Mohammad Al-Hashel is settling into his role as Kuwait’s central bank governor, taking over responsibility for a banking sector that is well capitalised and highly liquid. 

Not only was 2012 a year of domestic political turmoil and stalled economic development in Kuwait, it also marked the arrival of a new governor at the country's central bank – the first in 25 years. In February, frustrated by the challenges imposed by the lack of government spending, Sheikh Salem Abdulaziz Al-Sabah, a well-respected governor for quarter of a century and a member of Kuwait’s ruling family, resigned. Sheikh Salem had regularly called for economic reforms in his time at the Central Bank of Kuwait (CBK) but the political deadlock at the time proved too much.

In April 2012, the deputy governor, Mohammad Al-Hashel, was appointed governor of the CBK. The 38-year-old, who has a finance doctorate from the US, inherited a steady banking sector with banks showing strong capital adequacy ratios, declining non-performing loans ratios and reasonable profits.

Mr Al-Hashel has continued to pursue the prudent traditions of the CBK and has been active in developing new corporate governance regulations to be introduced in July 2013. He has also been pushing the introduction of Basel III regulatory requirements, which are due to be in place by the end of 2013. Kuwait was the first central bank worldwide to implement Basel II regulatory reforms and the CBK is keen to become one of the first in the Gulf to implement the Basel III reforms.

In other developments, the CBK has recently given approval to China’s biggest bank, the Industrial and Commercial Bank of China, to open a single branch in Kuwait. This branch is expected to open before the end of May.

Mr Al-Hashel believes the sentiment in Kuwait's banking sector has been much better in the first quarter of 2013, buoyed by credit growth reaching 5% in 2012 compared with just 1.6% in 2011. The new governor believes the indicators are looking good but he remains cautious.

In an exclusive interview with The Banker, Mr Al-Hashel provides clear insights on a variety of important issues. 

Q: How do you see the performance of the banking sector and what changes and developments, if any, do you think are needed?

A: Preliminary results for 2012 show that aggregate banking assets registered a growth of 7.04% to reach Kd52.7bn [$185bn]; customer deposits were up by 16.46%, and shareholder equity grew by 4.12%. The Kuwaiti banks continue to be well capitalised and highly liquid with a capital adequacy ratio of 18% and a ratio of liquid assets to total assets of about 25% by year-end 2012.

Furthermore, the non-performing loans ratio for the banking system fell from 7.06% in 2011 to 4.95% by the end of 2012. The banking system provision coverage ratio has also improved: coverage including provisions was 94.8% at of the end of 2012, up from 71.8% at the end of 2011, while coverage including provisions and collateral rose to 174.8% in 2012 from 128.6% in 2011.  

As the numbers confirm, the Kuwaiti banking sector is well capitalised and highly liquid. Furthermore, despite the challenging operating environment, the banking sector has been able to record profits even while taking precautionary provisions that exceed the regulatory requirements.

Today, we are preparing our banks for Basel III regulations and believe that banks are well positioned to comply with Basel III rules on both capital and liquidity standards, given the highly liquid and well capitalised nature of our banking system.

In this context, CBK follows its four-pronged monitoring mechanism to ensure:

  • banks maintain strong quality and quantity of capital;
  • sufficient liquidity to meet day-to-day transactions as well as any untoward developments;
  • reasonable profitability (given the challenging operating environment amid heightened global uncertainty); and
  • sound asset quality where assets are not only adequately managed but also suitably provided for. 

These four pillars are interconnected as banks need to excel in all areas to effectively perform their role as financial intermediaries. For instance, a strong capital base cannot be sustained for long if asset quality keeps deteriorating. Similarly, a poor liquidity profile can expose a bank to a liquidity crunch or even a deposit run, thus turning an otherwise solvent bank into insolvency.

Q:  What has been the impact of the global financial crisis on Kuwait and its financial sector, and what is the role of governance in the developments taking place?

A: Barring some exceptions, Kuwait’s banking sector remains unscathed from any direct exposure to toxic assets or exotic derivative products that hit the global financial industry. Kuwaiti banks were not dependent on wholesale funding and had lower exposure to foreign borrowing and lending. However, the slowdown in economic activity in the wake of the global crisis did have a bearing on the quality of performing loans in the banking sector. Further, concentration in exposure to a few sectors of the economy and to investment companies also led to higher non-performing loans. Still, Kuwaiti banks remained fairly liquid throughout the crisis and were well capitalised, thus having the ability to take provisions on the problem loans without damaging their capital positions.

