As Kuwait’s Islamic banks outperform their conventional peers, the country looks well on its way to becoming a financial hub for sharia-compliant financial services. James King reports.

Kuwait Finance House

Kuwait’s aim of becoming a hub for Islamic finance may be ambitious, but it is not unrealistic. The country’s Islamic banks posted impressive growth numbers in 2016 that showed them outpacing their conventional peers. This was accompanied by heavy investments in products and services, as well as their physical footprint, both domestically and overseas.

In tandem, over the past year the regulatory authorities have enacted several changes to improve governance standards in sharia-compliant financial services in the country. These changes are promoting the growth of a more transparent and accountable industry and one that meets the very highest standards of international best practice. As a result, most of Kuwait’s Islamic banks have reason to celebrate their recent performance, as well as the evolution of the wider market.

“Kuwait has come a long way in strengthening its position as an Islamic finance hub. We have been seeing increasing activity, particularly in the debt capital markets,” says Adel Al-Majed, vice chairman and chief executive officer of Boubyan Bank, the Islamic subsidiary of the National Bank of Kuwait. “Additionally, we appreciate the ongoing dialogue between the authorities [and the private sector], which has been conducive to a more open and collaborative operating environment for all.” 

A stronger position

According to EY’s 2016 World Islamic Banking Competitiveness report, sharia-compliant banking assets now account for more than 45% of Kuwait’s banking system total. Only Saudi Arabia among the ‘Qismut’ countries (Qatar, Indonesia, Saudi Arabia, Malaysia, the United Arab Emirates and Turkey) has a higher figure, with 51.2%. To give these figures further context, the United Arab Emirates and Malaysia, which have long been in the vanguard of Islamic finance, have only a respective 21.6% and 21.3% of their total banking sector assets registered as sharia compliant.

EY expects Islamic banks in Kuwait to capture close to a further 5% of market share by 2020, potentially tipping its sharia-compliant assets into the majority. Observing the performance of the country’s largest Islamic banks over the past year, it is not difficult to see why. “The year 2016 was an outstanding one for Boubyan Bank. We maintained double-digit growth, with net profits and assets growing at 17% and 11%, respectively. Over the same period, our financing portfolio grew by 16%,” says Mr Al-Majed.

Similarly, Kuwait Finance House (KFH), the country’s largest and oldest Islamic bank, registered growth in net profits of about 13% in 2016, while financing revenues and net operating revenues, excluding the contributions of non-recurring investments, increased by 13.5% and 8.2%, respectively.

“The bank achieved good levels of asset optimisation by exiting some non-core investments and businesses. [In addition], KFH’s capital adequacy ratio reached 17.88%, reiterating the strength of the bank’s financial position,” says chief executive Mazin Al-Nahedh.

New rules

Accompanying this growth has been a concerted effort by the authorities to improve the Islamic banking sector’s wider operating environment. In December 2016, the Central Bank of Kuwait issued new rules concerning the internal and external oversight of sharia-compliant lenders. To be implemented by 2018, the regulations include requirements for external sharia audits and put certain requirements on banks’ in-house sharia scholars. These mandate that a scholar can hold positions with a maximum of three banks and must have at least five years of suitable industry experience.

“Kuwait is emerging as a key hub for Islamic finance. The central bank is promoting this agenda and solid progress has been achieved to date,” says Ahmed Zulficar, deputy chief executive of Ahli United Bank Kuwait.

Meanwhile, Kuwait’s Islamic banks have been turning to sukuk issuances to boost their Tier 1 capital positions. Warba Bank, an Islamic lender established in 2010, issued a $250m Additional Tier 1 sukuk in early March with a coupon rate of 6.5%. At nearly $1.3bn in orders, the transaction was more than five times oversubscribed. Boubyan Bank completed a $250m Tier 1 sukuk in May 2016, priced at 6.75%, with an order book of about $1.3bn.

Similarly, Ahli United Bank issued a $200m perpetual non-call five perpetual sukuk in October 2016. “The deal was more than three times oversubscribed and with a coupon of 5.5%. The success of this transaction points to our leading position in Kuwait’s Islamic finance market,” says Mr Zulficar. “The deal roadshow visited the UAE, Switzerland, London and Singapore, and it was clear that not only was AUB Kuwait well received but the story around the sovereign and Islamic banking in Kuwait was equally well received. The sukuk has since been listed on both Nasdaq Dubai and the Irish Stock Exchange, again internationalising the bank and this market.”

Promoting the bond market

At home, the government has been working hard to stimulate the development of Kuwait’s sukuk market. Towards the end of 2015, the Capital Markets Authority (CMA) implemented an improved regulatory framework designed to encourage both sukuk and conventional bond issuance. In December 2016, the CMA said bond sales of about $4bn had been approved since the new framework was enacted, while $700m-worth of sukuk transactions had been issued over the same period. It reportedly has a further $2bn-worth of bonds and sukuk under consideration.

These developments come as leading Islamic institutions in the country emerge as global sukuk market-makers. In particular, KFH traded a total volume of $11.4bn in sukuk both regionally and internationally during 2016. This more than doubled the bank’s 2015 volume of $4.4bn. “This growing success story marks out KFH as a global sukuk market-maker. KFH achieved this remarkable development by motivating and encouraging a number of conventional and Islamic financial institutions to enter the market,” says Mr Al-Nahedh.

Though Kuwait’s banking landscape is highly competitive, Islamic banks are clearly winning the battle for consumer banking. According to data from Boubyan Bank, Islamic banks’ share of the consumer finance market in 2015 was about 50%. By the end of 2016 this was up to 62%. Many bankers point to the younger generation of Kuwaitis preferring sharia-compliant financial services, but Islamic lenders have also invested extensively in digital banking.

“Our digital journey started not by design but by trying to focus on customer service and customer convenience. Using technology enabled us to deliver a better customer service and in a more convenient way,” says Mr Al-Majed.

Communications advance

Boubyan Bank was the first lender in Kuwait to introduce near-field communication technology to its debit, credit and prepaid cards, which enabled contactless payments. Meanwhile, mobile banking services allow customers to pay for bills and access services directly through the app. These include payments to iTunes, Western Union transfers, payment of household bills and school fees.

In addition, Boubyan Bank has enabled cardless cash withdrawals from ATMs and introduced interactive teller machines, which has redefined banking hours for its customers. 

“We happen to be in the right place at the right time for us to straddle the space between traditional and digital banking,” says Mr Al-Majed. “The big picture implication is that over the next decade we’ll see a tremendous creation of value through the financial services world as these trends plough their way through the industry. Some banks will use that wave of change to jump up a few notches in the food chain, whereas many others will suffer tremendously.”  

These are exciting times for Kuwait’s Islamic finance industry. Strong growth looks set to continue for the foreseeable future, despite the downturn in oil prices, and continued regulatory developments and innovations from banks themselves are likely to deliver world-beating changes to the market. Kuwait might have ambitious goals, but it is well on its way to becoming a genuine hub for Islamic finance. 


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