest share of loans relative to total assets in the GCC: 79 percent compared to a GCC average of 59 percent.
- Credit composition: corporate loans 46.7 percent, personal loans 32.1 percent, SOEs 14.3 percent.
- SOE loans have almost doubled since 2016, suggesting crowding-out of private sector credit.
- Correlation of credit growth with output growth over the past 5 years is weak; utilities saw much larger credit growth than output growth, while manufacturing, mining and quarrying, and agriculture saw credit provision lag output growth.
- Deposits account for two-thirds of total bank liabilities and 90 percent of non-equity funding.
- Domestic government and SOEs account for 33 percent of deposits, virtually unchanged since 2015.
- More than 90 percent of assets and 89 percent of liabilities are owned by residents; non-resident participation remains low.
- Banking sector concentration is moderate with the third largest concentration in the GCC; recent and potential mergers may increase concentration further.
- Net interest margins close to 3 percent, among the highest in the GCC.
- Profitability (RoA) ranks below Qatar, Saudi Arabia, and the United Arab Emirates.
- Elevated overhead costs and non-interest expenses weigh on profitability; cost-to-operating income ratios are elevated.

Policy directions:
- Achieve economies of scale while preserving competition amid potential consolidation.
- Accelerate digitalization to reduce overhead costs and improve efficiency.
- Once the credit registry is fully developed, consider removing the interest rate cap on personal loans to support banking sector development.

### B. Fixed Income Markets — Key Findings and Recommendations

Findings:
- Local currency government debt share is 26 percent, split between conventional bonds (government development bonds), sukuks, and some Treasury bills.
- Secondary market trading is very limited; total secondary bond market trading accounted for 1.1 percent of market capitalization over the entire year of 2022.
- In July 2023, total secondary bond market trading on the Muscat Stock Exchange amounted to OMR 18 million relative to a market capitalization of OMR 4.4 billion.
- The average bond or sukuk traded 18 times in 2022; 19 percent of bonds accounted for 90 percent of transaction volume; 22 out of 58 bonds did not trade at all.
- Irregular issuances, lack of benchmarks, absence of secondary market trading, and impediments to non-resident participation hold back domestic fixed income markets.
- The vast majority of corporate bond issuances are from financial sector firms.

Recommendations:
- Implement more regular and predictable issuances and develop money markets at the short end of the yield curve.
- Implement a medium-term debt management strategy.
- Broaden the investor base in the government bond market to mitigate crowding-out of domestic bank credit by including insurance groups, the new consolidated pension fund, and other sources of demand.
- Incentivize development of life insurance products and further expand labor force participation to broaden domestic investor base.
- Eliminate barriers to non-resident participation (e.g., requirement that all secondary market transactions must go through a broker rather than OTC) and facilitate integration to Euroclear.
- In the longer run, seek eligibility to widely tracked emerging market bond indices to attract passive investors.
- Establish a primary dealer system for the secondary market after completing preliminary steps recommended by recent MCM TA.

### C. Stock Market — Findings and Policy Directions

Findings:
- At end-2022, stock market capitalization stood at $22 billion (19.4 percent of GDP).
- Regional average stock market capitalization: 93.1 percent of GDP.
- New listing activity over the past decade has been subdued; most IPOs since 2010 ranged below OMR 60 million in volume.
- Large share of SOEs and closely held companies limits the number of listed firms.
- Stock market traded value as a share of GDP reached 2 percent in 2022, the lowest in the GCC, and has declined compared to 2015.
- Yearly traded volume continues to account for about 10 percent of market capitalization.
- Median bid-ask spread stood at 2.6 percent in 2022, down from 3.4 percent in 2018, but still significantly higher than bid-ask spreads for other emerging markets.

Policy directions:
- Plan listing of several state-owned enterprises to grow market size.
- Oman’s Capital Market Authority should seek to attract more non-resident participation.
- Satisfy criteria for inclusion in widely used emerging market equity indices to increase foreign inflows.
- Joint development of debt and equity markets to improve liquidity and depth, facilitating allocation between safe and riskier securities.
- Introduce further investment vehicles (e.g., exchange-traded funds, futures contracts) in the longer run.

