With an eye to attracting foreign investment, Kuwait is pushing ahead with reforms to the regulation of corporate conduct. John Everington reports.

Kuwait skyline

Authorities in Kuwait have been keen to open up the country’s economy to foreign investors in the past few years, in a bid to diversify revenue streams and lower the government’s reliance on petroleum exports.

Capital markets have undergone a significant transformation, with a series of far-reaching reforms resulting in the inclusion of Kuwaiti stocks in the FTSE Russell Emerging Markets Index in late 2018. Stocks are set to be included in the Emerging Market Index of MSCI, the world’s largest index provider, in June 2020, generating about $2.7bn in passive inflows, according to initial estimates.

Moves have also been made to open up the banking sector to foreign investment as well; a decree from the Ministry of Commerce and Industry in December 2018 permitted foreign investors to own up to 5% of a Kuwaiti bank’s capital directly or indirectly, with shareholdings in excess of this level subject to approval by the Central Bank of Kuwait (CBK).

Gaining trust

In line with such moves to attract foreign investment, both the country’s Capital Markets Authority and the CBK have introduced regulations to improve corporate governance standards among corporates and lenders, thereby further winning the trust of foreign investors.

“The [banking] regulation rulebook is almost complete in terms of areas such as Basel reforms, provisioning liquidity and capital adequacy,” CBK governor Mohammad Y Al-Hashel tells The Banker. “The emphasis [going forward] is more on enforcement and ensuring the proper implementation of things, and [a greater focus] on corporate governance and ethics. It is more about how to meet the challenges in the future in a dynamic and efficient way.”

Yet an overhaul of lenders’ corporate governance standards – a challenging prospect within the Gulf Co-operation Council (GCC) at the best of times – is likely to face significant challenges as Kuwait and the wider GCC region goes into economic crisis mode, following the collapse of oil prices and the effects of the coronavirus.

Corporate governance reform began in earnest in the GCC in the aftermath of the 2008 global financial crisis, according to Dr Ashraf Gamal El Din, chief executive officer of Hawkamah, an institute for corporate governance based in Dubai.

“The initial push for corporate governance [in the region] stems from when financial institutions [around the world] were collapsing, and central banks were attempting to consolidate, putting in higher liquidity constraints,” he says.

Fighting back

The global credit crunch dealt a body blow to Kuwait’s banking investment community; Gulf Bank, then the country’s fourth largest lender, defaulted on debts in late 2008, requiring guarantees from the CBK and an investment from the Kuwait Investment Authority. Global Investment House defaulted the following year, with several of the country’s investment houses coming under significant strain.

Fast-forward 10 years, and the emphasis has shifted from ensuring basic financial soundness to adopting the kind of governance standards expected by would-be investors.

“From our work in the region, banks are trying to improve their corporate governance to a standard that is higher than just what is required by the regulations,” says Mr Gamal El Din. “It is not just about box-ticking, it is about being a respectable player in international markets.”

Public failures

While corporates in the GCC region have made progress in their corporate governance approaches in recent years – attracting praise from the international financial community in the process – a string of high-profile failures suggests there is much work to do.

Dubai-based Abraaj Capital, one of the world’s best known emerging markets private equity firms, collapsed spectacularly in 2018 amid mounting debts and allegations of the misuse of funds.

The founder of London-listed United Arab Emirates-based healthcare provider NMC Health, BR Shetty, was forced to resign in February, with the company later announcing that some $3bn-worth of debt had been hidden from its board.

Finablr, another company founded by BR Shetty that owns exchange houses UAE Exchange and Travelex, warned in March that it was in danger of going out of business following questions related to its financing arrangements and pressures from the coronavirus outbreak.

“With the region moving squarely into investor focus following Emerging Markets Index inclusion, there is now a critical requirement for more companies to take investor relations seriously and to adapt their disclosure cultures to the new reality,” said Iridium Advisors, an investor relations consulting firm based in Dubai, in a note published in February.

Independent members

The CBK announced new corporate governance regulations in September 2019, building on its corporate governance manual for banks – based on international standards from the Basel Committee on Banking Supervision – issued in 2012. The new regulations stipulate that banks appoint two independent board members to their board by June 2020, rising to four independent board members by June 2022.

Independent board members are required to not have business ties to the banks’ shareholders, and are not permitted to have loans or deposits with the lender in question.

“One of the challenges we’ve seen with many of the banks in the region is that they tend to be owned by the larger family businesses,” says Hawkamah’s Mr Gamal El Din. “Although they tend to be listed companies, the families will still own a large amount of a bank’s shares. There can therefore be resistance to fully fledged governance and disclosure standards, because they are often seen as being the family domain.”

Failure to comply with the new regulations will result in the CBK appointing its own ‘independent’ board members to banks’ boards.

“It is therefore in banks’ interests to make the appointment themselves, as they would prefer an independent board member to one appointed by the central bank,” says Elham Mahfouz, chief executive of Commercial Bank of Kuwait.

An age old problem

While the CBK’s requirements for independent board members has been broadly welcomed by the industry, bank boards continue to face a series of challenges in a rapidly changing business environment, according to Mr Gamal El Din.

“A key issue we’ve seen is that the average age of bank board members is quite high,” he says. “Age brings wisdom and experience, but that’s becoming irrelevant when it comes to what’s happening in the market now, particularly the impact of fintech and the threat from cyber attacks. Older board members can find it harder to comprehend as they’re outside their comfort zone.”

The need for expertise beyond traditional banking was highlighted by the CBK’s Mr Al-Hashel in a speech in September 2019.

“As the banking industry goes through a radical transition, banks will need to widen their talent pools and attract a broader range of skills, in line with their shifting business models and changing customer preferences,” he said.

Related to the issue of the high average ages of boards in the GCC region is a reluctance to discuss succession planning, according to Mr Gamal El Din. “It is a subject that is not very attractive or appealing to talk about in the culture here in the region,” he says. “There tends to be an attitude instead of ‘let’s wait until it happens and then we’ll do something’.”

Above all, banks’ commitment to sound corporate government practices will be sorely tested in the coming months as the impact of depressed oil prices and the spread of the coronavirus plays out in the banking sector and the wider economy.

“We’ve seen plenty of good examples and case studies of banks in the region implementing sound corporate governance practices. But there is so much uncertainty and change happening now, [we are] unsure how durable they are,” says Mr Gamal El Din. “The test is happening now. Is it good governance or just box-ticking? In the next couple of months we should find who the [banks with sound corporate governance practices] really are."


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