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Economics & Development | Global Arab Network
Kuwait strategy – Setting up financial and commercial hub
Global Arab Network - Oxford Business Group
Wednesday, 10 February 2010 13:19
kuwait_property-_copy
The local press reported this week that the Kuwaiti government had completed its policy agenda for the next three years, with the “focus on making Kuwait a financial and commercial hub”. This is likely to see a growing role for Islamic financial institutions (IFIs), which are an increasingly large and dynamic part of the country’s financial sector.

IFIs have been flourishing worldwide in recent years, as the economies of the Muslim world have grown rapidly, and investors, companies and individuals have sought new forms of financing. Kuwait is no exception, and now has one of the world’s largest Islamic banking industries by assets.

Kuwait has a range of IFIs, including three Islamic banks: Kuwait Finance House (KFH), the country’s biggest Islamic bank and one of the region’s largest IFIs, Kuwait International Bank (KIB) and Boubyan Bank. The Central Bank of Kuwait (CBK) has thus far not permitted conventional banks to open Islamic windows, which has helped the three players to build their client bases. Local non-bank IFIs include takaful (Islamic insurance) funds, which had a 14% insurance market share in 2009, finance companies and sharia-compliant real estate investment firms.

Generally, IFIs have been less affected by the global financial crisis and economic downturn than the conventional segment, as they tend not to invest in the sort of risky asset classes that have brought many institutions across the world to grief. However, during the years of breakneck portfolio growth in Kuwait, some banks failed to monitor risk closely enough. Kuwait’s sharia-compliant institutions could not be isolated from the country’s recession and real estate slump, as well as their exposure to the domestic stock market.

KFH’s profits fell by 24% in 2009 to KD157m ($544m) after a 43% drop the previous year. Chairman and managing director Bader Al Mukhaizeem attributed the fall to the effect of the global crisis on the region. Similarly, Boubyan Bank posted an unrealised loss of KD17.1m ($59m) in the first three quarters of 2009. One reason for the shaky performance is a rise in provisioning; banks in the Gulf and beyond have had to increase provisioning considerably in the face of the market conditions, which has impaired profitability in both conventional and Islamic institutions. Indeed, KFH’s declining profit came against rising deposits, which grew 10% to $39.2bn in 2009.

Banks were not the only IFIs to be hit. Sharia-compliant real estate investment funds, such as Amar Finance & Leasing Company’s real estate fund, also saw their profits fall, in line with global trends. Liquidity was tight across the board for most of 2009, with interbank lending still sluggish and investors wary, despite generous interest rate cuts.

However, both the regional and domestic economy are expected to rebound this year, with the IMF forecasting growth of 3.3% for Kuwait. This is likely to provide a fillip to the whole finance sector, as demand for financing rises and assets recover. Liquidity is already stronger, and should receive a further boost from the CBK’s half-point rate cut on February 7, which is also likely to improve market sentiment.

IFIs have also taken the opportunity to refocus their investments. In order to lower exposure to real estate, banks are looking towards the corporate sector, particularly local businesses. Many of these have been steady in the recession and have the stable structure and restrained strategies that point to long-term growth.

As the market recovers, a fourth Islamic bank is set to join the market. On January 27, the Bank of Kuwait and the Middle East (BKME), which is owned by conventional lender Ahli United Bank, announced that it would begin operating as a fully-fledged Islamic bank by the end of the second quarter. BKME’s sharia-compliant systems are now complete, and it has final approval from the CBK. The swift conversion of BKME from a conventional institution is indicative of banks’ confidence in the potential for growth in the segment, and the strategies that mainstream financial organisations are using to break into the market.

Meanwhile, on January 24, Boubyan Bank announced that it was commencing a major rights issue to raise its capital by 50%. The move seems designed to position the bank strongly during the recovery. Boubyan said the issue will see shares priced at a nominal value of 100 fils ($0.35), with a premium of 155 fils ($0.54), and that its capital will increase from KD116.6m ($406.2m) to KD174.9 ($609.4m). KFH has ruled out a similar move – apparently due to shareholder opposition – though it might lose out on the long-term benefits of a capital hike, one Kuwait-based analyst told Reuters.

Recent shifts in strategy by IFIs have shown that, despite their meteoric rise over the past decade, they cannot run by standing still, nor by following the market as a whole. They are likely to look to more innovative products and segments to support long-term growth. Despite the difficulties of the past two years, they are in an excellent position to do so.

Global Arab Network

This article is published in partnership with Oxford Business Group
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