### D. Corporate Financing — Findings and Implications

Findings:
- Publicly listed firms in manufacturing and energy have debt to assets ratio of 0.6.
- Share of long-term debt in total debt stands at about 20 percent, the lowest among the entire GCC.
- Credit growth about 7 percent (y-o-y) in the first half of 2023.
- Banks continue to miss the target of 5 percent of lending to SMEs; close to two-thirds of credit flows to personal loans, SOEs, or listed companies.
- SME lending as a fraction of total lending has declined for several institutions over past years.

Implications and recommendations:
- Continued development of local debt capital markets, including corporate bond market, could provide more long-term funding to non-financial corporations.
- Development of debt capital markets would free up bank credit for SMEs and firms without market access.

### E. Other Aspects — Financial Inclusion and Fintech

Financial inclusion findings:
- 75 percent of the population is banked.
- Oman’s share of banked population and credit card penetration range in the middle of the GCC; the GCC as a region lags countries of similar levels of development in financial inclusion (IMF, 2022a).
- Internet penetration is 97 percent.

Fintech (Box 1) — findings:
- Oman has a young population: 24 percent of the population are between 15 and 29 years old.
- High Internet and smartphone penetration create prerequisites for fintech development.
- The CBO’s Fintech Regulatory Sandbox launched in December 2020; three cohorts have started with focuses on digital wallets, blockchain technology for trade finance, and alternative financing methods.
- The next cohort in 2024 will work on open banking solutions.
- Industry figures report a total of 11 venture capital deals for a total volume of $3.5 million for Oman in 2022 relative to $907 million in Saudi Arabia, $36 million in Qatar, and $26 million in Jordan.

Fintech — recommendations:
- Dedicate a future sandbox cohort to SME financing solutions to foster innovation for underserved segments.
- Facilitate access to capital, set regulatory frameworks, and foster human capital (e.g., Fintech certificate in higher education).
- Develop more liquid equity markets with more IPOs to provide exit options to fintech founders and investors.
- Combine private initiatives and increased OIA funding for venture capital to grow Oman’s venture capital sector.
- Ensure adequate regulatory and supervisory frameworks to foster financial innovation while ensuring customer financial protection and safeguarding financial stability.

### III. Addressing Policy and Regulatory Gaps — International Practices (Introductory)
- The document proceeds to discuss international practices relevant to addressing policy and regulatory gaps (section heading indicates content follows).

---

### 21. Successful financial market development hinges on the right sequencing of reforms, while

### Financial market development: core findings and interdependencies
- Many emerging economies aim to transition from an initially bank-dominated financial system towards a multi-pronged one.
- The government bond market plays a foundational role by providing a risk-free asset and hence, a risk-free rate (Chami et al., 2010).
- Developing the yield curve of government bonds can serve as a steppingstone to develop a repo market and markets for asset-backed securities and covered bonds before developing commercial paper and corporate bond markets.
- Synergies and interdependencies across markets matter:
  - Development of the repo market increases demand for government bonds and can foster secondary market trading (BIS 2020).
  - Fostering venture capital and equity market trading can reinforce each other: venture capital is unlikely to scale without a well-developed IPO market, which in turn relies on liquid secondary equity markets.
- As capital markets grow, banks’ traditional lending business is likely to shrink; banks will need to evolve into activities such as securities underwriting, market making, and wealth management.
- Domestic bond markets and increased non-resident participation have been pivotal for financial market development in several EMs (examples cited: Malaysia, Mexico, Thailand; repo-market linkages in Hungary, Malaysia, Mexico, Thailand).
- More liquid, deeper, and less concentrated capital markets with a broader investor base have documented benefits including:
  - Lower sovereign yields (e.g., Colombia).
  - Greater total credit provision (e.g., Poland).
  - Diversification of bank lending towards SMEs (e.g., Malaysia).
- Monetary policy passthrough has strengthened in countries undergoing active financial market development, including Colombia, Indonesia, Korea, Mexico, and Thailand (BIS, 2020).
- Regulators and supervisors need to update frameworks as markets develop to mitigate financial stability risks, including vulnerabilities from increased non-resident participation.

