James King talks to Kuwait's Mohammad Y Al-Hashel, The Banker's Central Banker of the Year for the Middle East, about preserving the attractiveness of the national currency and harnessing the power of technology while mitigating its risks.

Mohammad Al-Hashel

Mohammad Al-Hashel

In January 2019, The Banker awarded Mohammad Y Al-Hashel the Central Bank Governor of the Year award for the Middle East. In recent years, the head of Kuwait’s apex lender has established a name for himself in the region – and beyond – for steering the country’s banking sector to a position of strength. 

It was no small feat for a country that was hit hard by the fallout from the global financial crisis. By the end of the third quarter of 2018, Kuwait's banking sector had a capital adequacy ratio of 18% and sector-wide non-performing loans stood at just 2%.

Mr Al-Hashel has successfully balanced the prudent management of Kuwait’s banking sector with a drive to nurture innovation; in November 2018, the Central Bank of Kuwait (CBK) launched a regulatory sandbox framework for financial technology groups. Looking ahead, this mix of strength and innovation should serve Kuwaiti banks well as they face the challenges and opportunities of an economy that is on a gradual path to reform.

Q: What steps has the central bank taken to maintain the attractiveness of the Kuwaiti dinar in light of rising US interest rates over 2018?

A: As a general rule, we conduct our monetary policy with an aim to strike a balance between healthy private sector credit growth and preserving the attractiveness of the Kuwaiti dinar as a source of domestic savings. It is pegged to a basket of currencies, which offers some flexibility in the conduct of our monetary policy. 

Still, we face a dilemma when it comes to setting policy rates. If we raise rates following the US Federal Reserve, it will further strengthen the dinar as a store of value for national savings. Yet it will hurt credit growth – particularly at a time when our economic conditions are different from the US.  

So far, we have been able to effectively use our monetary policy to achieve both objectives. To support credit growth, we have skipped five of the last seven rate hikes by the Fed. But we have used other monetary policy instruments, such as repo rates, to allow banks to pay more to depositors, thus maintaining the attractiveness of the dinar as well as healthy margins for banks.

Q: In what way is the central bank working to improve the supervisory environment for Islamic banks?

A: Islamic banking is a key element of our financial system, with Islamic banks accounting for about 39% of the Kuwaiti banking industry. In terms of [market] share, this is among the highest in any country with a dual banking system; that is, where both conventional and Islamic banks operate in parallel.  

The CBK has taken further steps to ensure that the growth of the Islamic banking industry [stands] on a strong footing. For instance, we have already issued comprehensive sharia audit regulations and we are about to launch a certificate for sharia auditors that will be recognised by the CBK as well as Kuwait's Capital Markets Authority.

Moreover, we have finalised the draft law at our level regarding a centralised sharia board to ensure consistency in fatwas [legal opinions]. We have also drafted the sukuk law, after incorporating comments of other stakeholders, pending its approval by the relevant authorities.

Q: To what extent is the central bank helping to foster the growth of fintech in Kuwait?

A: At the CBK, our approach in regulating innovations is both enabling and proportionate, as we aim to use a tiered process of introducing rules in accordance with the risks involved. We neither want to stifle innovation nor undermine financial stability. Yet the dilemma is that the very technologies that promise enhanced access to finance also pose risks to financial stability if not managed well.

So we have adopted a ‘regulatory sandbox’ approach to provide a safe testing place for innovative products or services. The approach will help harness the potential of innovative technologies but without exposing the entire financial system or the broader economy during the early stages of development.

Any entrepreneur, whether an individual or a company, can [use] the facility under the regulatory sandbox, where we will evaluate the technical, security, regulatory [compliance] and other aspects of the product, service or solution and help refine the same [conditions] in a controlled environment. Upon successful completion of all the steps and formalities, entrepreneurs will have the choice of offering their innovative solutions to the public independently or through existing banking platforms.

Q: What are the implications for the sector of the loosening of foreign ownership rules on domestic banks?

A: In December 2018, our Ministry of Commerce and Industry announced a decision to allow foreign investors to have a bigger stake in our banks. Previously, foreign ownership was capped at 49% of a bank’s capital. But even under new rules, investors will need to seek CBK approval if ownership exceeds 50% of a bank’s capital.

The new measure is part of the government’s efforts to encourage foreign investment in the local bourse; it has introduced a wide range of reforms in the recent past, including the ease of listing rules, the segmentation of the market into three categories, and the delisting of companies considered unsuitable for public investment, to name a few. These efforts have been well [received] – as is evident from the inclusion of Bourse Kuwait in the FTSE Emerging Markets Index in 2018 and its possible upgrade by MSCI from 'frontier' to 'emerging' market in 2020.

Greater foreign ownership of banks is expected to encourage the transfer of knowledge and technology, improved corporate governance and risk management practices, [leading to] greater competition and increased access to foreign capital in general.  

Q: Kuwaiti banks are well capitalised, highly liquid and profitable. Given this position of strength, what do you consider to be the main challenges facing them over the medium term?

A: To start with, some challenges that banks will face during the next couple of years will be shaped by the domestic economic environment. So far, our banking system has remained sound and stable, with robust capital adequacy levels, healthy profitability, strong asset quality and ample liquidity. 

However, banks’ stability and resilience is not infinite and may come under pressure if necessary economic and structural reforms are not implemented or are delayed. Unless we are able to make consistent and steady progress in addressing our structural imbalances, the banking sector will be vulnerable to an economic growth that is heavily dependent on oil revenues and exposed to its attendant volatility.  

In the years ahead, the growing footprint of fintech will challenge banks’ business models as well as their role and very place in the financial system. Moreover, the increasing risk of cyber threats will also test banks’ capacity to better identify, measure and mitigate such risk without compromising on the quality of their services or stability of their operations.  

Q: What are the central bank’s expectations for Kuwait’s economic growth over the medium term?

A: We expect our economic growth to be healthy, with positive contributions from both oil and non-oil sectors. The recovery in oil prices during 2017-18 – despite the correction in the last quarter of 2018, which was neutralised by better prices in early 2019 – has improved prospects for overall gross domestic product [GDP] growth. 

Compared with 2017, when oil GDP sharply contracted because of lower prices as well as production cuts under the OPEC+ agreement, growth in oil GDP was visibly positive in 2018 [in Kuwait]. Moreover, non-oil GDP has been growing steadily, thanks to higher capital spending by the government, which was particularly strong in 2014-15, though somewhat modest in 2018.

Collectively, we expect positive growth in overall GDP, duly supported by both the oil and non-oil sectors.


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