The governor of the Central Bank of Kuwait, Mohammad Al-Hashel, has every reason to look to the future with optimism, given that the country's banking sector is coping well with low oil prices, welcoming foreign entrants, bringing down its NPL ratio and helping diversify the country's economy. 

Since assuming the governorship of the Central Bank of Kuwait in April 2012, Mohammad Al-Hashel has been widely praised for his stewardship of the country’s financial sector. Under his guidance, Kuwait’s banks have built up healthy capital adequacy and liquidity ratios, in conjunction with a drastic reduction in system-wide non-performing loans (NPLs). This has been a remarkable transformation from the dark days of the financial crisis. Today, Kuwait’s banking sector now stands on the cusp of an impressive growth trajectory backed by the positive outlook of the domestic economy.

As a member of the governing board of the International Islamic Liquidity Management (IILM) and the Islamic Financial Services Board (IFSB), Mr Al-Hashel is also well positioned to oversee the development of Islamic finance in Kuwait. With a sound understanding of Kuwait’s position as one of the earliest pioneers of the Islamic finance industry, he is keen to develop the country's position in this field globally and maintain the growth rates enjoyed by Islamic banks in the country in recent years.

Above all, Mr Al-Hashel feels that the central bank’s hard work must continue. By encouraging the country’s banks to navigate a prudent path to sustainable growth, he hopes to avoid the mistakes of the past. Here, Mr Al-Hashel speaks to The Banker about the Kuwaiti banking sector’s prospects in light of lower oil prices, the impact of new regulations permitting foreign banks to open multiple branches in Kuwait and the positive role that the country’s banks can play in stimulating the non-oil private sector.

Q. To what extent will Kuwaiti lenders be impacted by a sustained lower oil price environment over the medium term?

A. Kuwait has a bank-centric financial system, with the banking sector accounting for about 84% of the domestic financial sector. However, in spite of the sharp decline in oil prices in recent months, the outlook for Kuwait’s banking system and economy remains stable due to strong reserves. This stable outlook reflects a satisfactory domestic operating environment and a sound banking system, which we have achieved though resilient financial disciplines and a strategic growth plan with strong support of our government. However, we understand any significant changes in the operating environment and macro conditions, including a prolonged downward drag in crude prices, may impact economic growth.

As a first line of defence against banking system stress we have established higher minimum capital requirements. Our banks are well capitalised, with a capital adequacy ratio of 18.8% and, moreover, 89% of [Kuwaiti] bank’s capital consists of Tier 1 capital, a strong indication of the high quality of their capital base. Furthermore, Kuwaiti banks have also maintained a high level of liquidity, exceeding the minimum requirement of a 100% liquidity coverage ratio.

However, we are fully aware and well prepared for any persistent global economic drag, such as the sustained drop in oil prices. Against this backdrop, we have implemented adequate macro- and microeconomic policy measures to build further resistance in the banking system.

Q. In what ways will recent regulations permitting foreign banks to open multiple branches in Kuwait benefit both the banking sector and economy as a whole?

A. Kuwait has been a fairly open economy and we have allowed, in the past, the establishment of foreign banks' branches with the intention to create a competitive banking environment. In turn, this allows increased credit intermediation which benefits the Kuwaiti economy, in particular promoting growth in the private sector. Permitting suitable foreign banks to open multiple branches is a strategic step towards boosting our bilateral relationship with developed economies, the Gulf Co-operation Council countries and emerging market trade partners. Furthermore, our prudential regulations and supervisory framework cater equally towards foreign banks' branches and local banks – an indicator of our vision to create a developed financial market in the region.

With the increasing globalisation of cross-border banking operations, expanding the reach of foreign banks in Kuwait will also allow Kuwaiti banks to be exposed to increased competition for retail customers. As such, increased competition will introduce innovation, new products and it will boost access to financial services – albeit from an already high level of financial access – which in itself will further lower costs of financial intermediation in Kuwait.  In this way, local banks are well poised to face the increased competition from foreign banks. Therefore, allowing multiple branches for foreign banks is expected to lead to a positive outcome for the Kuwaiti banking sector and the economy as a whole.

Q. What is the outlook for NPLs in Kuwait's banking system, and what objectives has the central bank set to decrease the bad loan ratio this year?

A. NPLs have been falling since their peak of 11.5% in 2009 to 2.3% as of December 31, 2014. We expect that NPLs will further decline in 2015 as loan books have been cleaned up following the economic crisis of 2008. Therefore, we are not expecting any increase in NPLs during the year other than those that occur as part of the normal course of business.

Nevertheless, we have adequate prudential norms such as dynamic provisioning to sustain NPLs in line with international norms. We are continuously mindful of sector loss norms and prepared for the prospects of persistent global economic drag. It may so happen that a sustained economic slowdown will warrant a different course of action, but we have adequate tool kits and early-warning systems to prevent any increase in NPLs.

Q. What factors do you see driving the growth of both conventional and Islamic lenders in Kuwait over the medium term? What role can Kuwaiti banks play in stimulating the growth of the non-oil sector?

A. A stable economic system is a mandatory requirement for the growth of the economy and the banking system. In an economy such as ours, with a bank-centric financial system (banking system assets are 115% of gross domestic product), the stability of the economic system and prudent risk taking for growth go hand in hand and both have been important considerations for the Central Bank of Kuwait.

While Kuwait’s near- and medium-term economic outlook remains positive, the banking system is experiencing positive developments on almost all fronts, ranging from strong growth in assets and deposits to a decline in NPLs. With such a sound financial system and adequate supply of capital in the banking system, the growth in banking system is ready to take off in the medium term. The government is selectively investing in infrastructure, power and oil sector projects and non-oil sectors are driving aggregate demand, thereby fostering further growth in the economy and the banking system.

Nevertheless, non-oil sector development is a real challenge in an oil-based economy such as Kuwait’s. However, we are selectively moving towards private sector participation and the development of small and medium-sized enterprises [SMEs]. Furthermore, Kuwaiti banks, through their overseas presence, are diversifying into the non-oil sector.

The government is committed to creating suitable ecosystems and investment policies for the development of SMEs and the development of the non-oil sector. Over the medium term, Kuwaiti banks can play a significant role by providing the capital for the growth of these SMEs, which are driven by entrepreneurial activities in the non-oil sectors of the economy.


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