### International best practices and SME financing (Box 2)
- Credit reporting and registries:
  - Introduction of a credit registry raises the likelihood that a firm has access to finance by 7 percentage points, leads to a 5-percentage-point drop in interest rates, and 7 months longer maturities (Martinez Peria and Singh, 2014).
  - Example: a Chilean credit bureau developed an SME credit score based on encrypted mobile data to supplement traditional credit databases (World Bank, 2018).
- Secured lending, factoring, and collateral registries:
  - Collateral registries with notice-based registration and online access provide unified information for lenders.
  - Example: In Mexico, Nacional Financiera provides factoring and reverse factoring services; interest rates for factoring services are capped at 7 percentage points above the bank rate (World Bank, 2018).
- FinTech solutions:
  - FinTech (e.g., equity-based crowdfunding, peer-to-peer lending, invoice lending) can enhance financial inclusion for firms without access to conventional banking (IMF, 2019).
  - Government can provide regulatory guardrails, but successful FinTech development hinges on private sector initiatives.
- Structural and macro prerequisites:
  - Policies facilitating SME access include macroeconomic stability, financial sector soundness, regulatory and supervisory capacity, competitive banking sector, and reduced public sector footprint (IMF, 2019).

### Oman-specific diagnosis and strategic priorities
- Oman’s Vision 2040 requires substantial financial market development to support funding needs of a diversified economy.
- Current characteristics of Oman’s financial system:
  - Centered around domestic banks.
  - Substantial government footprint.
  - Low liquidity.
  - Very limited SME funding.
- Successfully developing financial markets depends on structural financial sector reforms coordinated with government debt management.

### Sequencing of reforms: Phase 1 (near-term priorities)
Key actions:
- Continue development of local currency bond markets to improve market liquidity.
- Develop local currency government bond markets, with focus on secondary market trading to establish a benchmark yield curve.
- Deepen the market by developing the NBFI sector and facilitating non-resident participation.
- Remove regulatory hurdles such as the cap on government bond holdings.
- Introduce a market maker system.
- Develop the repo market alongside the government bond market to create additional demand for government bonds and invigorate secondary market trading.
- Consider adopting the Global Master Repurchase Agreement (GMRA) to standardize transactions and encourage private market repo activity not intermediated by the central bank.
- Ensure reform efforts are consistent with government debt management: adopt a medium-term debt management strategy and predictable issuances at benchmark maturities to facilitate participation.

### Sequencing of reforms: Phase 2 (after benchmark yield curve established)
Key actions:
- Develop markets for riskier securities, including corporate bond and equity markets.
- Introduce covered bonds or asset-backed securities as precursors to corporate bond market development.
- Promote broadening of the investor base to include domestic NBFIs and non-residents to avoid crowding out corporate credit.
- Leverage planned listings of several SOEs to increase secondary market activity and attract a broader investor base.
- Satisfy criteria for inclusion in widely used emerging market equity indices to attract greater non-resident participation.

### Banking sector and regulatory adjustments
- Debt capital markets development should enable banks to re-allocate lending towards SMEs.
- Consider relaxing or removing the current cap on government bond holdings; the cap currently applies to the gross stock of government bonds and is unlikely to be effective at mitigating crowding-out of private credit.
- Alternative targeting: caps could target net exposures (e.g., government bond holdings and loans to the government net of government deposits) or flows rather than stocks.
- Relaxation of the interest rate cap on personal loans would allow adequate risk pricing, maintain margins, and improve access to credit for private sector employees.
- Successful relaxation of the interest rate cap hinges on increased usage of the credit registry (Mala’a), currently being developed into a full-fledged credit bureau.
- Balance efficiency and cost gains from banking sector consolidation against rising market power and systemic risks.
- Adapt regulatory frameworks and increase monitoring of NBFIs and foreign investors as investor base broadens.
- Example of regulatory action: the recently issued framework for cybersecurity and resilience.

