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Reforms introduced by the Central Bank of Oman (CBO) in May, mandate all banks operating in the Sultanate to lend a minimum 5% of their credit portfolios to small- and medium-sized enterprises (SMEs) by December 31, 2014 . As well as boosting the availability of financing for Oman’s fledgling SME sector, the reforms aim to ease the flow and reduce the high cost of credit to a sector the government considers an engine of growth for the future.

Key features of the reforms include:

• Low interest/low cost credit for SMEs;
• Relaxation of the prudential requirements governing SME loans, most notably by reducing their risk weights by 25%;
• Domestic banks are required to set up dedicated SME finance departments with trained staff headed by an AGM, and engage in a “formal and periodical” exchange of views with the SME sector;
• Foreign banks are instructed to “formulate a liberal lending policy” consistent with CBO regulation and the government’s vision and to dedicate trained staff to cater to the SME sector;
• Introduction of reporting requirements, namely:-
  a. a monthly return on SME lending commencing from June 2013;
  b. a quarterly return of the loan appreciations received and processed, commencing from the quarter ending September 2013.”

In addition to these mandatory requirements, the CBO invites banks to support the SME sector by providing assistance on project planning, finance and business management, business initiatives, technical support, sourcing of raw materials, process management and marketing.
The reforms stresses that at no time should the portfolio of any bank fall below 5% and any bank which already allocates a larger share of its portfolio to SME lending cannot reduce its limit to the minimum.

While the regulations leave unclear the extent to which lending practices should be loosened, (stipulating that banks “should not be guided by collaterals in their credit decisions” when lending to SMEs but should still “equip themselves well in a systematic way”), there is no mistaking the thrust of the new CBO measures. As bank lending growth in Oman hit a 22-month low of 10.9 percent in February, the regulations urge banks to take measures “on an urgent basis, keeping in mind the vital role of SME segment in economic diversification, contribution to the national economy and Omani employment”. Supporting SMEs is a key part of the government’s economic policy for tackling unemployment in Oman, estimated at more than 24 percent by the International Monetary Fund and avoiding the recurrence of 2011 protests against joblessness.

SMEs have been widely recognized as effective and successful in developed markets, where they are responsible for much of the growth in new jobs contributing to 60%–70% of employment and more than 50% of GDP. However, in spite of the acknowledgment that SMEs are critical to economic development, many face substantial barriers to growth and sustainability ranging from limited access to and the high cost of finance as well as an unfavorable regulatory environment. Other challenges to the growth of a robust SME sector are lack of business management skills and market linkages needed to grow and succeed.