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At the helm of a sturdy banking sector

Interview - April 18, 2013
Dr Mohammad Y Al-Hashel, Governor of the Central Bank of Kuwait, speaks with World Report about the strength of Kuwait’s financial sector and economy, as well as the long-standing, healthy relations between the UK and his country
Although Kuwait’s banking sector is still somewhat vulnerable given its exposure to the stock market and high levels of real estate and personal loans, the Central Bank has ample resources to ensure that the sector has adequate liquidity. Besides commercial and specialised banks at the core of the system, it includes a growing number of financial companies and an active stock exchange. Please give us your assessment of Kuwait’s banking sector.
First of all, we do not agree that “Kuwait’s banking sector is still somewhat vulnerable.” In fact, the banking sector is very well capitalised and highly liquid, and our stress tests show that the sector is well placed to withstand any of the scenarios proposed – including sharp decreases in real estate or stock prices. 
Regarding personal loans, these are one of the best performing loans with the lowest non-performing loan (NPL) ratio amongst all lending done by Kuwaiti banks. Moreover, the personal lending sector does not make up the bulk of banks’ lending since Kuwaiti banks primarily focus on a diversified portfolio of corporate lending.
Could you give us an overview of the recent evolution of the Kuwaiti banking sector and its growth prospects for 2013-2014?

The Kuwaiti banking sector experienced a period of high growth in the years leading up to the 2008 financial crisis; unsustainable double-digit asset growth was fuelled by the boom in the stock market and real estate in Kuwait. Return to equity figures for banks were also in the double-digit range for many of the banks. Then, after the crisis hit, banks’ assets fell flat in 2010 and 2011, in line with trends across the globe, before picking up to register a growth of 7.5% in 2012. During 2012, customer deposits were up by 16.7% and shareholder’s equity grew by 5.6%.
The Kuwaiti banks continue to be healthy as they are well-capitalised and highly liquid, with a capital adequacy ratio of 18.2% and liquid assets to total assets of around 27% by end-2012. Furthermore, the NPL ratio for the banking system has come down from 7.06% in 2011 to 4.95% by end of 2012. Banking system provision coverage ratios have also improved; coverage including provisions was 94.8% as of the end of 2012, up from 71.8% at the end of 2011 and coverage including provisions and collateral was 174.8% in 2012 up from 128.6% in 2011.
Prospects for 2013-14 are favourable with banks benefiting from better growth prospects amid a number of infrastructure projects and greater purchasing power of consumers due to growing salaries, as well as strong macroeconomic fundamentals of the country.
What would you say are the most important changes on the way for the banking industry in the near future?
In the months ahead, banking industry will face firstly, higher requirements to hold liquidity and capital as per Basel III rules and secondly, stronger emphasis on corporate governance.
Fortunately, banks in Kuwait already have high liquidity and capital standards, with the capital adequacy ratio of 18.2% and liquid assets to total assets around 27% by end-2012.
Regarding corporate governance, CBK has taken strenuous efforts in improving the corporate governance of the Kuwaiti banks. A comprehensive set of new rules on corporate governance have been issued by CBK, in line with best global practices. These new regulations, which will become effective by mid-2013, are in addition to our earlier rules on the subject matter. CBK views these measures of significance in improving the accountability and control and to protect the interests of various stakeholders.
In this context, CBK follows its four-pronged monitoring mechanism to ensure that (a) banks maintain strong quality as well as quantity of capital, (b) sufficient liquidity to meet both day-to-day transactions as well as any untoward developments, (c) reasonable profitability (given the challenging operating environment amid heightened global uncertainty) and (d) sound asset quality where assets are not only adequately managed but also suitably provided for. 
These four pillars are interconnected since banks need to excel in all areas to effectively perform their role as financial intermediaries. For instance, a strong capital base cannot sustain for long if asset quality keeps deteriorating. Similarly, a poor liquidity profile can expose a bank to a liquidity crunch or even a deposit run, thus turning an otherwise solvent bank into insolvency.  
Please comment on the overall impact of fiscal stimulus implemented by the Kuwaiti authorities during the height of the global credit crunch.
The fiscal stimulus implemented by the Kuwaiti authorities during the height of the global credit crunch significantly increased the liquidity levels within banks by increasing the deposit base of the banks. Additionally, at a time when private credit off-take was slowing down, fiscal stimulus helped avoid a sharp contraction in economic growth.
What potential for growth do you see in Kuwait’s Islamic banking sector?

