Interview: Mohammad Y Al Hashel
What lessons from the financial crisis have shaped the CBK’s current position, and what will be the priorities for the bank moving forward?
MOHAMMAD AL HASHEL: The CBK, like regulatory bodies worldwide, has taken away important lessons from the financial crisis. First, regulators must remain vigilant and focus on regulating banks with a long-term approach. Second, regulators need to focus on systemic exposures rather than just ensuring the health of individual banks, which is of course important but not sufficient to maintain systemic stability. Accordingly, the CBK has increased its focus on overall financial stability by employing micro as well as macro prudential measures to ensure that both individual banks and the system as a whole remain robust. In this context, CBK follows a four-pronged monitoring mechanism to ensure that banks maintain strong quality as well as quantity of capital; sufficient liquidity to meet both day-to-day transactions as well as any untoward developments; reasonable profitability, given the challenging operating environment amid heightened global uncertainty; and sound asset quality where assets are not only appropriately managed but adequately provided for. These four pillars are interconnected since banks need to excel in all areas to effectively perform their role as financial intermediaries.
Does the CBK have the tools at its disposal to tackle any rise in inflationary pressure?
AL HASHEL: Given the small, open economy with a pegged, yet relatively flexible exchange rate system, the domestic price level of Kuwait is mainly affected by developments in the prices of imported goods. On the other hand, inflation in non-tradables is affected by the state of local demand. In line with international developments, consumer price index inflation in Kuwait marked a record high of 11.6% year-on-year (y-o-y) in August 2008, but registering a continuous decline since then. As a result, y-o-y inflation in December 2012 was 2.6%. Currently, in many of the developed countries, inflation is not an immediate concern as central banks are battling to help economies recover by adopting unusually relaxed monetary stance. In fact, CBK also cut down the discount rate in October 2012 by 50 basis points.
Having said that, we take our objective of ensuring price stability very seriously and do have the necessary tools and mechanism in place to keep our inflation within the target level and will be taking necessary steps if warranted by developments in the price level.
In what way can the issuance of government bonds change Kuwait’s financial landscape?
AL HASHEL: Government bonds serve as eligible instruments specified by the CBK for the purposes of banks’ liquidity management and control, and as a monetary policy tool used by the CBK to support operations to adjust liquidity conditions in the system. As demonstrated in many other financial markets, government bonds also act as a key benchmark for the pricing of corporate debt and other forms of financing.
Raising capital through the issue of private debt is a key feature of Kuwait’s planned development programme. Therefore, Kuwaiti-dinar denominated government bonds with maturities ranging from one to 10 years will provide the needed benchmark for the pricing of domestic corporate bonds and will also help develop the secondary market trading in domestic bonds.
What are the biggest challenges for regulating the broader financial services sector in Kuwait?
AL HASHEL: A broader challenge is to strike a balance between over- and under-regulation; while regulation of financial system should be strong enough to ensure financial stability, the danger of stifling growth and long-term development also need to be avoided. Another challenge is keeping ahead of the game by continuing to remain forward-looking and proactive in regulation, as opposed to being reactive. That requires that we not only supervise banks effectively, but also remain cognizant of the developments in overall economic and financial environment in which banks operate.
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