30/12/2012 15:04 AST
Responding to the political appeal to consolidate the development mission of Oman Development Bank (ODB), the board of directors of Oman Development Bank has decided to reduce the requirement level of collaterals requested for the bank's loans.
As a banking institution, following international and Central Bank of Oman (CBO) rules, eliminating the need for collateral securities totally is not possible. Financial sustainability must be assured and deposits and others liabilities must be reimbursed by the bank, said a press statement.
However, its development mission justifies a lower level of collateral than those required by other commercial banks, which seek mainly highest profitability.
Since 2007, ODB developed an internal rating model to compute rigorously the expected losses of loans provided. The model computes the right level of collateral, based on the merits of each project, in line with Basel 2 guidelines and the best practices followed elsewhere.
This model gives due weight to all parameters impacting the viability of the project to be financed. For instance, prior track record of the promoters, good financial statement of existing companies, and stable cash flows; diminish the expected loss, thus enable promoters to provide lesser securities.
Methodic approach
Through the relaxation of the model parameters, the bank allowed a uniform and across the board reasonable level of lower collaterals for a same level of risk. This methodic approach permits fairness among customers and an acceptable compromise between both necessities of sustainability of the bank and more growth to SME finance.
As lending is never risk free, it is prudent that all banks insist on some form of collateral security, particularly for the more risky SME lending.
Loan Guaranty Programme was purposefully launched recently to allow
loan with low level of collateral. Keeping in mind that SMEs often face difficulty in providing enough equity or collateral security and with a view to assisting SMEs, ODB in collaboration with the Ministry of Commerce & Industry, has entered into agreements with two commercial banks Bank Muscat and Oman Arab Bank in sharing their risk by providing 50 per cent guarantee to the lending bank, through which loans up to RO250,000 may be availed for viable projects not exceeding total investment of RO500,000.
This programme is introduced to widen the access to finance and create a vibrant private sector that will contribute to diversification of the Omani economy, create jobs and encourage self employment and entrepreneurship among Omani citizens, including the country's no so wealthy youth.
Recently, the Council of Ministers expanded the scope of the Loan Guarantee Programme to cover the sectors which ODB is not financing such as trading, contracting, construction and real estate activities. Responding to the success of the scheme, the LGP is likely to be operated through other banks in the near future.
Times of Oman
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