Q How do you view the performance of the local banks in 2005 and do you have any concerns about their prospects in 2006?
A The year 2005 brought strong performance by local banks in various aspects, recording significant development in their financial resilience indicators, reinforcing their role in serving the national economy by extending credit to various domestic economic sectors, and complementing the continued growth of recent years.
Among the indicators of this strong performance are an increase in local banks’ total assets in 2005 by 12.9% to Kd21.6bn ($74.8bn), an increase in private sector deposits with these banks by 15.5% to Kd13.4bn, and an increase in shareholders’ equity by 18.6% to Kd2.7bn. On the other hand, credit facilities extended by local banks rose by 18.8% to Kd12.3bn. Local banks maintain adequate provisions, both specific and general, against non-performing facilities in compliance with the instructions issued by the Central Bank of Kuwait (CBK) in this regard. Furthermore, net foreign assets grew by 12% to Kd1.5bn.
With respect to financial indicators, local banks realised considerable growth in their net profits. Total net profits during 2005 amounted to Kd670.4m, a 39% increase on their 2004 level. As a result, average return on assets of local banks rose to 2.9%, compared with 2.4% in 2004. Return on shareholders equity rose to 19.5%, compared with 18.4% in 2004. In addition, the average capital adequacy standard of local banks stood at 21.3% by the end of December 2005, the date when Basel II requirements were imposed on conventional banks and branches of foreign banks, compared with the minimum requirement of 12%.
These indicators provide adequate proof of the resilience of the local banking system and the soundness of its financial indicators. This was accomplished through the efforts of the banks and the CBK supervisory and oversight role, with its efforts to direct the local banks to enhance their performance, and keep them abreast of the ongoing developments in world banking and supervision according to best practices.
Certain factors have had an impact on achieving these performance levels and are expected to have a positive influence in the coming years as well. Among these was the removal in April 2004 of the state guarantee of depositors’ rights in Kuwaiti banks to avoid the adverse effects of continuing this guarantee and to provide a more level playing field for competition. Another factor was the removal of restrictions on the presence of foreign banks in the local market. Three new branches of competent international banks and a branch of a Gulf Co-operation Council bank were registered. The presence of foreign banks in the Kuwaiti market is expected to invigorate competition in the local banking market, elevate the level of products and services in the market, and prod local banks into further reinforcing their operating systems and efficiency – optimising the use of resources and focusing on corporate governance.
The application of the Basel II framework for capital adequacy, which includes standards for determining the minimum risk-sensitive capital requirements in banks, will no doubt increase local banks’ interest in improving and enhancing their risk measurement and management systems.
In view of that, my predictions regarding local banks’ performance during 2006 are positive and indicative of continued good performance by the local banking system.
Q While the macroeconomic picture looks healthy with oil prices high, what are your key concerns in terms of restructuring the economy and achieving economic reforms?
A In the past few years, Kuwait’s economic performance has been exceptionally good. Record oil revenues, rising gross domestic product, widening budget and current-account surpluses, and low inflation have combined to secure an economic boom that is expected to continue in the foreseeable future.
It is important, however, to recognise that these strong indicators are mostly outcomes of external forces. Nonetheless, the current boom is the ideal time to address long-standing challenges, such as economic diversification and employment generation, because it is preferable to take tough decisions when things are comfortable than having reforms forced on us by adverse circumstances.
It is important, too, to ensure that current financial surpluses are well-managed and do not simply find their way into expanded government commitments that would only deepen the structural challenges facing the economy. A prudent action would be to divert as much of these surpluses as possible towards capital expenditure, upgrading/expanding infrastructure, and the like.
Reducing the state’s dominance of the economy can improve efficiency and open up new investment and job opportunities. We need to rethink the role of the government in the Kuwaiti economy, which now pervades almost all areas of economic activity. Under this general proposition, it becomes clear that fiscal reform will be the main gateway for the needed restructuring. Specifically, this will involve a diversification of the revenue base, with more emphasis on capital expenditure and capacity building, so that the economy can grow on a sustainable basis and be better equipped to withstand external shocks.
In the effort to broaden and expand the capacity of the economy, there is a vital need to increase private sector participation, which in turn calls for increased effort in the improvement of the business and investment environment. One area that needs immediate attention is the upgrading of business activity-related legislation and regulation (foreign investment and licensing, for example) to international standards.
Generating employment for the fast-growing Kuwaiti labour force is the most important economic challenge for Kuwait. The labour market is unbalanced, with about 93% of the national workforce employed by the government. The continued reliance on the public sector as a source of jobs for nationals is not sustainable in the long term. Hence, encouraging the employment of nationals in the private sector is a major priority. Matching the output of the education system with the requirements of the labour market is a necessary condition to meeting this challenge.
Q The new Amir of the State of Kuwait, H. H. Sheikh Sabah Al-Ahmad Al-Sabah, is said to have a vision of developing Kuwait as a regional financial centre. How do you see this vision and what type of regional centre do you envisage? What specific advantages do you believe Kuwait can offer?
A Kuwait is particularly well suited to serving the needs of the broader Middle East region. We envisage a financial centre that will have internationally recognised financial institutions providing world-class financial services and be adequately supported by a spectrum of infrastructure and businesses that cater to these institutions (legal services, for example).
The vision we have for developing Kuwait as a regional financial centre is one that I prefer to describe as a dynamic and continuous reform agenda, culminating in a hub of banking and financial services that is competitive at the regional level. While that pursuit has already started – through gradual and well-sequenced financial liberalisation and regulatory modernisation – we expect to continue in our efforts of further liberalising the banking and financial sector as a strategic pursuit. Areas that still need further attention include upgrading rules and regulations concerning foreign investment, and revamping the outdated tax laws.
The Kuwaiti banking and financial sector has been described as well-capitalised, well-managed and well-regulated by international institutions, such as the IMF, and has been granted outstanding ratings by international rating agencies. Add to that world-standard supervisory rules and regulations, supported by prudent macroeconomic policies, and you have the ingredients for developing Kuwait into a major financial centre.
Q A number of foreign banks are now operating in Kuwait. What do you regard as their role in Kuwait; how do you expect them to develop; and what are the prospects of more foreign banks and other foreign financial institutions entering the market?
A Lifting constraints on the entry of foreign banks into the domestic market is, in the first place, compatible with the principle of economic freedom adopted by the State of Kuwait.
We welcome the presence in the domestic market of international foreign banks known for their efficiency, because the competition resulting from their presence will lead to the further enhancement of local banking services, thus improving the operational efficiency at local banks. Furthermore, the presence of foreign bank branches will result in diversification of the banking system units and enhance the basis for developing the State of Kuwait into a financial centre, strengthening the country’s financial and trade relations with the outside world, and opening new and diversified investment horizons for the private sector, including in the area of wealth management.
Accordingly, we expect the presence of these banks to have positive effects on both the Kuwaiti economy and the banking and financial system, including bringing local banks to focus on the principles of good governance – and thus realising value added for the Kuwaiti economy in general.
