## 3.   Efforts are ongoing to develop the local currency bond market, supported by Fund technical

## Source details

**Canonical URL:** [3.   Efforts are ongoing to develop the local currency bond market, supported by Fund technical](https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025033.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025033.pdf.md)
- [Structured JSON version](/-/media/files/publications/selected-issues-papers/2025/english/sipea2025033.pdf.json)

---

### Development of local currency bond and money markets
- Reinvigorating money markets is a preliminary step; the Central Bank of Oman (CBO) is looking to reintroduce short-term certificates of deposit to improve liquidity management and strengthen liquidity forecasting.
- Initiatives underway to enhance local debt market liquidity:
  - Developing a primary dealer system to improve price discovery and market communication.
  - Establishing a more regular auction schedule.
- Financial market infrastructure and legal and regulatory frameworks for government securities are assessed as closer to later stages of development following the issuance of the new Public Debt Law with provisions on governance arrangements, investor relations, liquidity management operations, and Medium-Term Debt Management Strategy preparation.
- International precedents: money- and repo-market development (for example, Hungary, Malaysia, Mexico, Thailand) used to initiate more secondary market trading in government securities; specific policy actions include adopting the standards of the General Master Repurchase Agreement and fostering repo market activity in private markets.

### Islamic finance and sukuk market
- Sukuk outstanding reached about $8 billion as of year-end 2023 (67 percent sovereign, 33 percent corporates).
- Overall bond issuance in Oman fell year-over-year in 2023 as the government used its budget surplus to pay down debt, while sukuk issuance expanded.
- Structure of Islamic finance industry (end of 2023):
  - Islamic Banking: 66%
  - Sukuk: 32%
  - Takaful: 2%
  - $28 Billion Outstanding (figure context)
- Regulatory and market-deepening actions:
  - Financial Sector Authority (FSA) and CBO amendments aim to improve transparency and liquidity.
  - FSA’s new Sukuk and Bond Regulation requires issuers to submit a report every year proving compatibility of the sukuk with the provisions of Islamic sharia, starting from the sukuk issuance date.
  - CBO is developing Sharia-compliant liquidity tools, including Islamic certificates of deposit and treasury bills.
- Challenges:
  - Islamic finance industry remains small relative to other GCC countries; issuance of sukuk instruments remains sporadic.
  - Illiquid secondary markets discourage participation; many Islamic banks hold sukuk to maturity rather than trade them.
  - Recommendations: improve predictability of sukuk auctions and establish Islamic-focused market makers (as in Saudi Arabia and United Arab Emirates).

### Equity market development and Capital Markets Incentives Program (CMIP)
- FSA announced the Capital Markets Incentives Program (CMIP) to attract private companies to list on the Muscat Stock Exchange (MSX) under the "Estidamah" financial sector development agenda.
- CMIP listing pathways:
  - Pathway (i): large private and family-owned companies, and limited-liability companies, form a new public joint stock company and list on the main MSX market.
  - Pathway (ii): startup companies and SMEs list on the Promising Companies Market (MSX-AIM).
  - A third pathway (smaller incentive package valid for 2 years) promotes conversion of a limited liability company to a public joint stock company.
- Incentives for participating companies: tax refunds and waivers, fee exemptions, preferred pricing and fast-tracked financing on certain projects for up to three to five years.
- Additional market-deepening measures authorized: establish a broader set of market makers, introduce short selling, margin financing, and securities lending and borrowing to improve market efficiency.
- Cautionary note on tax incentives:
  - Tax incentives to issuers are less common in other jurisdictions; overly generous tax breaks can attract ill-prepared companies and create fiscal risks.
  - Example: Jamaica’s experience with a five-year total corporate tax holiday followed by a reduced package and subsequent policy controversy.
- Complementary policy tools that have succeeded elsewhere:
  - Reduced listing and IPO preparation fees (Poland and Spain).
  - Training to build internal capacity on regular reporting requirements (India, France, U.K., and South Korea).
  - Saudi Arabia’s Nomu parallel equity market: lowering requirement for total number of public shareholders, intraday price change limits, and an independent research provider improved liquidity.

