Interview: Mohammad Al Hashel
How is the CBK monitoring and improving corporate governance in line with global practices?
MOHAMMAD AL HASHEL: The CBK has taken strenuous efforts to improve corporate governance in Kuwait’s banks. Specifically, in June 2012, the central bank thoroughly revised its existing corporate governance instructions to local banks, taking into account international best practice. We view these new measures, which were implemented in July 2013, as being very significant for improving accountability and control, and to protect the interests of various stakeholders. The CBK has been in continuous dialogue with banks to ensure smooth implementation and has conducted regular inspections to ensure genuine and proper compliance. Moreover, the CBK has issued a separate set of corporate governance rules applicable to finance companies.
What is the importance of meeting higher requirements to hold sufficient liquidity and maintain a strong quantity of capital?
AL HASHEL: Liquidity risk was at the core of the global financial crisis of 2007-08 as multiple institutions were unable to secure or roll-over short-term funding from market players, resulting in government interventions to bail out banks. This prompted the Basel Committee on Banking Supervision to introduce, for the first time in 2010, global liquidity standards as a minimum requirement under Basel III regulatory reforms. The new liquidity framework consists of two key ratios: first, the liquidity coverage ratio, which aims to promote resilience against potential liquidity disruptions over a 30-day stress period with sufficient high-quality liquid resources; and second, the net stable funding ratio, which requires a minimum number of stable sources of funding at a bank relative to the liquidity of the assets and the potential for contingent liquidity needs from off-balance sheet commitments over a one-year period.
Historically, capital regulation has been the dominant regulatory mechanism to contain risk-taking by banks. By providing a cushion against losses, the capital is supposed to act as a first line of defence against the’ failures of banks and the knock-on effects for systemic risk. Yet the financial crisis of 2007-08 also exposed the lack of capital held by major international banks. Both the quantity and quality of capital was inadequate relative to the exposures of many global banking institutions. Basel III thus seeks to improve the capital that banks must hold. The proposal includes, inter alia, increasing the proportion of common equity in required capital and introducing capital conversion and counter-cyclical buffers. With regard to Kuwait, our banks are well capitalised, with a capital adequacy ratio of 18.3% as of June 30, 2013. Moreover, about 90% of the banks’ capital consists of Tier 1 capital, a strong indication of the high quality of their capital base. Kuwaiti banks have also maintained a high level of liquidity, with a ratio of liquid assets to total assets of around 26.7%. Further, we are also in the process of implementing the regulatory regime envisaged under the Basel III reforms.
In what ways is the banking sector supporting small and medium-sized enterprises (SMEs)?
AL HASHEL: SMEs make a major contribution to the economy and are a primary source of employment. By some estimates, they represent 85% of the total number of private sector institutions in Kuwait. For banks, these businesses offer an opportunity to diversify their credit portfolios across a range of sectors. SMEs promote growth in the non-oil sector and enhance the potential for job creation. As such, the CBK has encouraged banks to extend adequate lending to SMEs.
As per CBK regulations, lending to SMEs attracts a preferential risk weight of 75%, compared to 100% or more for other types of lending. Moreover, the National Assembly approved a new law in March 2013 to establish the National Fund for the Support and Development of SMEs. An amount of KD2bn ($7.03bn) has been allocated for the capital of the fund. Up to 80% of the business venture can be financed by the fund, while the applicant should make up the remaining 20%.
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