Kuwait’s banks are among the largest and most robust in the region, with global consultancy firm KPMG ranking the country first in the GCC in terms of average net growth in total banking assets and net profit in 2022. Indeed, asset growth defined the sector’s trajectory that year, as Kuwaiti banks continued to recover from the disruptions of the Covid-19 pandemic.
Supply chain constraints initially saw global oil prices tumble in 2020 – a major issue for a country in which around half of GDP is accounted for by hydrocarbons – however, as prices rose in 2021 and 2022, the country’s economic fortunes rebounded, as did those of its banks, with 2022 seeing the highest credit growth since 2015.
The sector has seen some consolidation in recent years, as banks with significant levels of government ownership have been combined to confront growing local and global competition. The year 2022 saw the completion of the acquisition of Bahrain-based Ahli United Bank (AUB) by Kuwait Finance House (KFH), both of which feature significant government participation in their shareholder structure.
Competition is also increasing in the digital banking segment. The drive for digitalisation is now at full speed, as banks try to cut costs, improve efficiencies and deliver more flexible services to customers. This in turn is driving the growth of financial technology (fintech), supported not only by the private sector, but also by new regulations from the Central Bank of Kuwait (CBK).
Despite global geopolitical uncertainty, the reputation of Kuwaiti banks for caution and conservatism, along with strong reserves and prudent policies, is set to ensure the sector remains resilient in the coming years.
Structure & Oversight
The CBK is main regulator for the banking sector, headed by Basel Al Haroon, who was appointed as governor in April 2022. The bank’s board of directors brings together members from the public and private sectors, including undersecretaries from the Ministry of Finance (MoF), and the Ministry of Commerce and Industry. As of September 2023 half of the board members were women, illustrating the significant role women play in Kuwait’s financial community.
The central bank regulates and supervises the sector under the CBK law of 1968, amended in 1977 and updated regularly since. Chapter III of the law pertains to banking regulation, with a separate section on Islamic banking added in 2003. In 2022 the CBK introduced new regulations on open banking, banking-as-a-service and cloud computing, paving the way to begin licensing digital banks in 2022.
The Kuwaiti banking sector includes both conventional and sharia-compliant banks, with the current regulations prohibiting conventional banks from operating through Islamic windows, meaning that only 100% Islamic banks can conduct such activities. As a result, some conventional banks have Islamic arms, such as Boubyan Bank, the sharia-compliant subsidiary of the conventional National Bank of Kuwait (NBK).
The CBK has a specific agency for Islamic financial institutions, the Higher Commission of Sharia Supervision, that reports to the CBK board and is responsible for ensuring the sharia compliance of the CBK’s dealings with Islamic banks and finance institutions. It also proposes guidelines for the Islamic finance segment and pre-approves candidates for the sharia compliance boards of individual Islamic financial institutions, among other duties.
As of September 2023 the CBK supervised five domestically headquartered conventional banks: NBK, the Commercial Bank of Kuwait, Gulf Bank, Al Ahli Bank of Kuwait and Burgan Bank. It also supervised four domestic Islamic banks: Kuwait International Bank, KFH, Boubyan Bank and Warba Bank. A fifth Islamic lender, Bahrain’s AUB, was acquired by KFH for $11.6bn in October 2022, after the CBK gave its approval in July of that year.
In addition, the CBK supervises one specialist bank, the Industrial Bank of Kuwait, which was set up by the Kuwaiti government in 1973 to aid development of the banking, industrial and commercial sectors. Its current shareholders include the MoF, the CBK, and a range of Kuwaiti banks and investment houses.
There are 11 foreign bank branches operating in the country, the Kuwaiti operations of which are subject to CBK supervision: the Industrial and Commercial Bank of China, Bank Muscat, Al Rajhi Bank, Mashreq Bank, Doha Bank, Qatar National Bank, Citibank, First Abu Dhabi Bank, HSBC, BNP Paribas and BBK. Foreign banks tend to focus on commercial operations, with retail banking more the preserve of domestic lenders.