### Access for foreign investors and SOE reforms
- Initiative to link Muscat Clearing and Depository Company with Euroclear Bank to allow foreign investors to access Omani securities and broaden the investor pool; Phase 1 of this link is already operational and allows Omani investor access to international securities markets.
- Progress on SOE reforms: development of a unified governance framework and privatization/divestment efforts to reduce the state footprint and deepen capital markets.
  - Oman Investment Authority (OIA) was set to list three state-owned assets in the MSX in 2024.
  - Example: OQEP issued Oman’s largest IPO ever, raising $2 billion in October.
  - Two successful IPOs in 2023 raised about $1 billion.

### Investor base, NBFIs, and market structure constraints
- Investor composition for government debt securities (year-end 2023):
  - Banks held 57 percent of the outstanding stock of government debt securities.
  - Pension funds held 35 percent.
  - Retail investors held 0.3 percent of the outstanding stock of government debt securities.
- Mutual funds and insurance companies (Assets Under Management, as of end-2023 in USD million):
  - Mutual Funds: 221505.54
  - Insurance Companies: 173214.08
- Additional indicators:
  - Asset management remains small in Oman with assets under management of about 1 percent of GDP in 2023.
  - MSX foreign shareholding rate reached just over 20 percent at the end of 2023.
- Structural constraints driving a hold-to-maturity culture:
  - Systemic excess liquidity and underdeveloped debt markets lead investors to hold bonds at amortized cost rather than trade them at fair value.
  - Key preconditions for liquid secondary markets are not met:
    - i) An efficient money market, including an active interbank repo market.
    - ii) Predictable and transparent issuance of a select number of benchmark securities across tenors placed at market clearing prices.
    - iii) A sufficient number of intermediaries trading non-negligible amounts with standard pricing during agreed times.
  - Consequences: lack of reliable yield curve, limited market-making, and reduced contribution of fixed income-focused institutional investors to local market development.

### Constraints on Non-Bank Financial Institutions (NBFIs)
- Pension funds:
  - Pension fund reform is consolidating 11 public and private sector pension funds into one unified system.
  - Current mandates: hold at least 30 percent of portfolios in local government securities.
  - Upper bound: 10 percent of portfolio for holdings with more than 10-year maturity, constraining demand for longer-term bonds and slowing benchmark yield curve development.
- Asset managers:
  - Asset managers are small; mutual funds account for most investment managers.
  - Concentrated ownership of large equities by pension funds and government entities limits free float and liquidity.
  - Low retail awareness reduces demand for mutual fund investment.
- Insurance sector:
  - Total insurance sector premiums account for just over 1 percent of GDP (similar to the GCC average of about 1.5 percent of GDP as of 2022).
  - Demand for life insurance is low due to a solid government social safety net, lack of awareness, incentives, and access for non-Omani residents, and absence of tax incentives for insurance-based savings products.
- Finance companies:
  - Oman has five finance and leasing companies with loans concentrated in real estate, SMEs, and personal loans.
  - Main challenges: lack of public awareness and high cost of funding; funding mainly through debt and paid-up capital versus banks’ access to demand deposits.

### Policy recommendations and international best practices
- Priorities for developing the local currency bond market:
  - Rebuild money-market functioning and interbank repo activity.
  - Reintroduce CBO short-term instruments and develop Sharia-compliant liquidity tools.
  - Adopt predictable primary issuance: consolidate and reopen benchmark bonds, regularize auction calendars, and improve communication with primary dealers and institutional investors.
  - Develop a primary dealer system with enhanced market-making capacity.
  - Foster private repo market activity and adopt General Master Repurchase Agreement standards.
- For sukuk markets:
  - Increase issuance frequency and predictability.
  - Create Islamic-focused market makers and asset managers to support secondary market liquidity.
- For equity market deepening:
  - Implement CMIP while managing fiscal implications and avoiding undue policy uncertainty from overly generous tax incentives.
  - Deploy complementary tools: reduced listing fees, capacity-building for issuers, and market structure improvements (e.g., shareholder thresholds, intraday limits, independent research).
- For foreign investor access:
  - Complete linkage of Muscat Clearing and Depository with Euroclear to reduce custody/friction barriers and increase holdings of government securities.
- Overall: adopting measures that improved secondary market liquidity in comparable countries (e.g., Peru) — predictable issuance, reopening benchmarks, and stronger primary dealer engagement — could meaningfully enhance Oman's local currency bond market development and institutional investor participation.

