Less than a decade ago, Kuwait’s banking sector was stagnant, hindered by a slew of changing governments and crippled by political instability.
Between 2011 and 2014, infrastructure projects were few and far between, public spending was at a low point and banks were suffering on the back of it. In 2015, the government announced its first budget deficit for more than a decade.
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Over the past few years, though, that has all changed, with the government making efforts to diversify the economy through a series of measures – from allowing 100 percent foreign ownership in certain sectors to providing tax breaks to investors and relaxing the regulatory environment.
The latter has been particularly beneficial to the financial industry, which is now one of the country’s biggest sectors and is propping up the economy at a time when volatile oil prices (see Fig 1) and OPEC production cuts continue to have a significant impact on the Gulf Cooperation Council (GCC) region.
According to the IMF’s 2019 Kuwait: Financial System Stability Assessment report, financial system assets represented 252 percent of the country’s GDP at the end of 2017, with the majority being held within the banking sector. KPMG’s 2019 GCC Listed Banks’ Results: Embracing Digital report, meanwhile, concluded that the nation’s banks had “witnessed one of the best years in the recent past”, with overall net profits in the segment rising 19.3 percent year on year and total banking assets in the country growing by five percent.
In the coming years, a raft of mega-scale infrastructure projects – including the construction of new cities, bridges and highways under the ambitious Kuwait Vision 2035 development plan – is set to bolster the sector even further. As a result, Kuwait is now a finance leader in the GCC – a fact that is reflected in its continued position as one of the wealthiest nations in the world per capita (see Fig 2) – and it doesn’t look set to slow down any time soon.
Leading the market
While conventional banks are playing their part in propping up Kuwait’s financial industry, it’s the Islamic finance sector that’s witnessing the strongest growth: according to the Central Bank of Kuwait (CBK), Islamic banking groups recorded a 22.5 percent growth in their net income in 2018, compared with 15.9 percent among conventional institutions. Sharia-compliant assets now account for 40 percent of the country’s banking sector, according to the IMF.
Such progress has been facilitated by various developments, not least the government’s decision to start issuing Sharia-compliant instruments in 2016, which gave Islamic institutions easier access to high-quality liquid assets. Various digital innovations in the sector have helped spur growth further, with the likes of electronic payment systems, teller machines and biometric security all being utilised, and partnerships with fintech firms gradually being established.
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Together, these changes are putting Kuwait on the map at a time when the Islamic finance industry is growing as a whole – according to Thomson Reuters’ Islamic Finance Development Report 2018, global Sharia-compliant assets were worth $2.4trn in 2017 (up 11 percent from the previous year) and are expected to reach $3.8trn by 2023.
Among those benefitting the most from this growth is Kuwait International Bank (KIB). The Sharia-compliant lender stepped into the limelight recently when it was listed on Boursa Kuwait’s Premier Market – one of three new divisions introduced by the stock exchange in 2018 for companies excelling in terms of financial performance, share liquidity, corporate governance and other policies. It marks a new era for the former real estate specialist that became a fully fledged, full-service Islamic bank in 2007, boosting its investor profile within the region and beyond.
“KIB’s listing on the Premier Market reflects improvements in the bank’s operations and financial performance as part of its new strategic direction,” the bank’s CEO, Raed Jawad Bukhamseen, told World Finance. The new strategy involves a series of forward-thinking, client-centric digital innovations, an ambitious expansion plan and a focus on corporate social responsibility that puts company culture, the local community and the development of Kuwait’s wider economy at its heart.
At the core of the global Islamic banking sector is the sukuk. Equivalent to a bond, a sukuk is compliant with Sharia law and gives the holder a portion of the earnings generated by the asset without the need to pay interest. “Sukuk are important financial instruments for the Islamic banking sector – not only in Kuwait, but all over the world,” Bukhamseen said. “These specialised financial instruments can boost the funding and capital position of financial institutions.”
Banks are catching on to this fact: according to the IMF, global sukuk issuances multiplied 20-fold between 2003 and 2013 to reach $120bn, as institutions recognised the importance of diversifying their funding. One such institution was KIB, which struck gold earlier this year when it successfully priced a $300m AT1 perpetual sukuk at an annual profit rate of 5.625 percent. Listed on Euronext Dublin, it was the first AT1 sukuk to have been issued in Kuwait since 2017 and became the best performer in the secondary market this year. A weeklong road show helped the bank generate interest from investors across 26 countries, with the order book reaching a peak of $4.6bn – a more than 15-fold oversubscription. Further, 51 percent of the final distribution went to international investors.
Bukhamseen believes the successful issuance represents another turning point for the bank: “With this important financing instrument, KIB will be able to carry out its local expansion strategy, build its capital base as per Basel III guidelines and add a new source of capital. It also enhances the bank’s capital adequacy ratios and diversifies its funding sources.” KIB’s expansion plan includes opening several new retail branches in the country over the coming years, with the bank considering the strongest growth opportunities to be present in the market where it already boasts a substantial customer base. “Every organisation seeks growth and expansion as a long-term goal, as this allows you to gain an advantage in a relentlessly competitive environment,” Bukhamseen added. “As well as presenting new opportunities for everyone in the bank and enhancing profitability, expansion is a crucial strategy for survival.”
According to Bukhamseen, it’s not just the bank that will feel the benefits, as sukuk like this are essential to the development of the wider economy: “In addition to supporting the bank’s accelerated growth plans, the sukuk is a strong testament to the region’s capabilities in driving greater economic development by enabling the exchange of expertise and pro-active collaboration. A more diversified, efficient and stable financial system is necessary for the development of the banking sector. The financial system’s ability to allocate resources effectively and efficiently is crucial to supporting Kuwait’s transformation into a high value-added, high-income economy.”
Banking on digitalisation
But the health of the financial system (and, indeed, Kuwait’s wider economy) does not just rest on the development of sukuk: it also depends on how such financial instruments are presented to the public. This is where technology – and the sector’s uptake of it – comes into play. “Now, clients across every industry want to be constantly connected in all aspects of their lives,” Bukhamseen told World Finance. “The banking industry must meet these demands by offering new services that deliver an enhanced client banking experience – one that is armed with innovative technology. Today, the banking world is being disrupted by new technology and digitally sophisticated clients, driving banks to innovate in order to maintain customer loyalty. By embracing technology, banks can continue to stay relevant and set themselves apart in an increasingly digital world.”
Put simply, technology is essential in a market dominated by young, digitally savvy consumers – according to the UN, over 70 percent of Kuwait’s population is under the age of 35. Technology is also a way of reaching the underserved, with access to payments, transfers and other transactions made easier through the introduction of digital systems. Such transactions tend to involve lower costs for both the provider and the customer.
With the help of the CBK, which introduced new regulations to promote innovation in electric payment operations last year, Kuwait’s financial industry has already taken several steps to implement digital solutions. Further, according to KPMG’s GCC Listed Banks’ Results: Embracing Digital report, this trend is set to continue in the near future: “The digital agenda for banks in Kuwait is expected to increase as Kuwaiti banks continue to invest in digital banking channels, infrastructure and solutions. This will involve investments in new-age technologies, such as intelligent automation, blockchain and artificial intelligence. It is anticipated that Kuwaiti banks will see an increased acquisition of customers through digital channels across most product offerings.”
But, as Bukhamseen told World Finance, banks can’t do it alone: “KIB believes that collaboration between fintech firms and banks is essential in order to advance processes and banking offerings. These collaborations have already paved the way for improved service and technological innovations.”
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