### Measures to improve SME access and deepen finance
- Facilitate factoring and secured lending to bridge information asymmetries and alleviate cash flow shortfalls for SMEs.
- Promote FinTech businesses to complement debt capital market development and reallocation of bank funding toward SMEs.
- Consider a well-designed SME credit guarantee scheme with the objective to provide third-party credit risk mitigation to lenders to stimulate debt financing to SMEs (IMF, 2022).
- Exploit synergies between different financial market development measures throughout implementation.

*Source: sipea2024019 (IMF Selected Issues chapter).*

### 1. Underpinned by Vision 2040, Oman aims to reduce its economic reliance on the hydrocarbon

### sipea2024019 - 1. Underpinned by Vision 2040, Oman aims to reduce its economic reliance on the hydrocarbon

### Overview and Purpose
- Oman’s reforms aim to develop a well-diversified, private-led, sustainable, and inclusive economy where innovation and knowledge play a more prominent role, under Vision 2040.
- A well-developed, inclusive, and stable financial sector is required to navigate the country’s transformation and fund the new economy.
- This note assesses the development of Oman’s financial sector, identifies areas for potential improvement, and proposes policy actions to foster further financial development and inclusion.

### Stylized Facts
- The Omani financial system is dominated by banks; the NBFI sector is still nascent and primarily represented by pension funds and some insurance companies.
- Credit to the private sector stood at 55.4 percent of GDP in 2022.
- Oman’s private credit ratio has been among the lowest in the GCC in the past 5 years and lags emerging markets (63 percent of GDP, on average).
- Recent consolidation of pension funds into one unified entity may scale up NBFIs and the size of their investments.
- Omani capital markets are comparatively small and illiquid; primary government bond market shows healthy activity but the secondary market is mostly inactive.
- Non-resident participation in local markets remains low due to illiquidity and regulatory barriers such as the absence of OTC trading and lack of a link with Euroclear.
- Oman’s financial development index rose from 0.36 to 0.38 since the 2010 FSAP.
- Structural challenges identified in the 2010 FSAP persist: low capital market liquidity, absence of a well-established yield curve, and barriers to SME funding.

### Challenges and Avenues for Development (High-Level Recommendations)
- Remove structural regulations that limit banking sector development, including, once the credit registry is fully developed to ensure adequate risk scoring, the interest rate cap on personal loans.
- Develop capital markets, particularly for debt and equity funding of larger corporations, to enable banks to re-allocate funding towards SMEs.
- Over the medium term, develop other capital market instruments such as exchange traded funds, derivatives, and futures contracts.

### A. Banking — Key Findings and Policy Directions
Findings:
- Banking activity is concentrated in 6 domestic banks and two Islamic banks; there are also 9 foreign banks which typically operate one branch.
- The largest bank, the only domestic systemically important bank (DSIB) as of now, accounts for about 40 percent of total banking assets.
- After the merger of Sohar International Bank and HSBC Oman, the newly merged bank is a potential candidate for being classified as second DSIB in the country.
- Since 2015, the share of loans in total assets rose from 66 percent to 75 percent while the share of securities remains low at about 13 percent due to a cap on government bond holdings.
- Omani banks have the highest share of loans relative to total assets in the GCC: 79 percent compared to a GCC average of 59 percent.
- Credit composition: corporate loans 46.7 percent, personal loans 32.1 percent, SOEs 14.3 percent.
- SOE loans have almost doubled since 2016, suggesting crowding-out of private sector credit.
- Correlation of credit growth with output growth over the past 5 years is weak; utilities saw much larger credit growth than output growth, while manufacturing, mining and quarrying, and agriculture saw credit provision lag output growth.
- Deposits account for two-thirds of total bank liabilities and 90 percent of non-equity funding.
- Domestic government and SOEs account for 33 percent of deposits, virtually unchanged since 2015.
- More than 90 percent of assets and 89 percent of liabilities are owned by residents; non-resident participation remains low.
- Banking sector concentration is moderate with the third largest concentration in the GCC; recent and potential mergers may increase concentration further.
- Net interest margins close to 3 percent, among the highest in the GCC.
- Profitability (RoA) ranks below Qatar, Saudi Arabia, and the United Arab Emirates.
- Elevated overhead costs and non-interest expenses weigh on profitability; cost-to-operating income ratios are elevated.

