Kuwait’s banks have largely depended on their domestic market and, with the exception of the country’s largest bank, National Bank of Kuwait, have not aspired to build an international or even a regional network. But, while the focus remains within Kuwaiti borders, banks are also beginning to look at the opportunities outside and build operations – not only in the region but as far afield as Malaysia and Indonesia.
With the removal of Saddam Hussein the atmosphere in Kuwait has changed and the country’s greatest threat has disappeared. This has helped build confidence at home and in the ability to reach out to new markets. Improved stability, however, is only one aspect and higher oil prices along with efforts to open up the six Gulf Co-operation Council (GCC) states have significantly improved the prospects for intra-regional activities, regional M&As and greater business synergies. Added to this, the surge of interest in Islamic banking across the globe has created opportunities for Islamic banks to extend their activities to the Gulf and far beyond.
Open season
In the past year, there has been a plethora of new deals and expansion abroad and more is expected in coming years, as not only Iraq opens up but also as the GCC becomes much more of a single market and the banks seize the opportunities offered by the region’s booming economies. Not surprisingly, National Bank of Kuwait (NBK), the most profitable and best-rated bank in the region, has been quick off the mark. Chief executive Ibrahim Dabdoub describes regional expansion as one of the bank’s three main strategic thrusts.
During 2004, NBK made a series of moves that will significantly strengthen its regional and international presence. The bank already had an extensive network that includes subsidiary banks in London, Paris, Lebanon and Geneva together with branches in New York, Singapore and Bahrain (offshore) and representative offices in Bangkok and Ho Chi Minh City. But the network is now growing fast.
The opening of its first branch in Amman gives NBK entry into the Jordanian market, and the acquisition of a 20% stake in the International Bank of Qatar (formerly Grindlays Qatar Bank), along with full management control, expands its influence in the growing Qatar market.
Ready and waiting
Another key move in the Gulf is the long-awaited entry into Saudi Arabia. NBK has been granted a branch licence in Jeddah. According to Robert Eid, managing director of London-based National Bank of Kuwait (International), the Saudi branch will be operational this summer. The opening of a retail branch in Bahrain adds further depth to the bank’s coverage.
Mr Eid says the expansion into Qatar, Bahrain and Saudi Arabia is part of the bank’s ambitious regional programme, which is expected to include Dubai soon. Few GCC banks offer services across a range of countries and NBK is determined to become a truly regional player.
Iraq is also a key expansion point. Last month, NBK acquired a 75% majority stake in Credit Bank of Iraq (CBI), a relatively small bank with 12 branches but fully operational and under NBK control. The World Bank’s private finance arm, the International Finance Corporation (IFC), also has a 10% stake in CBI.
NBK is playing a leading role in re-establishing Iraq’s financial structure. It is one of three foreign banks, with HSBC and Standard Chartered, that are authorised to operate there and is the first to begin operations. It is also one of the five international banks involved in the Trade Bank of Iraq consortium. The Trade Bank provides the bulk of trade financing to Iraq on a fully cash-collateralised basis with funds deposited with JPMorgan, one of the consortium members. With the CBI acquisition and its other major roles, NBK is already the best placed foreign bank in Iraq. The enormous reconstruction programme there has yet to get fully under way, so NBK’s potential in Iraq is significant.
Iranian in-roads
Another important regional development is NBK’s recent agreement to establish a leasing company in Iran. In the current, more stable, political environment, the large Iranian market offers huge opportunities for Kuwait, which has long had traditional trading ties with Iran. Mr Eid says that NBK signed an agreement in March with the leading Iranian private sector bank, Karafarin Bank, and the IFC, whereby NBK and Karafarin would each hold a 40% share in the new venture.
Because foreign banks are not allowed in mainland Iran, the leasing venture in Tehran is an important first step for NBK. “We will feel our way,” says Mr Eid, who adds that recruiting has already started and the company will be up and running by the summer.
Besides the regional focus, NBK is expanding in Asia and is expected to open a representative office in Shanghai before the end of June. Mr Eid believes the move into China and the strengthening of operations throughout the Gulf and Iraq create huge synergies and allow NBK to leverage its relationships far better with companies across Asia and the Middle East.
Islamic pioneer
While NBK is leading the expansion trend beyond Kuwait’s borders, Kuwait Finance House (KFH), the country’s second largest bank, is rapidly extending its reach. A pioneer in Islamic banking, KFH is keen to finance more major projects in the Gulf. Last year, it issued sukuks (Islamic debt issuance) to the Kingdom of Bahrain and the Islamic Development Bank, for $250m and $400m respectively. It also played a vital role in the ground-breaking €100m European leasing sukuk for the German state of Saxony-Anhalt last year, stimulating interest in Islamic banking products across Europe. Although KFH had no operational investments abroad at the start of the year, in 2000 it bought a 20% stake in National Bank of Sharjah in the UAE, which has recently been converted into Islamic Bank of Sharjah, giving a foothold in the region.
KFH’s big story, though, is its move into Asia. In what chairman Bader Abdul Muhsen Al-Mukhaizeem says is “an important step towards expansion and penetration strategy worldwide”, KFH has obtained a licence for a wholly-owned subsidiary in Malaysia, to be known as Kuwait Finance House Malaysia. With a paid-up capital of $100m, this large investment reflects the growing demand for Islamic banking services in muslim countries.
As a full service bank covering all sectors, this new Islamic institution will play the role of commercial bridge between Gulf and Kuwaiti markets on one hand and Malaysian and south-east Asian markets on the other.
KFH sees Asia as a huge market and the Malaysian banking authorities are also keen to bring KFH’s extensive Islamic banking experience to their region. According to deputy general manager Anwar Al-Bader, preparations for KFH’s Malaysian bank are well under way and the formal opening is expected by the end of the year. KFH sees huge opportunities for its style of Islamic banking in Asia, at both wholesale and retail levels, and is keen to extend into the huge Indonesian market and even on to China, where there is strong interest in Islamic finance.
New entrant
Boubyan Bank, the newly-created Islamic bank in Kuwait, is also keen to invest in Asia. In January this year, just a few months after its opening, Boubyan took a 20% stake in Bank Muamalat Indonesia. According to Boubyan’s chairman, Yacob al-Muzaini, Muamalat controls up to 50% of the Islamic banking sector in Indonesia, the world’s most populous muslim state. Muamalat has 156 branches and up to one million customers but still has huge growth potential. Closer to home, Boubyan plans to develop all over the Gulf and according to Yacoub Al-Awadi, deputy general manager, the bank is looking at deals in Iran and Turkey among other countries.
Of the six other Kuwaiti banks, only Al-Ahli Bank of Kuwait (ABK) has operations outside Kuwait. But strategies are changing as the GCC opens up and banks seize the growing opportunities available in trade, project finance and even retail.
Regional expansion is still in its infancy but appears to be the way forward, with NBK taking the lead. The Islamic banks are breaking out in new directions but others have natural paths forward. Bank of Kuwait and the Middle East (BKME) is 46%-owned by regional player Ahli United Bank. A major shareholder of Burgan Bank is investment house Kuwait Projects Company, which has a network of financial shareholdings in the Gulf and elsewhere in the Arab world. With opportunities exploding in the Gulf, the Kuwaiti banks are in a good position to diversify their risks and press home many of the regional synergies they have not yet explored. Expansion abroad has begun and will not be turned back.
