Interview: Mohammad S Al Omar
How are smaller investment firms and financial services companies dealing with current difficulties, particularly with regard to liquidity?
MOHAMMAD SAL OMAR: The market has been rough, but now we can see that buyer confidence is beginning to return. Some investors with a higher risk tolerance are starting to buy distressed assets – at the right price, of course. One thing the financial crisis has taught us is that these investment companies must do their due diligence and make wise investments, rather than frivolous risky investments. The firms that made these mistakes have failed, or need to be restructured now. Struggling financial services companies which have a good quality of assets but suffer from liquidity problems can be restructured to avoid failing totally. It is possible to stretch short-term liabilities to long-term liabilities with the right credit assessment and credit risk evaluation. It is also possible to support some of these companies by readjusting their assets to market value, enabling their assets to perform and helping to stabilise their balance sheets. The government plays a huge role in the economy here; if the new government increases spending and implements the National Development Plan, all banks and all sectors will benefit. Everything from real estate to cross-border trade will increase, which the banks here will be ready to support.
How would you characterise the current oversight and regulation of Islamic financial services in Kuwait?
AL OMAR: We are not unduly affected by local regulations compared to other institutions. Islamic banks are no different from conventional banks when it comes to meeting regulations. There is a one-size-fits-all model here in Kuwait, which we all operate under; the only difference is that Islamic banks have more internal oversight and due diligence. Conventional banks will service the customer’s needs according to their standards. Islamic banks will also service the customer’s needs, but must follow an additional set of rules to do so. The end result is the same; it’s just the process that differs. As long as there is a standard set of regulations which we must all follow, there is no need for additional regulations on Islamic financial institutions.
If Basel III has been universally adopted, then it should be Basel III for everyone. The difference is all in the details.
For example, we don’t trade bonds; we have sukuks, which are asset backed, so the risk weight is different.
We do comply with international regulations and will continue to do so. International regulations are there to protect everybody, the depositors and the shareholders, and at the same time to insure that accounting standards are similar across nations.
In which ways can sukuks provide liquidity where traditional credit from banks is not available? How can sukuks be made more attractive in Kuwait?
AL OMAR: Sukuks differ from traditional bonds because they are asset backed and cannot be traded. There are a variety of financial mechanisms that conventional banks can utilise, such as buying and trading bonds, which are not available to Islamic banks.
If an Islamic bank wants to issue sukuks they need to have assets, which can be anything: an airport, land, etc. This is viewed as safer because at their core, sukuks are backed by concrete and are more easily identified assets – unlike conventional bonds, which can be inflated due to false ratings and collateralisation. These were the types of financial mechanisms that caused the subprime meltdown and the subsequent global financial crisis. Sukuks cannot be abused in this way because they are naturally risk-mitigated.
Companies can benefit greatly from utilising sukuks to shore up their balance sheets or to raise capital.
When you buy sukuks you know exactly what risk you are taking. Buying a share in an airport or railway that is owned by the government and operating at a profit is much smarter and risk adverse than the traditional model. Hopefully, with help from the National Development Plan, more companies will be able to make use of sukuks in a positive way over the coming years.
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