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Abstract
In the past decade there have been two bank mergers in Oman together with numerous unsuccessful merger attempts. The purpose of the paper is to explain the consistent undertone of merger discussion in Oman, and how additional mergers (barring those between the biggest players) might benefit the overall industry and some of its stakeholders. Through in-depth interviews with key stakeholders, this study explores the motivations for mergers in the banking sector in Oman, and reasons for the recent phenomena of non-completion of others. Results show that there are good arguments for additional consolidation in the Omani banking sector. Such consolidation would allow more local banks to participate in the financing of larger investment projects. Socio-political reasons relating to the necessity to create jobs and maintain domestic employment dictate that there is little scope for cost reduction from mergers. Directors’ personal interests often thwart promising merger propositions from going through. This research contributes to the small literature on the banking sector in Oman. It also adds a more nuanced perspective on the motivation behind bank mergers that do not fit the standard narrative in the finance literature. For instance, while the business case for industry consolidation are strong, social and political impediments can render beneficial industry restructuring infeasible.
Keywords:
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 United Nations, “Human Development Report 2010, The Real Wealth of Nations: Pathways to Human Development”, November 2010.
2 Approximately 4.5 million, with 2.8 million being Omanis and 1.7 million being expatriate workers.
3 UNICEF, “UNICEF Data Warehouse: Cross-Sector Indicators, Geographic Area: Oman, Indicator: Infant Mortality Rate”, 12 December 2020.
4 Electronic Census of Population, Housing and Establishments, Sultanate of Oman, “Oman Population by Age Group”, 12 December 2020.
5 Abouzzohour, “One Year into His Reign, Oman’s Sultan Must Renegotiate the Social Contract and Prioritize Diversification”, Brookings, 13 January 2021.
6 85% of government income is from oil.
7 Times of Oman, “In-Country Value of Active Enterprises in Oman Crosses OMR9 Billion”, 1 October 2023.
8 Al Shaibany, “25,000 Jobs to be Created for Omanis from the End of the Year”, The National, 5 October 2017.
9 Abouzzohour, “One Year into His Reign, Oman’s Sultan Must Renegotiate the Social Contract and Prioritize Diversification”.
10 Cowen and Tabarrok, Modern Principles of Economics (2014).
11 Al-Muharrami, “Evolving Banking Market Structure in Oman: Should CBO Approve the Mergers?”, International Journal of Islamic and Middle Eastern Finance and Management 12.2 (2019), pp. 254–264.
12 Babicci and Wongsurawat, “Case Study: From an ‘Underperforming 80’s Bank’ to One of Oman’s Best –The Transformation of BankDhofar”, Strategy and Leadership 46.5 (2018), pp. 44–49.
13 By total assets.
14 About three times larger than its closest competition.
15 With the exclusion of Bank Muscat.
16 Borodin et al., “Impact of Mergers and Acquisitions on Companies’ Financial Performance”, Journal of International Studies 13.2 (2020), pp. 34–47.
17 Marks and Mirvis, “Merge Ahead: A Research Agenda to Increase Merger and Acquisition Success”, Journal of Business and Psychology 26.2 (2011), pp. 161–168.
18 Sawler, “Horizontal Alliances and the Merger Paradox”, Managerial and Decision Economics 26.4 (2005), pp. 243–248.
19 Rabier, “Acquisition Motives and the Distribution of Acquisition Performance”, Strategic Management Journal 38.13 (2017), pp. 2666–2681; Hassan, Ghauri, and Mayrhofer, “Merger and Acquisition Motives and Outcome Assessment”, Thunderbird International Business Review 60.4 (2018), pp. 709–718
20 Price leadership occurs when a preeminent firm announces a price change, and all other players follow in the same direction. Economists consider such behavior to be tacit collusion between players in an oligopolistic market [Besanko et al., Economics of Strategy (2010)].
21 Eisenhardt, “Agency Theory: An Assessment and Review”, Academy of Management Review 14.1 (1989), pp. 57–74.
22 Gupta, Atul and Lalatendu Misra, “Deal Size, Bid Premium, and Gains in Bank Mergers: The Impact of Managerial Motivations”, Financial Review 42.3 (2007), pp. 373–400.