Islamic banking is an important component of the financial services sector in Kuwait, with approximately 38% market share of total assets in the Kuwaiti banking sector as of the end of 2012. As a matter of fact, Kuwait has played a pioneering role in promoting Islamic finance, as our first Islamic bank (Kuwait Finance House) was established as early as in 1977.
Given the preferences of many investors and clients for Shariah compliant banking, Islamic banks have witnessed significant growth over the years, increasing the number of Islamic banks to five in Kuwait. Furthermore, growth in Islamic banking has also helped create strong demand for other Islamic investment products such a Sukuks as the Islamic banks need to invest their excess liquidity in Shariah compliant instruments.
Estimates by Zawya, a Thomson Reuters company, suggest that Sukuk issuance reached an all-time high of around USD 140 billion during 2012. We expect the demand for Islamic finance to remain strong amid growing populations in Muslim countries and rising government development expenditures which many countries are choosing to finance through Shariah compliant products. These trends will have a positive effect on growth of Islamic banks within Kuwait as well.
Please discuss the state of Kuwait’s economy and highlight what perspectives there are for economic diversification.
Given its oil reserves, Kuwait will continue to be an oil-dominated economy for a long time. While significant opportunities exist for diversifying the oil sector itself through expansion of upstream/downstream activities, considering the inherent volatility of the oil market, development of non oil activity has been a major target of policies summarised in the recently enacted Development Plan. It is to be noted that the Development Plan is only one of a broad set of medium-term policies which work toward the strategic goals aimed at developing Kuwait as a regional trade and financial hub.
Further diversification that enhances the efficiency of the non-oil sectors is a major aim of economic policies so as to create a business-friendly investment-enhancing environment through major upgrades of the legislative structure, as well as redefining the role of the government and private sectors in economic development, including among other formats public private partnerships.
What do you consider to be the most attractive investment opportunities currently available in Kuwait, particularly as they relate to the government’s Development Plan?
Attractive investment opportunities exist in Kuwait in the areas of infrastructure (including ports and airports), transport, health care and education – to mention just a few. Prospective foreign investors, particularly from the United Kingdom, are encouraged to consider such opportunities given their long-standing track record of innovation and experience of working in the region.
Please give us an overview of Kuwait-UK relations.
Undoubtedly, the historical relations between the State of Kuwait and the United Kingdom have always been deeply rooted in the various fields at all levels, setting a unique example of established and developed political, commercial, economic, investment and cultural cooperation between the two countries over the past ten decades.
Trade relations and investment ties, in particular, represent the key drive to the growth of such bilateral relations, reflected by the total value of trade exchange between Kuwait and the United Kingdom which was estimated to amount KD 872 million (equivalent to £1990.4 million) in 2012, at an increase of 4.9% and 33.1% compared to its level in 2011 and 2010 respectively. The visit of His Excellency the British Prime Minister to Kuwait in February 2011 has led to the formation of a joint working team for the enhancement of trade and investment exchange between the two countries. The said team provides the necessary potentials towards multiplying the volume of trade exchange to a target of £4 billion by the year 2015. 
Moreover, Kuwait is definitely one of the main investors in the United Kingdom in terms of the volume of Kuwaiti deposits with UK banks and the financial and tangible investments. Kuwaiti investments in the UK are distributed among governmental institutions, private sector companies and individuals. Such deep ties between Kuwaiti citizens and the United Kingdom were well expressed by Mr Roger Gifford, Lord Mayor of London, who pointed out that around 15 thousand properties in the United Kingdom are owned by Kuwaiti citizens. 
In this context, it is our obligation to stress the pivotal role of the Kuwait Investment Office in London, which was the first independent sovereign investment fund in the UK. It was founded in February 1953 for the purpose of enhancing the solid bilateral economic relations between the two countries and to function as the main tool of Kuwaiti foreign investments. Kuwait Investment Office is currently the owner of more than 100 shares of major stocks listed in the stock market in the UK and is a shareholder in large British institutions and companies. It also effectively manages the Kuwaiti investment assets in global markets under the supervision of Kuwait Investment Authority.
With reference to the potentials of enhancing British investments in the oil and gas sector in Kuwait, it is worth mentioning that British investments in this vital sector extend to many past decades. Such investments have been effectively contributing to the revival and development of this sector. Accordingly, investment opportunities in Kuwait are still widely open to more British investors, for the enhancement of oil and gas development strategies, particularly, with Kuwait’s endeavours to increase the production capacity of crude oil to around 4 million b/p/d by 2020. Plans and projects aiming at the development of oil facilities, increasing the capacity of refining crude oil and constructing the fourth oil refinery, are presently under execution. Shell Corporation is currently developing gas northern fields, for which the Kuwaiti authorities have allocated enormous budget to be invested in the oil and gas sector till 2020, aiming at increasing and developing the capacities of refining and exporting crude oil, and establishing two new petrochemical plants.
I would like on this occasion to stress the fact that the Kuwaiti-British relations are very distinguished and highly valued by the government and the people of Kuwait. The Government of Kuwait spares no effort to facilitate any obstacles that may hinder British investors in the Kuwaiti market. Those efforts were firmly asserted during His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah’s last visit to the United Kingdom during the period 27-29 November 2012. 
In conclusion, I would like to thank you for this interview hoping that it sheds the light on some of the aspects that are significant to British investors. I would like also to stress that the State of Kuwait is a broad window for strategic investment prospects. In light of the persistent efforts of the Kuwaiti authorities and the wise directions of His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah to accelerate the growth and the economic and social development in the State of Kuwait, the investment opportunities are at this stage increasing, specifically, those related to the strategic projects for the development of infrastructure including the projects of constructing and developing airports, land ports and metro network, in addition to the programmes intended for the improvement and development of health care and education services.