Policy directions:
- Achieve economies of scale while preserving competition amid potential consolidation.
- Accelerate digitalization to reduce overhead costs and improve efficiency.
- Once the credit registry is fully developed, consider removing the interest rate cap on personal loans to support banking sector development.

### B. Fixed Income Markets — Key Findings and Recommendations
Findings:
- Local currency government debt share is 26 percent, split between conventional bonds (government development bonds), sukuks, and some Treasury bills.
- Secondary market trading is very limited; total secondary bond market trading accounted for 1.1 percent of market capitalization over the entire year of 2022.
- In July 2023, total secondary bond market trading on the Muscat Stock Exchange amounted to OMR 18 million relative to a market capitalization of OMR 4.4 billion.
- The average bond or sukuk traded 18 times in 2022; 19 percent of bonds accounted for 90 percent of transaction volume; 22 out of 58 bonds did not trade at all.
- Irregular issuances, lack of benchmarks, absence of secondary market trading, and impediments to non-resident participation hold back domestic fixed income markets.
- The vast majority of corporate bond issuances are from financial sector firms.

Recommendations:
- Implement more regular and predictable issuances and develop money markets at the short end of the yield curve.
- Implement a medium-term debt management strategy.
- Broaden the investor base in the government bond market to mitigate crowding-out of domestic bank credit by including insurance groups, the new consolidated pension fund, and other sources of demand.
- Incentivize development of life insurance products and further expand labor force participation to broaden domestic investor base.
- Eliminate barriers to non-resident participation (e.g., requirement that all secondary market transactions must go through a broker rather than OTC) and facilitate integration to Euroclear.
- In the longer run, seek eligibility to widely tracked emerging market bond indices to attract passive investors.
- Establish a primary dealer system for the secondary market after completing preliminary steps recommended by recent MCM TA.

### C. Stock Market — Findings and Policy Directions
Findings:
- At end-2022, stock market capitalization stood at $22 billion (19.4 percent of GDP).
- Regional average stock market capitalization: 93.1 percent of GDP.
- New listing activity over the past decade has been subdued; most IPOs since 2010 ranged below OMR 60 million in volume.
- Large share of SOEs and closely held companies limits the number of listed firms.
- Stock market traded value as a share of GDP reached 2 percent in 2022, the lowest in the GCC, and has declined compared to 2015.
- Yearly traded volume continues to account for about 10 percent of market capitalization.
- Median bid-ask spread stood at 2.6 percent in 2022, down from 3.4 percent in 2018, but still significantly higher than bid-ask spreads for other emerging markets.

Policy directions:
- Plan listing of several state-owned enterprises to grow market size.
- Oman’s Capital Market Authority should seek to attract more non-resident participation.
- Satisfy criteria for inclusion in widely used emerging market equity indices to increase foreign inflows.
- Joint development of debt and equity markets to improve liquidity and depth, facilitating allocation between safe and riskier securities.
- Introduce further investment vehicles (e.g., exchange-traded funds, futures contracts) in the longer run.

### D. Corporate Financing — Findings and Implications
Findings:
- Publicly listed firms in manufacturing and energy have debt to assets ratio of 0.6.
- Share of long-term debt in total debt stands at about 20 percent, the lowest among the entire GCC.
- Credit growth about 7 percent (y-o-y) in the first half of 2023.
- Banks continue to miss the target of 5 percent of lending to SMEs; close to two-thirds of credit flows to personal loans, SOEs, or listed companies.
- SME lending as a fraction of total lending has declined for several institutions over past years.

Implications and recommendations:
- Continued development of local debt capital markets, including corporate bond market, could provide more long-term funding to non-financial corporations.
- Development of debt capital markets would free up bank credit for SMEs and firms without market access.