*Source: IMF staff report content provided in the supplied PDF content unit.*

### 16.   The presence of institutional investors that have different objectives in managing their portfolios

### Life insurance, long-term bonds, and investment funds
- Finding: The development of life insurance products would give rise to strong demand for longer-term bonds and make local capital markets more dynamic.
- Policy recommendations:
  - Support the development of life insurance products.
  - Enhance the financial literacy and risk awareness framework.
  - Consider temporary and targeted tax incentives to spur demand for insurance products.
- Evidence from other jurisdictions: In Chile, India, Morocco, and Nigeria tax incentives—mostly in the form of deductions related to life, health and retirement savings products, as well as VAT exemptions for certain lines of insurance—worked well in stimulating savings towards specific pension and life insurance products (Noordhoek and others, 2022).
- Investment-fund development:
  - Expand the investment-fund segment specialized in fixed income products.
  - Implement further financial literacy programs on equity-based mutual funds to attract retail investors and induce trading activity (Malaysia, Hashimoto and others, 2021).
  - Development of fixed-income investment funds could be a joint effort of the Oman financial sector authorities (CBO, MoF, FSA) and the investment fund industry (for example, through the Omani Securities Association).
- Market infrastructure and foreign investor participation:
  - Ensure a link between Muscat Clearing Depository (MCD) and Euroclear.
  - Remove counterparty risks with brokers in the secondary market to attract more foreign investors to the local bond market.
  - Foreign investors can play a critical active role in the development of hedging markets.
  - Risk monitoring: FSA should monitor emerging risks, including trade-offs related to foreign investor participation since they could be more sensitive to global market conditions and amplify local market volatility.

### Pension funds, consolidation, and capital market development
- Finding: Pension funds already play a significant role in local government debt markets.
- Caution on consolidation: Reforms to consolidate the pension fund sector should avoid slowing the development of local capital markets (Khan, Li, and Zhao, 2024 forthcoming).
- Case study—Kazakhstan (2013 policy shift):
  - Policy shift: nationalize management of the pension system and move funds from private pension funds into a single pension savings fund.
  - First effect: tight portfolio restrictions led to an over-concentration of Kazakh pension fund portfolios and reduced benefits to capital market development.
    - Footnote detail: Pension funds were mandated to invest at least half of their assets in government bonds, and a maximum of 30 percent could be allocated to “Class A” corporate securities.
  - Second effect: consolidation into a single pension fund led to inactivity in domestic capital markets as major institutional investors overseeing private pension funds exited domestic capital markets, producing stagnant and non-liquid markets (OECD, 2017).
- Implication for Oman: Pension funds in Oman also have portfolio allocation restrictions (see Box 1); alleviating these restrictions would assist in developing longer-dated benchmark yields and growing local equity markets.

### Equity market deepening, SOE listings, and foreign investor access
- Finding: Planned listing of several SOEs would increase secondary market activity and attract a broader investor base.
- Inclusion in emerging market equity indices:
  - Satisfying criteria for inclusion to widely used emerging market equity indices will attract greater non-resident participation, as seen in Colombia, Kuwait, Mexico, Qatar, Saudi Arabia, and United Arab Emirates.
  - Example: Saudi Arabia’s Qualified Foreign Investor program provided direct and full access to the Saudi Stock Exchange (Tadawul), eased qualifying criteria and foreign ownership limits, and opened the IPO market to foreign investors.
  - Oman: local capital markets, both primary and secondary markets, are fully open to foreign investors.
- Behavioral effect: Measures to foster entry of new market players and enhance secondary market liquidity should reduce the propensity of investors to buy and hold securities.
- Regulatory guardrails and supervisory priorities:
  1. Conduct appropriately resourced and intensive supervisory oversight.
  2. Incentivize stronger risk management, especially as participation by nonbank financial institutions increases.
  3. Close data gaps to facilitate appropriate and timely risk assessment by market participants and supervisory authorities.
- Purpose: Broadening the investor base is desirable to achieve investor diversification and mitigate crowding out of bank credit, but regulators need to remain mindful of financial stability implications.