The CBK’s duties include the supervision of finance companies, of which there is one conventional – Kuwait Finance & Investment Company – and one Islamic – Al Mulla International Finance – as well as 15 conventional and eight Islamic investment companies, and 32 exchange companies.
The central bank closely monitors cybersecurity in the financial space, with 2014 and 2015 seeing the enactment of electronic transactions laws and a national cybersecurity law. The Communication and Information Technology Regulatory Authority (CITRA) has a dedicated information security and emergency response department responsible for cybersecurity overseeing measures – an increasingly key area as the banking sector undergoes a process of digitalisation (see ICT chapter).
Rates & Rules
Since 2007 the Kuwaiti dinar has been pegged to a weighted basket of international currencies from countries with which Kuwait has significant trade and financial relations. With this, the CBK aims to guard the currency against fluctuations in the US dollar, to which the dinar had been exclusively pegged in 2003-07. The US dollar, however, remains the most highly weighted currency in the basket.
With heightened inflation a global phenomenon and many central banks raising interest rates, the CBK has been obliged to follow suit. In January 2023 the CBK raised its benchmark discount rate to 4%, after a series of hikes in 2022. This in turn led to a hike in bank interest rates, within the pricing cap on retail lending the CBK imposes. That cap is calculated according to a formula: the base rate plus 2.5 percentage points for short-term loans, and the base rate plus 4 percentage points for medium-term loans.
Higher interest rates have impacted credit growth and net income ratios, although Kuwaiti banks have long been well prepared for such monetary tightening. The CBK’s mandatory capital adequacy ratio (CAR) of 12% of risk-weighted assets, for example, is well below the sector’s average CAR of 17.3% in 2022. It is also above the Basel III recommended level of 10.5%.
The CBK introduced a series of rules during the pandemic to aid banks, individuals and businesses in overcoming the economic impact of lockdowns, health crises and travel bans. These packages have now largely been unwound. Loan deferral programmes for retail and corporate loans expired at the end of the third quarter of 2021, while regulatory liquidity requirements, which were cut to 80% during the pandemic, were raised to 90% in January 2022 and 100% in January 2023 for both the liquidity coverage ratio and the net stable funding ratio. In addition, the capital conservation buffer was returned to 2.5% on January 1, 2023.
In December 2020 Kuwait was upgraded to emerging market status by MSCI. With the country’s banks major players on the Kuwait Stock Exchange, the upgrade has led to even tighter and more regular examination of the banks’ financials by the CBK, which also supervises the capital markets.
For a number of years, the banking sector was the largest on the bourse by value, with its 10 listed banks often the most actively traded. In May 2023, for example, the 10 institutions accounted for 35.4% of all trading on the exchange. Virtually all the shares of listed banks also continue to be Kuwaiti owned, with NBK having the largest foreign shareholding, at 24.5%, and Commercial Bank of Kuwait the smallest, at less than 0.1%, as of mid-2023.
Market Shares
The Forbes Middle East list of the region’s 50 largest banks by market value, which used February 28, 2023 as its base line, ranked KFH fifth, at $37.5bn, and NBK sixth, at $26.3bn. The market dominance of these two players is underscored by the fact that the next-highest-valued Kuwaiti bank was Commercial Bank of Kuwait, in 33rd place with $3.3bn, followed by Gulf Bank, at 34th with $3.2bn. Burgan Bank came 37th, with $2.4bn, Al Ahli Bank of Kuwait 40th, with $2bn, and Warba Bank 43rd, with $1.5bn.
Kuwaiti banks are strongly represented among the top institutions regionally as well as globally. After its acquisition of AUB, KFH now ranks as the second-largest Islamic bank in the world by assets, after Saudi Arabia’s Al Rajhi Bank, with around $121bn in total assets.
Domestically, the banking sector had total assets of KD84.8bn ($279.1bn) in July 2023. According to international credit ratings agency Fitch, in the first half of 2022 the share of sector assets taken by Islamic banking was 45.5%, with 54.5% for conventional institutions.