### E. Other Aspects — Financial Inclusion and Fintech
Financial inclusion findings:
- 75 percent of the population is banked.
- Oman’s share of banked population and credit card penetration range in the middle of the GCC; the GCC as a region lags countries of similar levels of development in financial inclusion (IMF, 2022a).
- Internet penetration is 97 percent.

Fintech (Box 1) — findings:
- Oman has a young population: 24 percent of the population are between 15 and 29 years old.
- High Internet and smartphone penetration create prerequisites for fintech development.
- The CBO’s Fintech Regulatory Sandbox launched in December 2020; three cohorts have started with focuses on digital wallets, blockchain technology for trade finance, and alternative financing methods.
- The next cohort in 2024 will work on open banking solutions.
- Industry figures report a total of 11 venture capital deals for a total volume of $3.5 million for Oman in 2022 relative to $907 million in Saudi Arabia, $36 million in Qatar, and $26 million in Jordan.

Fintech — recommendations:
- Dedicate a future sandbox cohort to SME financing solutions to foster innovation for underserved segments.
- Facilitate access to capital, set regulatory frameworks, and foster human capital (e.g., Fintech certificate in higher education).
- Develop more liquid equity markets with more IPOs to provide exit options to fintech founders and investors.
- Combine private initiatives and increased OIA funding for venture capital to grow Oman’s venture capital sector.
- Ensure adequate regulatory and supervisory frameworks to foster financial innovation while ensuring customer financial protection and safeguarding financial stability.

### III. Addressing Policy and Regulatory Gaps — International Practices (Introductory)
- The document proceeds to discuss international practices relevant to addressing policy and regulatory gaps (section heading indicates content follows).

*Source: IMF selected issues paper excerpt provided in the content unit.*

### 21. Successful financial market development hinges on the right sequencing of reforms, while

### sipea2024019 - 21. Successful financial market development hinges on the right sequencing of reforms, while

### Financial market development: core findings and interdependencies
- Many emerging economies aim to transition from an initially bank-dominated financial system towards a multi-pronged one.
- The government bond market plays a foundational role by providing a risk-free asset and hence, a risk-free rate (Chami et al., 2010).
- Developing the yield curve of government bonds can serve as a steppingstone to develop a repo market and markets for asset-backed securities and covered bonds before developing commercial paper and corporate bond markets.
- Synergies and interdependencies across markets matter:
  - Development of the repo market increases demand for government bonds and can foster secondary market trading (BIS 2020).
  - Fostering venture capital and equity market trading can reinforce each other: venture capital is unlikely to scale without a well-developed IPO market, which in turn relies on liquid secondary equity markets.
- As capital markets grow, banks’ traditional lending business is likely to shrink; banks will need to evolve into activities such as securities underwriting, market making, and wealth management.
- Domestic bond markets and increased non-resident participation have been pivotal for financial market development in several EMs (examples cited: Malaysia, Mexico, Thailand; repo-market linkages in Hungary, Malaysia, Mexico, Thailand).
- More liquid, deeper, and less concentrated capital markets with a broader investor base have documented benefits including:
  - Lower sovereign yields (e.g., Colombia).
  - Greater total credit provision (e.g., Poland).
  - Diversification of bank lending towards SMEs (e.g., Malaysia).
- Monetary policy passthrough has strengthened in countries undergoing active financial market development, including Colombia, Indonesia, Korea, Mexico, and Thailand (BIS, 2020).
- Regulators and supervisors need to update frameworks as markets develop to mitigate financial stability risks, including vulnerabilities from increased non-resident participation.

