Interview: Adel Abdul Wahab Al Majed; Michel Accad; Elham Y Mahfouz
In what ways do you expect lending to grow, and what impact will regional developments have?
ELHAM Y MAHFOUZ: The upgrade of Boursa Kuwait has generated large money inflows and we have also seen local banks going out for borrowing by issuing bonds, all of which have been well received by the market. Kuwait is a politically neutral country with strong financial buffers through the sovereign wealth fund, which provides a high level of comfort to international investor sentiment. In this context, corporate lending growth in 2019 is expected to be reasonable, with most of our growth centred on construction, contracting and retail, whereas Islamic banks have focused on real estate, as they tend to own land. Mega-projects under the state’s development plan, a major driver for lending activity in 2017 and 2018, have slowed down in 2019; however, there is still some major construction activity in the oil and gas sector, health care and education. Construction works have been supported by the government, even through the 2008 financial crisis.
Retail business is an important factor for everyone in the banking sector. Customer service and innovative product offerings through technology and digitalisation shall always remain the prime factor for servicing customers professionally, catering to various customer segments and attaining customers’ loyalty and satisfaction. In 2020 retail business is expected to grow despite the market limitation. However, competition will intensify over fees and offerings.
Cost of funding has increased in the region due to the geopolitical situation across the GCC, which has affected pricing. Similarly, governments are not injecting money into the system as before, and countries need long-term funds to finance upcoming projects, which has increased the cost of funds. Simultaneously, customers are demanding to pay lower interest rates, which is shrinking returns for banks as they seek to retain good customers. Lastly, some banks are driving prices down as they look to aggressively expand in the market, creating higher pressure for existing players to keep good customers and adequate risk portfolios.
ADEL ABDUL WAHAB AL MAJED: Corporate lending grew at the rate of 3% to 4% during the last two to five years. However, we expect growth in the short and medium term to be in the range of 6% to 7%. This positive outlook is supported by Kuwait’s stable economy, steady government spending, good corporate earnings and its inclusion in the MSCI Emerging Markets Index, which lifted sentiment and attracted large foreign inflows. Its inclusion was fuelled by aggressive strategic pipeline projects worth $230bn, covering different sectors but mainly focusing on construction as well as oil and gas.
The real estate market provides another boost for corporate credit growth; its stability stimulates banks to focus on this secured finance activity. We expect retail lending to grow by around 8%. If the mortgage legislation is passed, this will further accelerate growth in the short and medium term. Positive GDP growth and an expected increase on capital expenditure spending by the government and bankable population are the main growth drivers. Kuwait’s banking sector has historically been resilient to regional developments due to strong fundamentals. However, growth over the long term could be curtailed by a marginal rate, due to public sentiments, the global market and economic tensions.
How can banks meet the needs of non-oil growth, such as small and medium-sized enterprises (SMEs)?
MICHEL ACCAD: Although the pace at which public-private partnerships (PPPs) have been rolled out could be expedited, there are major projects being finalised very soon and some are expected to be officially mandated over the next few months. All banks are welcome to participate in these opportunities; however, leading and arranging these deals is delicate and requires specific skills in project finance, which few local banks possess. We are not only developing capabilities for this and looking at PPP financing but also at transactions in corporate finance in Kuwait and across the region. Major areas for investment in the short term are centred on power generators and waste-to-energy projects, whereas in the longer term there will be sizeable opportunities for health and education, especially as these tie in with the broader New Kuwait 2035 vision.
Some structural issues need to be addressed first to unlock the potential of SME financing. To best incentivise banks lending to SMEs, there must be a shared risk arrangement, where banks have some skin in the game and loans are partially guaranteed by the government. This form of partnership ensures security for the banks but also poses enough risk to force them to make the right lending choices to their SME customers.
AL MAJED: Local banks have an aggressive appetite for financing government-related projects, due to the low credit risk element and lower capital requirements. However, this will depend on the pace at which government development plans are executed as well as on the initiatives emerging from the private sector. Obstacles may also limit a banks’ capabilities. These include financing capabilities to a single obligor; shortage of liquidity and its impact on the financing cost; scarcity of foreign currency sources and the subsequent impact on the financing cost and competition with international agencies that can provide cheap funding; and introducing new techniques in offering strategic projects to the market, like PPPs, or delay of payment to suppliers or contractors from some government entities, which may cause irregularity of accounts.
Banks usually compete to improve or at least maintain their market share, which can be sourced from both private sector and government projects under different forms like PPPs, build-operate-transfer models or corporate finance. In order to succeed in capturing a decent market share, banks need to be equipped with good expertise, especially in project finance, as well as have turnkey solutions for corporate clients that cover most of their banking needs in an innovative way.
To what extent is the banking system absorbing disruptive technology, whether on digital or mobile platforms, to improve customer experience?
AL MAJED: Consumers are in the fast lane regarding digital adoption, and competition is heating up in this segment. Banks in Kuwait are investing heavily in internet and mobile banking to digitise the customer journey and scale up innovative digital solutions. Innovating existing products through partnerships is another way in which banks are accelerating in this segment.
Banks are also strengthening collaboration for payment systems through the central bank’s new projects payment platform and sandbox for financial technology. The market is strictly regulated, but there is an opportunity for external solutions and innovation – such as cloud and biometrics – for banks to adopt.
ACCAD: Going forward, we strive to differentiate ourselves through simplification. Having a stronger digital presence is a key factor in this process, as customers increasingly feel more comfortable using mobile or digital platforms than going to a physical branch. It is advantageous to have a smaller branch network, as it facilitates the transition into tomorrow’s banking world.
Automation is already part of our everyday internal processes, and it is being done with incredible efficiency. For instance, we have small bots doing some transactions, including processing salary payments for company employees. In addition, the underlying technology behind cryptocurrencies and blockchain has tremendous potential to expedite financial transfers in seconds, while also fulfilling the necessary know-your -client requirements on both ends. Unlocking the full benefit of blockchain will be a gradual process, but we are firm believers in this technology. Banks must not only invest in financial innovation tools but in core banking systems and enhanced digital infrastructure to support the deployment of these new offers. At the same time, precautions must be taken, as increased digital spending will also entail some cybersecurity risks.
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