The CBK has made strenuous efforts to improve the corporate governance of Kuwaiti banks. A comprehensive set of new rules on corporate governance has been issued by the CBK, in line with best global practices.

These new regulations, which will become effective by mid-2013, are in addition to our earlier rules in this area. The CBK views these measures as significant in improving banks’ accountability and in helping to protect the interests of various stakeholders.

Q:  What do you believe will be the impact of the changes in capital structures and Basel III on financial institutions in Kuwait, and how do you view the future capital structures of institutions in Kuwait and the region?

A: As mentioned earlier, the Kuwaiti banking sector is well capitalised with a capital adequacy ratio of 18% as of the end of 2012. At the same time, about 90% of the banks’ capital consists of high-quality Tier 1 capital, which means that Kuwaiti banks are well placed to adopt Basel III.

We believe the future capital structures of Kuwaiti banks and other Gulf Co-operation Council banks will remain strong as Basel III requirements will force banks to maintain more quality capital against the assets that they hold.

Q: Many Kuwaiti institutions have sought growth overseas. How do you view the growth of the banking sector, both in terms of domestic growth and overseas expansion?

A: CBK has encouraged banks to expand overseas, provided it is in countries and markets that help banks appropriately diversify their portfolios. The fact that our banks are expanding abroad is a reflection of their health and capacity to grow.

Out of 11 banks in Kuwait, four have been active in expanding their operations overseas. These four are also the banks with major shares in the domestic market. The expansion overseas has helped these banks to use their excess capital to invest in banking sectors with good long-term growth prospects in markets such as Malaysia, Turkey and Egypt.

Locally, there is good potential for growth on account of:

  • a fast-growing population, the majority of whom are below the age of 24 years;
  • financing needs related to the country’s development projects, which are planned to serve this fast-growing population; and
  • the relatively high and growing purchasing power of the local population.

Q: Islamic finance has played an increasing role in Kuwait in recent years and in The Banker’s 2012 global listing of the top Islamic institutions, Kuwait had 32 entrants in the list, including the fifth largest in the world, Kuwait Finance House. How do you view the changes and growth in the Islamic finance market in Kuwait and elsewhere?

A: Islamic banking is an important component of the Kuwaiti banking sector, comprising a 38% market share of total assets as of the end of 2012. It is worth highlighting that Kuwait has played a pioneering role in promoting Islamic finance, as our first Islamic bank [Kuwait Finance House] was established as early as 1977.

Given the preferences of many investors and clients for sharia-compliant banking, Islamic banking in Kuwait has witnessed significant growth over the years, increasing the number of Islamic banks to five. Furthermore, growth in Islamic banking has also helped create strong demand for other Islamic investment products, such as sukuk, as Islamic banks look to invest their excess liquidity in sharia-compliant instruments.

Some estimates, reported by the Financial Times, suggest that sukuk issuance during 2012 reached $131bn, witnessing a strong growth of 54% when compared with 2011. We expect the demand for Islamic finance to remain strong in light of growing populations in Muslim countries and rising government development expenditures, which many countries are choosing to finance through sharia-compliant products.

Q: The Kuwaiti economy has been growing but there have also been strong budget surpluses as revenues have not been spent. How do you view Kuwait’s macroeconomic outlook, its prospects for growth and attracting investment, and also for getting many stalled projects off the ground and thereby building more growth into the economy?

A: Growing budget and current account surpluses amid strong oil prices in the past few years have increased the amount of funds being earmarked for future generations and have also further bolstered the government’s ability to undertake various development projects.

However, given the nature of our economy, the opportunities for investing the entire surplus in Kuwait are obviously limited as excessive spending might overheat the economy, stoke inflation and create asset bubbles. So we need to maintain a judicious balance of investing at a rate that is appropriate for the economic growth, but which does not lead to over-supply or excessive exposure to a particular sector.

The government is already in the process of implementing a set of ambitious projects that will boost growth and create jobs for our youth. At the same time, a sizeable portion of the surplus is being invested in various assets abroad to ensure a steady supply of resources for future generations.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter