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Kuwait: Leading institutions showing healthy financials

Monday, 29 March 2010 15:09

In the aftermath of the global financial crisis, Kuwait's banking sector appears to have weathered the worst of the storm, with most of the country's leading lenders showing healthy financials. However, despite abundant liquidity and incentivising measures introduced by the Central Bank of Kuwait (CBK), banks are still reluctant to lend, citing a lack of perceived growth prospects.

As has been experienced elsewhere in the Gulf region, the ratio of non-performing loans (NPLs) in Kuwait has nearly doubled since the crisis began. Nevertheless, despite decreased profits due to provisions required to cover the costs of poorly performing loans, seven of the country's nine domestic banks recorded positive earnings in 2009, a significant rebound from 2008 when only one bank generated positive returns.

Much of the credit for this resurgence has to go to the government, which possesses both the capital reserves and the willingness to intervene if required. When in 2008 Gulf Bank, the country's second-largest lender, reported a $1bn loss in derivatives trading, the CBK quickly stepped in by guaranteeing all deposits in the banking system. Meanwhile, the country's sovereign wealth fund, the Kuwait Investment Authority, provided a capital injection through purchasing ownership in the bank via a rights issue.

Although the Gulf Bank incident was considered an anomaly, a wider issue was the domestic banks' exposure to struggling investment firms, many of which are facing solvency issues as a result of their real estate and equity assets losing value. By year-end 2009 outstanding debt to local investment firms was estimated at $18bn, including $7.6bn owed to foreign financial institutions. While at the beginning of 2008, it was estimated that bank loans to customers related to real estate and securities investments accounted for 55% of the total.

These factors led the government to approve a $5.2bn rescue package. Titled the "Financial Stability Law" (FSL), the package guarantees 50% of fresh loans to local firms throughout 2009-10. It is, however, provided on the basis that loans must go towards "productive" sectors and will therefore not cover the acquisition of real estate or securities.

The scheme's intention is to boost confidence in the financial sector by offering local companies access to fresh credit in order to repay debt commitments to local and foreign banks. The scheme is not intended as a blanket bailout, with firms required to first prove that they are eligible for support, as well as implementing certain financial and administrative changes to qualify.

The law has so far not been tested, with over-leveraged companies preferring to negotiate loan reschedules directly with creditors rather than entering into a government-led restructuring package. But it appears that the FSL might soon be called on, with Islamic investment firm Investment Dar indicating in early March that it will apply for government protection to resolve its outstanding debts of $3bn. The company has stated that the move is not being sought as a method of financial support, but to obtain the legal cover afforded under the FSL framework.

Despite numerous measures to introduce fresh credit to the market, with the discount rate having been cut six times between October 2008 and February 2010, banks in Kuwait are feeling hampered by what they perceive as a lack of worthy lending prospects. As the Kuwaiti government is cash-rich and does not need to borrow, there remain few viable lending options for banks wishing to extend credit growth and improve their asset quality.

Many believe that lending incentives and guarantees aside, the most effective and direct solution on the part of the government to encourage viable borrowing opportunities is direct spending, as banks are usually more willing to lend to companies involved in government-backed projects. And in this regard, the banking sector received good news in February as parliament approved a KD30bn ($103.9bn), four-year spending plan. While the details are not yet finalised, even a small proportion of the planned projects would immediately lead to borrowing from construction companies, creating a ripple effect to other sectors.

Global Arab Network

This article is published in partnership with Oxford Business Group

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