### International best practices and SME financing (Box 2)
- Credit reporting and registries:
  - Introduction of a credit registry raises the likelihood that a firm has access to finance by 7 percentage points, leads to a 5-percentage-point drop in interest rates, and 7 months longer maturities (Martinez Peria and Singh, 2014).
  - Example: a Chilean credit bureau developed an SME credit score based on encrypted mobile data to supplement traditional credit databases (World Bank, 2018).
- Secured lending, factoring, and collateral registries:
  - Collateral registries with notice-based registration and online access provide unified information for lenders.
  - Example: In Mexico, Nacional Financiera provides factoring and reverse factoring services; interest rates for factoring services are capped at 7 percentage points above the bank rate (World Bank, 2018).
- FinTech solutions:
  - FinTech (e.g., equity-based crowdfunding, peer-to-peer lending, invoice lending) can enhance financial inclusion for firms without access to conventional banking (IMF, 2019).
  - Government can provide regulatory guardrails, but successful FinTech development hinges on private sector initiatives.
- Structural and macro prerequisites:
  - Policies facilitating SME access include macroeconomic stability, financial sector soundness, regulatory and supervisory capacity, competitive banking sector, and reduced public sector footprint (IMF, 2019).

### Oman-specific diagnosis and strategic priorities
- Oman’s Vision 2040 requires substantial financial market development to support funding needs of a diversified economy.
- Current characteristics of Oman’s financial system:
  - Centered around domestic banks.
  - Substantial government footprint.
  - Low liquidity.
  - Very limited SME funding.
- Successfully developing financial markets depends on structural financial sector reforms coordinated with government debt management.

### Sequencing of reforms: Phase 1 (near-term priorities)
- Continue development of local currency bond markets to improve market liquidity.
- Key actions:
  - Develop local currency government bond markets, with focus on secondary market trading to establish a benchmark yield curve.
  - Deepen the market by developing the NBFI sector and facilitating non-resident participation.
  - Remove regulatory hurdles such as the cap on government bond holdings.
  - Introduce a market maker system.
  - Develop the repo market alongside the government bond market to create additional demand for government bonds and invigorate secondary market trading.
  - Consider adopting the Global Master Repurchase Agreement (GMRA) to standardize transactions and encourage private market repo activity not intermediated by the central bank.
  - Ensure reform efforts are consistent with government debt management: adopt a medium-term debt management strategy and predictable issuances at benchmark maturities to facilitate participation.

### Sequencing of reforms: Phase 2 (after benchmark yield curve established)
- Develop markets for riskier securities, including corporate bond and equity markets.
- Key actions:
  - Introduce covered bonds or asset-backed securities as precursors to corporate bond market development.
  - Promote broadening of the investor base to include domestic NBFIs and non-residents to avoid crowding out corporate credit.
  - Leverage planned listings of several SOEs to increase secondary market activity and attract a broader investor base.
  - Satisfy criteria for inclusion in widely used emerging market equity indices to attract greater non-resident participation.

### Banking sector and regulatory adjustments
- Banking sector evolution:
  - Debt capital markets development should enable banks to re-allocate lending towards SMEs.
  - Consider relaxing or removing the current cap on government bond holdings; the cap currently applies to the gross stock of government bonds and is unlikely to be effective at mitigating crowding-out of private credit.
  - Alternative targeting: caps could target net exposures (e.g., government bond holdings and loans to the government net of government deposits) or flows rather than stocks.
  - Relaxation of the interest rate cap on personal loans would allow adequate risk pricing, maintain margins, and improve access to credit for private sector employees.
  - Successful relaxation of the interest rate cap hinges on increased usage of the credit registry (Mala’a), currently being developed into a full-fledged credit bureau.
  - Balance efficiency and cost gains from banking sector consolidation against rising market power and systemic risks.
- Regulatory and supervisory updates:
  - Adapt regulatory frameworks and increase monitoring of NBFIs and foreign investors as investor base broadens.
  - Example of regulatory action: the recently issued framework for cybersecurity and resilience.

### Measures to improve SME access and deepen finance
- Facilitate factoring and secured lending to bridge information asymmetries and alleviate cash flow shortfalls for SMEs.
- Promote FinTech businesses to complement debt capital market development and reallocation of bank funding toward SMEs.
- Consider a well-designed SME credit guarantee scheme with the objective to provide third-party credit risk mitigation to lenders to stimulate debt financing to SMEs (IMF, 2022).
- Exploit synergies between different financial market development measures throughout implementation.

*Source: sipea2024019 (IMF Selected Issues chapter).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024019.pdf_