Sheikh Salem Abdulaziz Al-Sabah, governor of the Central Bank of Kuwait, discusses the latest financial developments in Kuwait with Stephen Timewell.

Q  On 20 May 2007, Kuwait unpegged its currency from the dollar. What has been the impact of this major policy shift on the Kuwaiti dinar and the effect on inflation since then?

A Since we restored the old regime, a basket of trade-related currencies, the Kuwaiti dinar has appreciated by almost 9% against the dollar, strengthening the dinar, and so far in our opinion it is excellent. With 80% of our goods and services imported and our exchange rate appreciating against the dollar, the depegging has played a positive role as regards imports and has played a part in reducing inflation, especially from the high price of imports.

Inflation has gone up. This is no surprise because of the rising cost of food in Kuwait and elsewhere as a result of increased demand and decreased supply of agricultural products through drought and biofuels, and also the increased price of oil, transportation and insurance. Inflation was 3.1% in 2006 and rose to an official rate of 5.5% in 2007 as population increases created more pressure on housing, with rental prices rising 6% and food prices rising, especially given that 85% of food is imported. In January 2008, inflation rose to 9.5%.

Fighting inflation is a prime aspect of monetary policy but it cannot be fought alone. Other factors, such as fiscal issues, are important. Here the issue of land is difficult and different policies could relieve the high cost of housing. Harmonisation of economic policies, including monetary policies, is needed to solve inflationary pressures.

Had we not depegged the currency from the dollar, we are certain that prices and inflation would be much higher. While other economic policies are also needed, depegging has played a role in lowering the level of inflation and helped to put us in a better position than Qatar with 14% and the UAE with 12% inflation.

Q  What is Kuwait’s position towards the unified single currency for the Gulf Co-operation Council (GCC) states in 2010?

A Kuwait is fully committed to the single currency target of 2010. We are doing our best as governors of the GCC to lay down the foundations and finalise the details in the latter months of this year. Perhaps something will happen to postpone the target date, but Kuwait is committed fully to monetary union.

Q  Foreign banks at present are only allowed one branch. When is this likely to change, if at all?

A The central bank is supportive of foreign banks having more than one branch but this requires an amendment to the existing legislation in parliament. This will be a decision for parliament. The central bank will push for the amendment, which we hope will be submitted to parliament before the end of the year.

Q  Given that Kuwait is a major player in this area, how do you see the role of sovereign wealth funds (SWFs)?

A Kuwait has played a role in such funds for more than 50 years and has played a very neutral role very well. However, to accommodate the opinion of both sides, the SWFs and recipient countries, we have to reach a common understanding. To my knowledge, at a meeting at the IMF in early May both sides reached an understanding in terms of transparency and strategies, and we hope that by October all of this will be finalised. In my opinion, the results are encouraging and giving positive signals.

Q  Islamic banking is growing fast in the Gulf but conventional banks in Kuwait are not able to offer Islamic products. What is your approach to the expansion of Islamic finance?

A Under a law issued by parliament, all conventional banks are not allowed to offer Islamic financial services. Banks are either Islamic or conventional, so the central bank is just applying the law. However, we do allow banks to be transformed from conventional to Islamic. Between 2004 and 2006, Kuwait Real Estate Bank was converted into Kuwait International Bank, a wholly Islamic bank.

For me, the greatest challenge for Islamic banking is the sukuk (Islamic bond) issue; launching a sovereign sukuk. The question of public assets backing the sukuk needs a flexible type of interpretation. This needs more discussion as well as understanding with sharia scholars.

While conventional banks can by law establish a separate Islamic entity for Islamic financial services, the central bank has not approved any of these. And, with 44 Islamic investment companies already operating in Kuwait, we do not want an influx of Islamic institutions and prefer to take a gradual approach to expansion.

Q  The central bank of Kuwait has taken a unique step in limiting consumers’ access to credit. How does this work?

A The model looks at the level of consumer credit and instalment loans. Consumer loans should not exceed five years and should not exceed 40% deduction from net salary paid to the bank. The banks must look at a person’s salary, and payments must not exceed 40% of that disposable salary.

Banking knowledge is limited. We do not want people to get over-indebted and create a social problem. The system is working well.

Q  Many Gulf countries in recent times have made substantial efforts to increase their roles as regional and international financial centres. And along with Bahrain, Qatar and the UAE, Saudi Arabia has significantly changed the structure of its financial sector. What role does Kuwait see for itself as a financial centre in the future?

A In the past, Kuwait has been a major financial part of the area. It was the leading commercial centre, so why not repeat it now? We have conducted a study with McKinsey, which is with the council of ministers and which emphasises that specialisation is a must. Specialisation is more appropriate for Kuwait.

Our understanding of a financial centre is not just having international financial institutions present. It should be a complementary type of centre. It is not just the presence of international firms, and they should be present, but it should be the opportunity to move and direct accessible funds between owners with surpluses to other partners that need the funds. I think with proper instruments and supportive institutions from advisers to lawyers this is an integrated services offering and this is what we are thinking about, not just the presence of international financial institutions.

The study is before the council of ministers and I believe something will crystalise on our strategy before the end of the year.

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