### SME equity market, MSX-AIM, and information asymmetry
- Finding: Reducing information asymmetry would stimulate investor interest in the newly proposed MSX-AIM exchange and help establish the market as an alternative source of funding for advanced SMEs in Oman.
- Cross-jurisdictional lessons:
  - Tax incentives are common for encouraging investment in SME equities (examples: France, India, Poland, Spain, U.K.), but institutional investors frequently identify liquidity and transparency of financial information as key determinants for SME investment.
  - Example: Poland’s NewConnect alternative exchange nominated authorized advisors to help decide whether a company is ready to access the equity market by overseeing initial and ongoing listing requirements and providing a stamp of approval for SME suitability.
- Oman-specific tool: Creation of a comprehensive credit bureau (Mala’a) would serve as an essential tool to address information asymmetry in SME financing and could potentially be used by capital markets to assess creditworthiness (IMF, OECD, World Bank, 2015).

### Investor preferences for investing in listed SMEs (Table 3)
- Source: Schellhase 2017; “SME Financing and Equity Markets,” World Federation of Exchanges, 2017
- Note: Sample included 21 retail investors and 19 institutional investors across five countries: Canada, China, Mexico, Nigeria, and South Africa. Interpret cautiously due to small and diverse sample.
- Retail Investors vs Institutional Investors (percentages):
  - Liquidity of shares: 67% (Retail Investors), 84% (Institutional Investors)
  - Regulatory framework: 57% (Retail Investors), 68% (Institutional Investors)
  - Information disclosure: 67% (Retail Investors), 68% (Institutional Investors)
  - Tax incentives: 52% (Retail Investors), 53% (Institutional Investors)
  - Research on SMEs: 57% (Retail Investors), 53% (Institutional Investors)
  - Lower transaction costs: 33% (Retail Investors), 42% (Institutional Investors)
  - Investment vehicles: 29% (Retail Investors), 33% (Institutional Investors)
  - Diversification opportunities: 48% (Retail Investors), 48% (Institutional Investors)

*Source: IMF Selected Issues Paper sipea2025033, sections 3 and 16.*

### 3.   Efforts are ongoing to develop the local currency bond market, supported by Fund technical

### sipea2025033 - 3.   Efforts are ongoing to develop the local currency bond market, supported by Fund technical

### Development of local currency bond and money markets
- Reinvigorating money markets is a preliminary step; the Central Bank of Oman (CBO) is looking to reintroduce short-term certificates of deposit to improve liquidity management and strengthen liquidity forecasting.
- Initiatives underway to enhance local debt market liquidity:
  - Developing a primary dealer system to improve price discovery and market communication.
  - Establishing a more regular auction schedule.
- Financial market infrastructure and legal and regulatory frameworks for government securities are assessed as closer to later stages of development following the issuance of the new Public Debt Law with provisions on governance arrangements, investor relations, liquidity management operations, and Medium-Term Debt Management Strategy preparation.
- International precedents: money- and repo-market development (for example, Hungary, Malaysia, Mexico, Thailand) used to initiate more secondary market trading in government securities; specific policy actions include adopting the standards of the General Master Repurchase Agreement and fostering repo market activity in private markets.

### Islamic finance and sukuk market
- Sukuk outstanding reached about $8 billion as of year-end 2023 (67 percent sovereign, 33 percent corporates).
- Overall bond issuance in Oman fell year-over-year in 2023 as the government used its budget surplus to pay down debt, while sukuk issuance expanded.
- Structure of Islamic finance industry (end of 2023):
  - Islamic Banking: 66%
  - Sukuk: 32%
  - Takaful: 2%
  - $28 Billion Outstanding (figure context)
- Regulatory and market-deepening actions:
  - Financial Sector Authority (FSA) and CBO amendments aim to improve transparency and liquidity.
  - FSA’s new Sukuk and Bond Regulation requires issuers to submit a report every year proving compatibility of the sukuk with the provisions of Islamic sharia, starting from the sukuk issuance date.
  - CBO is developing Sharia-compliant liquidity tools, including Islamic certificates of deposit and treasury bills.
- Challenges:
  - Islamic finance industry remains small relative to other GCC countries; issuance of sukuk instruments remains sporadic.
  - Illiquid secondary markets discourage participation; many Islamic banks hold sukuk to maturity rather than trade them.
  - Recommendations: improve predictability of sukuk auctions and establish Islamic-focused market makers (as in Saudi Arabia and United Arab Emirates).

