Interview : Mazin Saad Alnahedh

Do you think that there is an absence of sharia-compliant liquidity management tools, and what solutions would you propose to this?

MAZIN SAAD ALNAHEDH: Sharia-compliant banking has recently become a much more influential factor in the global financial sector, thanks to the creation of products and services that can compete with their conventional counterparts. KFH Group banks have continued their strong performance in accordance with the set plans and strategies to benefit from the elements of strength in each market. The issue of liquidity management in Islamic finance needs to be addressed while considering the developments currently taking place in conventional finance. There are two main issues, especially in the short term. The first is the lack of a developed money market, and especially an interbank market, of the kind seen in conventional finance. The other is a shortage of short term, or highly tradeable, investment instruments with limited capital risk and predictable returns.

The Basel Committee on Banking Supervision proposes two new regulatory standards for liquidity risk. The first, the liquidity coverage ratio, ensures that institutions have sufficient high-quality liquid resources to survive an acute stress scenario lasting one month. The second, the net stable funding ratio, promotes longer-term resiliency by encouraging banks to fund their activities from more stable sources.

What are the main factors driving economic growth in Kuwait, and how do they affect Islamic banking?

ALNAHEDH: The growth in Islamic banking assets is a reflection of the country’s growing economy. Kuwait has to follow the regional trend of pursuing economic and fiscal reform programmes with multiple initiatives that seek to support economic diversification to nonoil income-generating projects, including its historical commercial role as a trade hub in the Gulf.

Small and medium-sized enterprises can play a pivotal role in transforming Kuwait into an attractive financial and trade centre to investors, where the private sector leads the economy, fostering competition and promoting production efficiency, furthering human resource development while inspiring business environment with a balanced development plan. Currently, the public sector wage bill accounts for the largest portion of Kuwait’s government expenditure, and its generous allocation of government subsidies including fuel, electricity, water and food staples. Subsidies represent 22% of government spending, with average annual benefits of approximately $10,000 per capita, out of which $2500 are fossil-fuel subsidies.

In addition, infrastructure and energy interested specialist contractors in the first quarter of 2018, following Kuwait’s target to supply 15% of its energy demand with renewables by 2030. In the third quarter of 2018 numerous contracts and projects were secured and it was also revealed that China may become a major construction investor in Kuwait.

Kuwait is behind other GCC countries in global sukuk (Islamic bonds) issuance. What needs to be done to encourage sukuk issuances?

ALNAHEDH: Although short-term sovereign sukuk issuances were successfully established in Bahrain, other governments may be reluctant to issue sukuk, especially if they carry a higher cost of funding.

The international shortage of sukuk is usually cited as the main reason why we do not have an actively traded market in Kuwait, despite efforts to develop one. In this context, a task force recently proposed a new intergovernmental entity responsible for issuing sukuk. This is an interesting initiative, though it is not yet clear whether it will develop traction. A key issue will be whether enough governments find it attractive to commit assets when they have the alternate option of issuing sukuk directly themselves. The trade-off will be between the finer rates that the new entity should be able to secure, against the associated loss of control.