23 A company becomes too big to fail if its bankruptcy would result in a catastrophe to the economy (due to some domino-effect or massive job loss). The government is therefore implicitly guaranteed to bail the company out if it ever falls into serious trouble.
24 DeYoung, Evanoff, and Molyneux, “Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature”, Journal of Financial Services Research 36.2 (2009), pp. 87–110.
25 Du and Sim, “Mergers, Acquisitions, and Bank Efficiency: Cross-Country Evidence from Emerging Markets”, Research in International Business and Finance 36 (2016), pp. 499–510.
26 Karolyi and Taboada, “Regulatory Arbitrage and Cross-Border Bank Acquisitions”, Journal of Finance 70.6 (2015), pp. 2395–2450.
27 Jiang, Levine, and Lin, “Competition and Bank Opacity”, Review of Financial Studies 29.7 (2016), pp. 1911–1942; Blau, Brough, and Griffith, “Bank Opacity and the Efficiency of Stock Prices”, Journal of Banking and Finance 76 (2017), pp. 32–47.
28 McLetchie and West, “Beyond Risk Avoidance: A McKinsey Perspective on Creating Transformational Value from Mergers”, Perspectives on Merger Integration (2010), pp. 11–17,
29 Brouthers, Hastenburg, and van den Ven, “If Most Mergers Fail Why are They so Popular?”, Long Range Planning 31.3 (1998), pp. 347–353; Banal-Estañol and Seldeslachts, “Merger Failures”, Journal of Economics and Management Strategy 20.2 (2011), pp. 589–624.
30 Yin, “The Case Study Crisis: Some Answers”, Administrative Science Quarterly 26.1 (1981), pp. 58–65.
31 Al-Muharrami, “Evolving Banking Market Structure in Oman: Should CBO Approve the Mergers?”, International Journal of Islamic and Middle Eastern Finance and Management 12.2 (2019), pp. 254–264.
32 Oman Daily Observer, “Oman Sets Retirement Age for Staff of Govt Companies”, 2 June 2020; Oman Daily Observer, “His Majesty Presides Over Council of Ministers Meeting, 15 December 2020.
33 Babicci and Wongsurawat, “Islamic Banking in Oman: Laying the Foundations”, Middle East Policy 27.1 (2020), pp. 115–124.
34 Drysdale, “Population Dynamics and Birth Spacing in Oman”, International Journal of Middle East Studies 42.1 (2010), pp. 123–144.
35 Capital adequacy is the amount of capital a bank must retain in relation to its risk portfolio, so that in case of need, the bank can sustain a reasonable amount of bad debt. It is a measure of the financial soundness of a bank and in practice a higher ratio means the bank will have less capital available to employ for business purposes, or to lend to its customers. International standards set by the Basel III Accord are 8%.
36 This is the total amount that a bank can lend to any one customer or any one related group of customers and is measured in relation to a bank’s net worth. In developing countries where financing of infrastructure requires high levels of capital, banks need the ability to provide significant loans. In Oman this is restricted by the relatively small size of the Banks’ balance sheets and the Central Bank regulations. The Basel III Accord guidelines for single borrower limit is 25%.
37 Middle East and North Africa.
38 Hamadi and Awdeh, “Banking Concentration and Financial Development in the MENA Region”, International Journal of Islamic and Middle Eastern Finance and Management 13.4 (2020), pp. 675–689.
39 Khattak and Ali, “Are Competition and Performance Friends or Foes? Evidence from the Middle East Banking Sector”, International Journal of Islamic and Middle Eastern Finance and Management 14.4 (2021), pp. 671–691.
40 Wang and Luo, “Oil Prices and Bank Credit Risk in MENA Countries after the 2008 Financial Crisis”, International Journal of Islamic and Middle Eastern Finance and Management 13.2 (2020), pp. 219–247.
Additional information
Notes on contributors
Kris Babicci
Kris Babicci was Chief Executive Officer of Bank Dhofar (Oman’s second largest bank) from September 2007 to June 2011, and held senior positions in the Australia and New Zealand Banking Group (ANZ Bank) and Standard Chartered Bank, [email protected];
Winai Wongsurawat
Winai Wongsurawat is Associate Professor at the College of Management, Mahidol University, Bangkok, 69 Vipawadee Rangsit Road, Samsennai, Phayathai District, Bangkok, Thailand, where he teaches economics and management strategy, [email protected].