### Equity market development and Capital Markets Incentives Program (CMIP)
- FSA announced the Capital Markets Incentives Program (CMIP) to attract private companies to list on the Muscat Stock Exchange (MSX) under the "Estidamah" financial sector development agenda.
- CMIP listing pathways:
  - Pathway (i): large private and family-owned companies, and limited-liability companies, form a new public joint stock company and list on the main MSX market.
  - Pathway (ii): startup companies and SMEs list on the Promising Companies Market (MSX-AIM).
  - A third pathway (smaller incentive package valid for 2 years) promotes conversion of a limited liability company to a public joint stock company.
- Incentives for participating companies: tax refunds and waivers, fee exemptions, preferred pricing and fast-tracked financing on certain projects for up to three to five years.
- Additional market-deepening measures authorized: establish a broader set of market makers, introduce short selling, margin financing, and securities lending and borrowing to improve market efficiency.
- Cautionary note on tax incentives:
  - Tax incentives to issuers are less common in other jurisdictions; overly generous tax breaks can attract ill-prepared companies and create fiscal risks.
  - Example: Jamaica’s experience with a five-year total corporate tax holiday followed by a reduced package and subsequent policy controversy.
- Complementary policy tools that have succeeded elsewhere:
  - Reduced listing and IPO preparation fees (Poland and Spain).
  - Training to build internal capacity on regular reporting requirements (India, France, U.K., and South Korea).
  - Saudi Arabia’s Nomu parallel equity market: lowering requirement for total number of public shareholders, intraday price change limits, and an independent research provider improved liquidity.

### Access for foreign investors and SOE reforms
- Initiative to link Muscat Clearing and Depository Company with Euroclear Bank to allow foreign investors to access Omani securities and broaden the investor pool; Phase 1 of this link is already operational and allows Omani investor access to international securities markets.
- Progress on SOE reforms: development of a unified governance framework and privatization/divestment efforts to reduce the state footprint and deepen capital markets.
  - Oman Investment Authority (OIA) was set to list three state-owned assets in the MSX in 2024.
  - Example: OQEP issued Oman’s largest IPO ever, raising $2 billion in October.
  - Two successful IPOs in 2023 raised about $1 billion.

### Investor base, NBFIs, and market structure constraints
- Investor composition for government debt securities (year-end 2023):
  - Banks held 57 percent of the outstanding stock of government debt securities.
  - Pension funds held 35 percent.
  - Retail investors held 0.3 percent of the outstanding stock of government debt securities.
- Mutual funds and insurance companies (Assets Under Management, as of end-2023 in USD million):
  - Mutual Funds: 221505.54
  - Insurance Companies: 173214.08
- Additional indicators:
  - Asset management remains small in Oman with assets under management of about 1 percent of GDP in 2023.
  - MSX foreign shareholding rate reached just over 20 percent at the end of 2023.
- Structural constraints driving a hold-to-maturity culture:
  - Systemic excess liquidity and underdeveloped debt markets lead investors to hold bonds at amortized cost rather than trade them at fair value.
  - Key preconditions for liquid secondary markets are not met:
    - i) An efficient money market, including an active interbank repo market.
    - ii) Predictable and transparent issuance of a select number of benchmark securities across tenors placed at market clearing prices.
    - iii) A sufficient number of intermediaries trading non-negligible amounts with standard pricing during agreed times.
  - Consequences: lack of reliable yield curve, limited market-making, and reduced contribution of fixed income-focused institutional investors to local market development.

