Interview: Mohammad Al Omar
Did Islamic financial institutions emerge from the global financial crisis in a stronger position than their conventional counterparts?
MOHAMMAD AL OMAR: Like traditional lenders, Islamic financial institutions were affected, both in Kuwait and in other GCC countries. We are now seeing weak economic growth around the world following the crisis. Nonetheless, the consequences for Islamic banks were generally less severe because of their lower leverage and smaller investment portfolios, and because they did not engage in speculation or rely on derivatives and other risky investment tools.
Because Islamic banks provide financing through asset-backed instruments, they have arguably played a more important role during the downturn in stimulating productive sectors of the real economy. When the real economy regains momentum, Islamic banks will be well positioned to capitalise. During the crisis both Islamic and conventional banks in Kuwait have benefitted from prudent government oversight and regulation. For example, domestic lenders have been required to adhere to a loan-to-deposit ratio of 85%, and rules governing borrowing on equity have been relatively restrictive. In addition, to stimulate lending and market liquidity, the central bank has guaranteed 50% of bank loans disbursed to local firms.
Due to these and other measures, we are seeing renewed growth in the nation’s banking sector and balance sheet stability. Following the crisis, the overall sector will have a much stronger focus on risk management and corporate governance in line with Basel III, which will benefit all stakeholders.
What are the prospects for Islamic financial institutions in Kuwait and the wider banking sector?
AL OMAR: Kuwait Finance House and the Islamic banking industry stand to profit considerably from the global sukuk market, which is now expanding rapidly. Demand for sukuk products and services is high not only in the GCC, but also in the EU and in emerging economic powerhouses such as Turkey. In the coming years, sukuk may also become a popular tool for governments to raise capital, as they can monetise assets through sharia-compliant securitisation.
There is optimism that the banking industry as a whole will benefit from the National Development Plan, which will involve more than KD30bn ($108bn) in spending on capital projects over the next 4-5 years. As part of the plan, the government intends to build several residential cities to accommodate surging housing demand. Banks can finance the construction of these new residential areas, and of the schools, clinics and shops that will follow in their wake.
Banks will also play a key role in financing the expansion of the nation’s infrastructure under the plan, thereby helping the nation to meet the needs of a young and growing population. Other sectors will also benefit from these development plans, which will stimulate economic growth and further increase demand for banking services.
Over the short-to-medium term, what is the growth outlook for the Kuwaiti economy?
AL OMAR: Despite its vast oil wealth and financial stability, Kuwait is a small nation subject to external shocks and fluctuations in the international economy. Consequently, the country may be negatively affected by ongoing unrest in the MENA region, and by weak growth in the developed world over the next several years as the major economies undergo balance sheet corrections. Nonetheless, in many ways Kuwait controls its own destiny. For instance, as we continue to benefit from the high price of oil, we must use our budget surplus to make long-term investments in the economy, and not merely channel revenues into social subsidies. In particular, we must ensure that we increase the production capacity of our oil refineries, otherwise we will not be able to meet the projected increase in demand driven by emerging economies, which would lead to rising prices.
