With the country's well-capitalised banking sector set to transition smoothly to Basel III standards and a positive macroeconomic outlook, central bank governor Mohammad Al-Hashel is able to concentrate on Kuwait's longer term prospects. He tells The Banker how he expects more growth in the Islamic banking sector and an increase in government spending, both of which will prove beneficial to the country's economy.

Back in April 2012, Mohammad Al-Hashel was appointed governor of the Central Bank of Kuwait, replacing Sheikh Salem Abdulaziz Al-Sabah, a member of Kuwait's ruling family, who had been head of the central bank for a quarter of a century. Mr Al-Hashel has a string of qualifications from universities in the US, including a financial doctorate from Old Dominion University in Virginia, and had held a number of positions at the Central Bank of Kuwait, including deputy governor to Mr Al-Sabah, before he was named as head of the institution, which was founded in 1969.

Already during his relatively short time in this role, Mr Al-Hashel has emerged as a strong advocate of Islamic banking, a sector that is going from strength to strength in Kuwait. And Islamic banking is not the only sector that has flourished during his tenure. The country’s all-important National Development Plan, which stalled for several years, has finally gained some momentum, while the banking sector and wider economy as a whole have bounced back from the global recession, providing a healthy platform for future growth.

With the dark days of the global economic crisis fading into memory and the country enjoying the benefits of a relatively strong oil price, the near-term outlook for the Kuwaiti economy is good. As Mr Al-Hashel approaches his two-year anniversary as head of the central bank, The Banker asks him what he expects in 2014 and how he sees the country's economy developing over the longer term.

Q. Where do you see growth in the banking sector in Kuwait?

A. Credit growth in the domestic market has started to accelerate. During 2013, domestic private sector credit to residents grew by 8.1%, compared with 4.6% in 2012. We expect the growth to maintain this trend going forward, as implementation of the development projects, though still somewhat slower, is likely to gain momentum.

Q. How smoothly do you expect the Basel III implementation to go in Kuwait and what are your estimated timings on this? 

A. We expect the implementation of Basel III capital adequacy standards to be fairly smooth. The board of directors of the Central Bank of Kuwait has already approved the structure of the Basel III capital adequacy standard and the transitional phase of its implementation. In accordance with the results of our quantitative-impact study and in line with Basel III guidelines and the implementation process by other central banks around the world, the board of directors approved a minimum capital adequacy ratio of 13% to be implemented by the Kuwaiti banks in a phased manner.

Specifically, banks are required to meet the capital adequacy ratio of 12% from the start of 2014, of 12.5% from the start of 2015 and of 13% from the start of 2016. The gradual phasing in of Basel III capital adequacy standards will ensure that Kuwaiti banks continue to broaden their business activities and expand their lending portfolios while remaining compliant with the new regulations.

Q. What is the state of the inflationary environment in Kuwait at present?

A. Kuwait has historically been an economy [with low inflation]. As a small, open economy with a relatively flexible exchange rate system, the domestic price level in Kuwait is mainly affected by developments in the prices of imported goods in their countries of origin. On the other hand, inflation in non-tradables is affected by the state of the local demand conditions and, in that regard, prudent macroeconomic policies have maintained relatively low non-tradable inflationary pressures. We do not expect domestic or external dynamics to generate any significant inflationary pressure in the foreseeable future.

Q. How prepared is the Kuwaiti banking sector to withstand any sudden shocks?

A. It is a key mandate of the Central Bank of Kuwait to ensure a sound and stable financial system and we have ensured this stability over the years, even at times when many other countries experienced serious financial meltdown. Our banks continue to remain well capitalised with a capital adequacy ratio of 18.85% as of December 31, 2013. Moreover, approximately 90% of the banks’ capital consists of Tier 1 capital, a strong indication of the high quality of their capital base.

Kuwaiti banks have also maintained a high level of liquidity, with liquid assets to total assets of about 26.6% as of December 31, 2013. Results of our recent stress-testing exercise also affirm the resilience of our banking system to withstand major shocks.

Q. How do you see the Islamic banking sector developing in Kuwait this year? What innovations are we likely to see in the sector in the future?

A. Growth in the Islamic banking segment is to be driven by the overall growth in the domestic economy and would be in line with the growth in the banking sector in general, as mentioned earlier. Islamic banking is a key segment in Kuwait’s financial system and we currently have an equal number of Islamic and conventional banks (five each). Over the years, the share of Islamic banks in Kuwait has grown and now stands at about 38.5% in terms of the total assets of the domestic banking system.

On our part, we have created an enabling environment for Islamic finance to flourish. The Central Bank of Kuwait has issued detailed regulations to ensure a sound Islamic banking system, in line with best global practices and keeping in view the dynamic nature of the industry. These regulations cover areas such as Basel III, and corporate and risk governance, and have been suitably modified in accordance with the specific nature of Islamic banking. These measures have provided the Islamic banks a conducive environment to operate and grow in line with shariah principles.

Q. What is the macroeconomic outlook for Kuwait? Will we see more growth through infrastructure?

A. The outlook is positive. The positive macroeconomic outlook is to a large extent the outcome of many factors: the firmness of oil prices at a relatively high level, the optimism that currently prevails after a period of domestic political tensions, and last but not least, strong support from the fiscal and monetary stance of the government. In the past couple of years, increases in government expenditures have supported the growth of the non-oil economy. Continuation of the policy is expected to provide further support to economic growth in the future.

Moreover, the passage of a number of laws that facilitate business in general and the efforts put in to create an investment-friendly environment through the reduction of bureaucratic red tape and defining a new role for government that encourages private sector participation in various non‑oil sectors is expected to further the positive outlook.

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