### Constraints on Non-Bank Financial Institutions (NBFIs)
- Pension funds:
  - Pension fund reform is consolidating 11 public and private sector pension funds into one unified system.
  - Current mandates: hold at least 30 percent of portfolios in local government securities.
  - Upper bound: 10 percent of portfolio for holdings with more than 10-year maturity, constraining demand for longer-term bonds and slowing benchmark yield curve development.
- Asset managers:
  - Asset managers are small; mutual funds account for most investment managers.
  - Concentrated ownership of large equities by pension funds and government entities limits free float and liquidity.
  - Low retail awareness reduces demand for mutual fund investment.
- Insurance sector:
  - Total insurance sector premiums account for just over 1 percent of GDP (similar to the GCC average of about 1.5 percent of GDP as of 2022).
  - Demand for life insurance is low due to a solid government social safety net, lack of awareness, incentives, and access for non-Omani residents, and absence of tax incentives for insurance-based savings products.
- Finance companies:
  - Oman has five finance and leasing companies with loans concentrated in real estate, SMEs, and personal loans.
  - Main challenges: lack of public awareness and high cost of funding; funding mainly through debt and paid-up capital versus banks’ access to demand deposits.

### Policy recommendations and international best practices
- Priorities for developing the local currency bond market:
  - Rebuild money-market functioning and interbank repo activity.
  - Reintroduce CBO short-term instruments and develop Sharia-compliant liquidity tools.
  - Adopt predictable primary issuance: consolidate and reopen benchmark bonds, regularize auction calendars, and improve communication with primary dealers and institutional investors.
  - Develop a primary dealer system with enhanced market-making capacity.
  - Foster private repo market activity and adopt General Master Repurchase Agreement standards.
- For sukuk markets:
  - Increase issuance frequency and predictability.
  - Create Islamic-focused market makers and asset managers to support secondary market liquidity.
- For equity market deepening:
  - Implement CMIP while managing fiscal implications and avoiding undue policy uncertainty from overly generous tax incentives.
  - Deploy complementary tools: reduced listing fees, capacity-building for issuers, and market structure improvements (e.g., shareholder thresholds, intraday limits, independent research).
- For foreign investor access:
  - Complete linkage of Muscat Clearing and Depository with Euroclear to reduce custody/friction barriers and increase holdings of government securities.
- Overall: adopting measures that improved secondary market liquidity in comparable countries (e.g., Peru) — predictable issuance, reopening benchmarks, and stronger primary dealer engagement — could meaningfully enhance Oman's local currency bond market development and institutional investor participation.

*Source: IMF staff report content provided in the supplied PDF content unit.*

### 16.   The presence of institutional investors that have different objectives in managing their portfolios

### 16.   The presence of institutional investors that have different objectives in managing their portfolios

### Life insurance, long-term bonds, and investment funds
- Finding: The development of life insurance products would give rise to strong demand for longer-term bonds and make local capital markets more dynamic.
- Policy recommendations:
  - Support the development of life insurance products.
  - Enhance the financial literacy and risk awareness framework.
  - Consider temporary and targeted tax incentives to spur demand for insurance products.
- Evidence from other jurisdictions: In Chile, India, Morocco, and Nigeria tax incentives—mostly in the form of deductions related to life, health and retirement savings products, as well as VAT exemptions for certain lines of insurance—worked well in stimulating savings towards specific pension and life insurance products (Noordhoek and others, 2022).
- Investment-fund development:
  - Expand the investment-fund segment specialized in fixed income products.
  - Implement further financial literacy programs on equity-based mutual funds to attract retail investors and induce trading activity (Malaysia, Hashimoto and others, 2021).
  - Development of fixed-income investment funds could be a joint effort of the Oman financial sector authorities (CBO, MoF, FSA) and the investment fund industry (for example, through the Omani Securities Association).
- Market infrastructure and foreign investor participation:
  - Ensure a link between Muscat Clearing Depository (MCD) and Euroclear.
  - Remove counterparty risks with brokers in the secondary market to attract more foreign investors to the local bond market.
  - Foreign investors can play a critical active role in the development of hedging markets.
  - Risk monitoring: FSA should monitor emerging risks, including trade-offs related to foreign investor participation since they could be more sensitive to global market conditions and amplify local market volatility.

