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Finance sector shows solidity and growth

Article - October 24, 2013
The banking sector is well capitalised, highly liquid and ready to withstand shocks such as drops in real estate or stock prices
THE KUWAIT STOCK EXCHANGE’S MARKET CAPITALISATION HAS CONSISTENTLY BEEN ONE OF THE LARGEST OF ARAB MARKETS
Kuwait’s financial industry is at the centre of the Government’s economic diversification programme and receives its full official support in fostering long-term growth in the sector. The Central Bank of Kuwait (CBK) has pledged to reinforce the industry by continuing to promote financial and monetary stability in Kuwait with prudential micro and macroeconomic policies and tools designed to strengthen the Kuwaiti banking sector, reduce systematic risks and improve its resilience to shocks that could affect the system’s proven ability to continue providing key financial services in times of global economic adversity. 
 
In the years leading up to the 2008 financial crisis, Kuwait’s banking sector experienced a period of high growth, with unsustainable double-digit asset expansion fuelled by the boom in the stock market and real estate. Return-to-equity figures for many of the banks were also in the double-digit range. Then after the crisis hit, banks’ assets fell flat in 2010 and 2011, in line with trends around the world, subsequently picking up to register growth of 7.5 per cent in 2012. Furthermore, customer deposits rose by 16.7 per cent last year and shareholder’s equity grew by 5.6 per cent.
 
“The banking sector is very well capitalised and highly liquid, and our stress tests show that the sector is well placed to withstand scenarios such as sharp decreases in real estate or stock prices,” says Governor of the CBK Dr Mohammad Y. Al-Hashel. “Regarding personal loans, these are one of the best performing loans with the lowest NPL [nonperforming loan] ratio among 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.”
 
Growth prospects for 2013-2014

Kuwaiti banks continue to be healthy as they are well capitalised and highly liquid, with a capital adequacy ratio (CAR) of 18.2 per cent and liquid assets to total assets of around 27 per cent by end-2012. Furthermore, the NPL ratio for the banking system has dropped from 7.06 per cent in 2011 to 4.95 per cent by the end of last year. The CBK also reports that the banking system provision coverage ratios have also improved, up from 71.8 per cent at the end of 2011 to 94.8 per cent as of the end of 2012. Coverage including provisions and collateral was 174.8 per cent in 2012, up from 128.6 per cent 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”

Dr Mohammad Y. Al-Hashel,
Governor of the Central Bank of Kuwait
Levels of public debt are low and Kuwait is expected to continue to report healthy fiscal and current account surpluses. “Prospects for 2013-14, are favourable with banks benefiting from better growth prospects amid a number of infrastructure projects, greater purchasing power of consumers due to growing salaries as well as strong macroeconomic fundamentals of the country,” adds Dr Al-Hashel. 
 
Regulatory changes ahead

In the near future, the nation’s banking industry will face two main challenges: higher requirements to hold liquidity and capital as per Basel III rules and a stronger emphasis on corporate governance. Fortunately, Kuwaiti banks already have high liquidity and capital standards. 
 
Regarding corporate governance, the CBK has taken strenuous efforts in improving the corporate governance of the emirate’s banks and has issued a comprehensive set of new rules on corporate governance, in line with best global practices. “These new regulations, effective July 2013, are in addition to the 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,” says Dr Al-Hashel.
 
Islamic banking

The Islamic banking sector was created by Kuwaitis working in Dubai. It is an important component of Kuwait’s financial services industry, having approximately 38 per cent 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, KFH) was established as early as in 1977,” says Dr Al-Hashel.
 
KFH today is one of the foremost Islamic financial institutions in the world, providing a wide range of Shariah-compliant products and services covering banking, real estate, trade finance, investment portfolios and corporate, commercial and retail financial markets.   
 
Estimates by Zawya, a Thomson Reuters company, suggest that Sukuk issuance reached an all-time high of around $140 billion during 2012. Demand for Islamic finance is expected to remain strong amid expanding populations in Muslim countries. Plus many countries are choosing to finance national development initiatives through Shariah-compliant products.
 
With many investors and clients expressing preferences for Shariah-compliant banking, Islamic banks have witnessed significant growth over the years, increasing the number of Islamic banks to five in Kuwait, including Boubyan Bank, which has spearheaded numerous social responsibility initiatives that benefit the nation’s health, education and environmental sustainability. 

Burgan Bank is a premier
sponsor of  this financial
overview by World Report
“We focus on integrity as an Islamic value, so we do not compromise,” says its Vice-Chairman and CEO Adel Al-Majed. “We do not overcharge or go beyond the appropriate limits. We place paramount importance on our customers and staff, and we aspire to get ahead of competitors through creativity and innovation. We have recently offered many brand-new products and initiatives that are unprecedented all over Kuwait. Teamwork is also substantial.”
 
Similarly, other Kuwaiti banks, such as Burgan Bank, have displayed genuine dedication to a host of social responsibility programmes to positive effect. “We created the virtual dealing room at Kuwait University, where business students have the opportunity to experience live dealing or treasury transactions,” comments Majed Eisa Al-Ajeel, Chairman of Burgan Bank. “Education and youth empowerment is the cornerstone of our entire CSR strategy. Our main aim is to build the leaders of tomorrow.”
 
Diversity brings opportunity

With the current push for greater economic diversification, foreign involvement and public-private partnerships (PPPs), attractive investment opportunities are highly evident in the areas of infrastructure (including ports and airports), transport, healthcare and education, to name but a few examples of promising sectors. 
 
Local banks, such as Burgan Bank, are on hand to guide investors into mutually beneficial partnerships. “Many projects are taking place in the private sector. We have to encourage the private sector to play an active role in the economy; promoting sound PPPs is vital to succeed,” says its chairman. Present in seven countries across the MENA region, Burgan Bank is one of the youngest commercial banks in Kuwait, and one of its largest. “Although we are active in building scale, capabilities and footprint through strategic acquisition and to diversify into high growth markets, we are highly focused on being effective at driving growth in our core market – Kuwait,” says Mr Al-Ajeel. 
 
“I would like to stress that the State of Kuwait is a broad window for strategic investment prospects,” adds the Central Bank’s Governor. “Prospective foreign investors, particularly from the UK, are encouraged to consider such opportunities given their long-standing track record of innovation and experience of working in the region.” l 

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