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Middle EastApril 3 2017

Kuwait central bank governor builds on risk reduction and regulation measures

Mohammad Al-Hashel, the governor of the Central Bank of Kuwait, talks to James King about his efforts to strengthen the bank's supervisory capacity, meet the challenges of adopting IFRS9 and ensure the continued stability of the banking system.
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Al Hashel

Mohammad Al-Hashel, governor of the Central Bank of Kuwait (CBK), was appointed in 2012. Since then, the country’s banking system has gone from strength to strength. Building on the work of his predecessor, Mr Al-Hashel has shored up confidence in Kuwait’s financial sector after a damaging financial crisis.

Today, Kuwait is widely regarded as one of the best-regulated banking jurisdictions anywhere in the world. Much of this reputation rests on the work of the CBK, which has, as the International Monetary Fund notes, been proactive in strengthening regulatory oversight and mitigating financial stability risks.

Here, the governor speaks to The Banker about his plans to enhance the CBK’s supervisory capacity and the challenges ahead for Kuwait’s banking system.

Q: How would you characterise the health of Kuwait’s banking system today?

A: The banking system in Kuwait has remained stable despite the challenging economic environment since the sharp drop in oil prices in mid-2014. For instance, our banks’ capital adequacy ratio stands at 18.7% as of December 2016. The non-performing loan ratio at 2.2% is at historically low levels, while the coverage ratio stands at 237%.

The results of our stress testing exercise also affirm the resilience of our banking system to various shocks. That fact that our banks have weathered the low oil price environment without facing any stress is comforting to the CBK, and we aim to continue to ensure the stability and soundness of our banking system.

Q: The CBK has worked hard to strengthen the oversight of Kuwait’s financial sector in recent years. What additional reforms is it planning to boost resilience?

A: Over the past few years, the CBK has not only refined its existing regulations to reflect the best global practices but has also introduced a host of new measures, in line with Basel III reforms. For instance, we have enhanced our capital adequacy regime by setting out higher and better-quality capital for our banks to further strengthen their loss-absorbing capacity. We have also put up additional capital requirements for our systemically important banks.

Furthermore, our additional capital conservation buffer and counter-cyclical capital buffer requirements would respectively enable banks to maintain an additional cushion and would help contain the build-up of systemic risk.

We have also introduced a simple leverage ratio as a supplementary measure to ensure that banks do not become overly leveraged. Last but not least, we have implemented two new liquidity standards, liquidity coverage ratio and net stable funding ratio, which aim to improve banks’ capacity to withstand liquidity stress and to make their funding structure stable.

Going forward, we recognise that ensuring the stability of a constantly adapting banking system cannot be left to regulation alone. Therefore, we are further strengthening our supervisory capacity to suitably complement our revamped regulatory regime.

Nevertheless, not every aspect of the banking system can be regulated, so banks must assume prime responsibility for their actions and behaviours. Accordingly, we have required them to maintain robust corporate governance standards, duly supported by strong internal controls, and prudent risk management.

Q: To what extent has Kuwait been affected by derisking? And what steps is the CBK taking to strengthen domestic anti-money laundering/combating financing of terrorism [AML/CFT] compliance to maintain international standards?

A: While banks have the liberty to change the composition of their assets and liabilities while being compliant with the relevant regulatory directives, the CBK also ensures that they continue to play their role in financial intermediation. Though the scale of derisking in Kuwait has remained limited, we have proactively engaged in dialogue with all stakeholders, not only in Kuwait but also at the regional and international level, to help customers enjoy easy access to banking services.  

Regarding AML/CFT, in line with the revised Financial Action Task Force [FATF] standards, regulatory bodies in Kuwait have placed greater emphasis on risk-based AML/CFT inspections. The relevant authorities in Kuwait are also working with the Middle East and North Africa FATF as we continue to address the full range of AML/CFT issues identified in our mutual evaluation report. Moreover, with the active assistance of World Bank, national risk assessment for money laundering/terrorism financing is also in process, which will further help in the development of a strategic plan for Kuwait.

Q: What are the implications of Kuwait’s domestic debt issuance programme for the banking sector?

A: Greater issuance of domestic debt will help the banking sector diversify their investment portfolio by investing more in domestic public debt. Moreover, presence of a risk-free government yield curve would provide a useful benchmark to price other types of debt and will also help develop private debt market. To counter any risk of private sector crowding-out, the CBK has closely worked with the ministry of finance to limit government borrowing from domestic banks within an acceptable range to ensure that banks continue to extend credit to the private sector.  

Q: What impact, if any, will the introduction of IFRS9 have on Kuwait’s banking sector?

A: Over the years, the CBK has followed a very prudent approach regarding provisions, based on a detailed internal assessment. Accordingly, banks were required early on to build sufficient provisions under general and specific categories. As a result, our available provisions-to-non-performing loan ratio now stands at 237%, indicating sustainable improvement compared with 87% in 2007.

Moreover, we have built these provisions through our own initiatives by proactively assessing future needs, instead of waiting for global guidelines. As a result, our banks are comfortably positioned to continue performing their role in financial intermediation.  

Admittedly, moving to an expected-loss approach will require significant process changes including greater integrations of credit risk management with the core banking system. Banks will need more data on how portfolios perform through the credit cycle and would require sophisticated models for estimating expected loss in the absence of data on default history. In this context, we are closely working with the banking sector to help build their ability to smoothly transition towards the changing reporting standards.

Q: The government of Kuwait raised gasoline and utility prices in 2016. What is the expected inflationary impact of these rises?

A: The hike in fuel prices in September 2016 did put some pressure on the consumer price index [CPI], but the overall impact was largely neutralised by downward pressure in other components such as housing, food and other imported goods. Introduction of higher electricity and water tariffs in coming months may push the average annual inflation up but the overall impact on CPI would remain muted amid contained housing and food inflation.  

Q: What are the key risks and challenges facing Kuwait’s banks over the next year?

A: While our banking system remains sound and stable so far, its resilience is not infinite and may come under pressure if necessary economic and structural reforms are not implemented or delayed. Though ensuring banking stability is critical, it is only a necessary condition for overall economic stability, and not a sufficient one.

Given the strong feedback loop between the overall economy and the financial sector, regulation can’t be the only game in town to maintain financial stability. Equally critical are economic and structural reforms that are essential for a stable macroeconomic environment where the financial sector can flourish. Therefore, the challenges that banks will face during the year would largely depend upon the kind of macroeconomic environment they experience.

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Read more about:  Middle East , Kuwait