Interview: Mohammed Jarrah Al Sabah
What can be done to stimulate lending in Kuwait and boost local exposure in international markets?
MOHAMMED JAEEAH AL SABAH: There are two steps that can be taken to boost lending. First, the government must use fiscal policy to stimulate the economy. This can be achieved by increasing general spending rates through capital expenditure on infrastructure and other development projects. Second, the authorities must enhance liquidity in the local banking sector and encourage lenders to finance private sector projects. In this respect, the Central Bank of Kuwait (CBK) plays a key role. The CBK recently amended the cap on the loan-to-deposit (LTD) ratio, raising it from 85% to 100%. This will increase the denominator of the LTD by adding the monetary and financial instruments to deposits and linking the same to the deposits’ tenure, starting at 75% for deposits maturing in less than three months and reaching 100% for those maturing in more than one year. As for local financial institutions’ international exposure, the contribution of domestic banks to foreign credit markets depends on two major factors: the pace of economic recovery in major economies and the profitability of the opportunities available.
What do you identify as the most significant trend in sharia-compliant finance?
AL SABAH: The crisis has negatively affected both conventional and Islamic banks. However, major studies carried out by the IMF and the World Bank indicate that Islamic lenders were not as severely affected. This reflects the fact that sharia-compliant institutions share risks with customers, deal with tangible assets and do not trade in loans or handle financial derivatives. Despite the harmful consequences of the crisis, it had a positive impact on Islamic banking by making its transparent and well-regulated business model more widely known internationally. Consequently, more people worldwide are now adopting Islamic banking practices and Islamic lenders are seeing increased profitability both across the GCC and around the wider Arab world.
Are sukuk (Islamic bonds) appealing to non-Islamic institutions? How will the market develop ?
AL SABAH: Sukuk instruments have drawn attention from investors worldwide. Although the market experienced a downturn in the aftermath of the crisis, it recovered in 2010 with the issuance of 800 sukuk at a total value of $59bn, an all-time high. In 2011 the total value nearly doubled, reaching$85bn. Further growth in sukuk issuance was noticed in 2011 from many GCC countries. This reflects the resilience and attractiveness of sukuk, as well as their ability to gain investors’ trust. Sukuk issuers in Kuwait will benefit from the development plan, which aims to transform the country into an international financial and commercial centre.
What effect has the Financial Stability Law had?
AL SABAH: The Financial Stability Law has enhanced trust and confidence in the country’s banking and financial sectors. It was issued immediately after the passage of the Deposit Warranty Law in November 2008, under which the state guaranteed 50% of new financing extended by local banks to companies in 2009 and 2010. The purpose of both measures was to ensure the stability of the banking sector and to enhance the productive sectors through bank financing, thereby stimulating economic growth and activity.
What do you see as the single biggest lesson that Kuwait can learn from the global financial crisis?
AL SABAH: The main lesson is that Kuwait must reform the imbalances in its economy. We can no longer rely on oil as the sole source of income, for we have seen how the crisis affected oil markets. Although prices rose again recently, they are subject to fluctuation in global supply and demand. Another crisis would severely affect the industrial countries and therefore affect us too. Also, just as we cannot rely on oil forever, we cannot continue to rely on the government to drive our economy forward. Instead, we must make a concerted effort to stimulate private sector economic activity.
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