Oman is an oil-rich nation but many firms in the country show clear evidence of financial constraints. This is paradoxical because the country has large oil surpluses, and banks, financial institutions, and other institutional investors in the country are flush with funds. Financial constraint is a well-researched topic and a large number of empirical research papers have been published on the topic of financing constraints. Previous researchers have classified firms into discrete categories of financial constraint and relate these classifications to accounting variables. This study uses the famous KZ index and the methodology suggested by Kaplan and Zingales to look at the firm level data of Omani companies. The KZ Index serves as an indicator of the level of financial constraint under which a firm is operating, and the higher the index, the more constrained is the firm financially. All the active companies listed on the Muscat Securities Market were considered for the purpose of the study. Data related to three years2003, 2004, and 2005was used for the purpose of the study. The study shows that a majority of the firms in some industry groups are financially constrained. Macro level bank credit data also indicates a decline in credit to some industry groups. The study argues that financial constraints depend on the industry group to which a firm belongs, because bank lending practices depend on the nature of the business and the type of the security available.

A large number of firms in Oman have financial constraints in spite of the nation being rich in oil. This is paradoxical because the country has large oil surpluses, and banks, financial institutions and other institutional investors in the country are flush with funds. Financial constraint is a well-researched topic. Fazzari et al., (1988) published a seminal paper on estimating financing constraints in 1988. Since then a large number of empirical research papers (Ghosh, 2006) have been published on the topic of financing constraints.

Kaplan and Zingales (1997) classify firms into discrete categories of financial constraint and relate these classifications to accounting variables. Lamont et al., (2001) constructed a KZ index of financial constraint using the accounting variables suggested by Kaplan and Zingales (1997). The KZ index serves as an indicator of the level of financial constraint under which a firm is operating, and the higher the index, the more constrained is the firm financially. Only firms with positive real sales growth are considered as being either "possibly constrained", "likely less constrained" etc. Lamont, Polk and Saa-Requejo (2001) comment that sorting firms on interest coverage ratios, net cash flow or dividend payout produce similar results to sorting on the KZ index.

They comment that the construction firms with a high KZ Index (firms which are financially constrained) have high debt, low cash, and low dividends. They use the KZ Index to study the linkage between financial constraints and stock returns. Beck et al., (2004) looked at the determinants of financing obstacles in an empirical study spread over 80 countries. One of their conclusions is that institutional development is the most important country characteristic explaining cross-country variations in financing obstacles.

Applied Finance Journal, Financing Constraints, Muscat Securities Market, Accounting Variables, Gross Domestic Products, GDP, Sectoral Bank, Oman Securities Market, Organization for Economic Cooperation and Development , OECD, Insurance Companies, Energy marketing companies, International Research Foundation, Industry and Service Sectors.