AMJ, in partnership with the Oman American Business Centre (OABC), organised a seminar on corporate law and finance for SMEs in Oman.

Presented by AMJ senior associate Asad Qayyum, and entitled ‘Survive to Five: Navigating Financial and Legal Aspects for Companies in Oman’, the seminar was designed to help start-ups and companies in the early stages of development. It highlighted a number of common pitfalls faced by entrepreneurs regardless of the sector in which they operate.

Qayyum noted that “Setting up and running a business can be very exciting and rewarding. However, no how brilliant the business idea is, without a solid legal and financial foundation, entrepreneurs run the risk of becoming one of the ‘4 out of five’ startups that statistically fail in the first five years.”

He provided participants with insights on the legal and financial frameworks essential for success, incentives and concessions available in Oman for SMEs, advice on tax and finance, employment, intellectual property protection and the all-important role of networking organisations such as the OABC.

Oman’s banking regulator, the Central Bank of Oman (CBO) has been at the forefront of promoting policies which facilitate access to finance for the nascent SME sector in the country. Initiatives include a regulation mandating banks to allocate a minimum 5% of their total loan books to SMEs by the end of 2015.

This measure, introduced following a 2014 CBO report which recognised limited access to and the high cost of finance as an inhibiting factor for SME growth, has posed challenges for the banking sector. The small number of SMEs in the market combined with their relatively modest financing requirements, means that the larger banks in particular face difficulty building up sizable loan books in the segment.

A new definition of SME introduced in January 2016 which significantly increases the number of enterprises eligible for SME funding is expected to make it easier for banks to reach the 5% target. Essentially, larger enterprises (measured by the higher of turnover or staffing levels) will now be treated as SMEs. The decision classifies a micro enterprise as one with 1-5 employees and turnover of less than OMR100,000 (previously 1-4 employees and turnover of less than OMR25,000); a small enterprise has 6-25 employees and turnover of OMR100,000-499,999 (increased from 5-9 employees and turnover of OMR25,000-250,000); and a medium enterprise has 26-99 workers and turnover of OMR500,000- 2,999,999 (increased from 10-99 employees and turnover of OMR250,000-1,500,000).

According to industry experts, the measures taken by the banking regulator have led to plenty of liquidity in the market to finance smaller firms. The main challenges now for the sector are lack of innovation and entrepreneurial culture, business skills and proper auditing/accounting mechanisms for SMEs.

For further information, contact banking and finance team members, Marcus Pery or William Barrie.

Oman’s Commercial Agencies Law was amended by royal decree at the end of July to remove a number of statutory protections for Omani agents selling or distributing products or services of foreign companies. The Commercial Agencies Law, originally issued in 1977, governs the relationship between foreign principals and their local agents. The law has long been viewed as unfavourable to the foreign principal largely due to provisions which entitle an agent to claim compensation in the event of the ‘without cause’ termination of an agency agreement of indefinite duration or failure to renew a fixed term agreement upon expiry.  As a result, a foreign principal wishing to terminate an agency agreement without the consent of the agent often faces protracted negotiations and high compensatory payments. These provisions, common to most GCC agency arrangements, are viewed as restrictive practice by the World Trade Organization (WTO). As a result of the new changes:-

• Powers previously granted to the Ministry of Commerce and Industry (MOCI) to ban the imports of a foreign principal’s goods in the event of its ‘without cause’ termination of the agency have been removed.
• The prohibition against direct sales of a foreign principal’s goods or services or sale through an intermediary other than the registered agent has been removed. Agents no longer have a statutory right to claim damages for commission or profits earned from such sales.
• The right of an agent to statutory compensation upon termination of the agency agreement has been removed.
• The Council of Ministers, acting on the recommendation of the competition and anti-monopoly authorities, has the power to break up monopolies over specific types of goods and services which have a negative impact on supply and demand and lead to unjustified price increases.

These amendments to the Commercial Agencies Law are the first of three complementary legislative measures aimed at increasing competition and curbing price rises.  A draft competition and anti-monopoly law and new consumer protection law are reportedly close to being finalised. These measures signal the government’s determination to develop a competitive private sector as part of Oman’s economic diversification strategy a main pillar of which is to create a level playing-field for small and medium scale enterprises.  They are also in line with Oman’s commitments as a member of WTO to liberalise trade and eliminate restrictive practices. For more information on the changes, contact Reetika Walia or your usual focal point at AMJ.

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.