### Pension funds, consolidation, and capital market development
- Finding: Pension funds already play a significant role in local government debt markets.
- Caution on consolidation: Reforms to consolidate the pension fund sector should avoid slowing the development of local capital markets (Khan, Li, and Zhao, 2024 forthcoming).
- Case study—Kazakhstan (2013 policy shift):
  - Policy shift: nationalize management of the pension system and move funds from private pension funds into a single pension savings fund.
  - First effect: tight portfolio restrictions led to an over-concentration of Kazakh pension fund portfolios and reduced benefits to capital market development.
    - Footnote detail: Pension funds were mandated to invest at least half of their assets in government bonds, and a maximum of 30 percent could be allocated to “Class A” corporate securities.
  - Second effect: consolidation into a single pension fund led to inactivity in domestic capital markets as major institutional investors overseeing private pension funds exited domestic capital markets, producing stagnant and non-liquid markets (OECD, 2017).
- Implication for Oman: Pension funds in Oman also have portfolio allocation restrictions (see Box 1); alleviating these restrictions would assist in developing longer-dated benchmark yields and growing local equity markets.

### Equity market deepening, SOE listings, and foreign investor access
- Finding: Planned listing of several SOEs would increase secondary market activity and attract a broader investor base.
- Inclusion in emerging market equity indices:
  - Satisfying criteria for inclusion to widely used emerging market equity indices will attract greater non-resident participation, as seen in Colombia, Kuwait, Mexico, Qatar, Saudi Arabia, and United Arab Emirates.
  - Example: Saudi Arabia’s Qualified Foreign Investor program provided direct and full access to the Saudi Stock Exchange (Tadawul), eased qualifying criteria and foreign ownership limits, and opened the IPO market to foreign investors.
  - Oman: local capital markets, both primary and secondary markets, are fully open to foreign investors.
- Behavioral effect: Measures to foster entry of new market players and enhance secondary market liquidity should reduce the propensity of investors to buy and hold securities.
- Regulatory guardrails and supervisory priorities:
  1. Conduct appropriately resourced and intensive supervisory oversight.
  2. Incentivize stronger risk management, especially as participation by nonbank financial institutions increases.
  3. Close data gaps to facilitate appropriate and timely risk assessment by market participants and supervisory authorities.
- Purpose: Broadening the investor base is desirable to achieve investor diversification and mitigate crowding out of bank credit, but regulators need to remain mindful of financial stability implications.

### SME equity market, MSX-AIM, and information asymmetry
- Finding: Reducing information asymmetry would stimulate investor interest in the newly proposed MSX-AIM exchange and help establish the market as an alternative source of funding for advanced SMEs in Oman.
- Cross-jurisdictional lessons:
  - Tax incentives are common for encouraging investment in SME equities (examples: France, India, Poland, Spain, U.K.), but institutional investors frequently identify liquidity and transparency of financial information as key determinants for SME investment.
  - Example: Poland’s NewConnect alternative exchange nominated authorized advisors to help decide whether a company is ready to access the equity market by overseeing initial and ongoing listing requirements and providing a stamp of approval for SME suitability.
- Oman-specific tool: Creation of a comprehensive credit bureau (Mala’a) would serve as an essential tool to address information asymmetry in SME financing and could potentially be used by capital markets to assess creditworthiness (IMF, OECD, World Bank, 2015).

### Investor preferences for investing in listed SMEs (Table 3)
- Source: Schellhase 2017; “SME Financing and Equity Markets,” World Federation of Exchanges, 2017
- Note: Sample included 21 retail investors and 19 institutional investors across five countries: Canada, China, Mexico, Nigeria, and South Africa. Interpret cautiously due to small and diverse sample.
- Retail Investors vs Institutional Investors (percentages):
  - Liquidity of shares: 67% (Retail Investors), 84% (Institutional Investors)
  - Regulatory framework: 57% (Retail Investors), 68% (Institutional Investors)
  - Information disclosure: 67% (Retail Investors), 68% (Institutional Investors)
  - Tax incentives: 52% (Retail Investors), 53% (Institutional Investors)
  - Research on SMEs: 57% (Retail Investors), 53% (Institutional Investors)
  - Lower transaction costs: 33% (Retail Investors), 42% (Institutional Investors)
  - Investment vehicles: 29% (Retail Investors), 33% (Institutional Investors)
  - Diversification opportunities: 48% (Retail Investors), 48% (Institutional Investors)

*Source: IMF Selected Issues Paper sipea2025033, section 16.*

---


_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025033.pdf_