NBK reported total assets of KD36.5bn ($120.1bn) at the end of the first quarter of 2023, with its Islamic subsidiary Boubyan Bank reporting KD8.03bn ($26.4bn), while KFH reported a total of KD36.9bn ($121.4bn). Both NBK and KFH have numerous overseas operations – KFH’s acquisition of AUB having boosted its international portfolio in particular – yet the two banks’ share of the domestic market remains dominant. Fitch estimated NBK’s share of the Kuwaiti market at around 33% after KFH’s October 2022 AUB acquisition, while KFH’s share stood at 28%.
In terms of the other banks on the Forbes list, for the first quarter of 2023 the Commercial Bank of Kuwait reported total assets of KD4.38bn ($14.4bn), while Gulf Bank posted KD6.82bn ($22.4bn), Burgan Bank KD7.19bn ($23.7bn), Al Ahli Bank of Kuwait KD6.06bn ($19.9bn) and Warba Bank KD4.59bn ($15.1bn).
Performance
After slower economic growth in the period leading up to the pandemic – which itself caused economic shrinkage in Kuwait, as elsewhere – GDP growth began to recover in 2021 and has since accelerated (see Economy chapter).
According to the IMF, GDP grew by 1.3% in 2021 and 8.7% in 2022, making the latter a boom year for the country. The fund expects real GDP growth to slow in 2023 to around 0.9%, however, on the back of weakening oil prices, with non-oil economic activity also returning to pre-pandemic norms.
At the same time, the population – which shrunk during the pandemic as many expatriate workers left – grew by 8% in 2022 to 4.74m, bringing it back to near pre-pandemic levels. This highlights a surge in new projects, as many foreign workers are employed in construction, with the fourth quarter of 2022 and first quarter of 2023 both seeing an uptick in project awards (see Construction & Real Estate chapter).
The government responded to the surge in oil revenue and economic revival with a series of ambitious budgets. The 2023/24 version, at KD26.3bn ($86.6bn), was a record 11.7% larger than the 2022/23 budget. However, the political calendar remains a factor in 2023, with elections held in June 2023 and the possibility of the budget being trimmed by the incoming administration. At the same time, reforms to public spending – the 2023/24 budget could create a major budget deficit, with 80% of government spending on public sector salaries and subsidies – may also move slowly, particularly in regards to long-awaited changes to the public debt law.
Against this background, the banking sector enjoyed a return to growth in 2022. In terms of total sector assets, while these rose marginally in 2021 – from KD72.8bn ($239.6bn) to KD73.8bn ($242.9bn) – they were up 14.5% to KD84.5bn ($278.1bn) in 2022. The most recent figures, for July 2023, show continued growth, albeit at a slower rate, with total assets at around KD84.8bn ($279.1bn).
The year 2022 was one of intense competition for deposits, which has sometimes driven margins to extreme lows. One such example was a KD25m ($82.3m) government agency deposit that attracted a rate of 5.8% from a conventional bank after 10 locally based lenders made bids in December 2022. Keeping liquidity in local currency can make such bids worthwhile in the current operating environment.
Lending rose by 6.3% in 2021 and 7.7% in 2022, according to NBK data. Credit growth slowed to 5.1% in March 2023, as higher interest rates and declining price competition between banks impacted the sector. Household and business credit growth measured at 9% and 6.8%, respectively, in 2022, but by the end of the first quarter of 2023 this had moderated to 6.7% and 4.2%.
Going forwards, in terms of credit growth, much depends on the course of interest rates, and in turn, global inflationary concerns, as well as on the creation of a steady flow of new projects and investment opportunities in Kuwait.
At the same time, the interest rate cap means that banks are sometimes unable to profitably price and offer loans to businesses that are higher risk, but still potentially profitable. This is a particular concern for loans to small- and medium-sized businesses (SMEs), which may be higher risk and less transparent than larger companies. To help address this, the National Fund for SME Development, established in 2013, offers support packages to qualifying businesses. Some banks have also advocated for the interest cap to be raised for loans to SMEs specifically.
Amid weaker credit growth and a slowdown in government project expenditure in recent years, Kuwait’s banks have accumulated a large amount of unused liquidity. CBK regulations on the CAR have also kept banks’ coffers full. While the CAR slipped a little between June 2021 and June 2022 – from 19.1% to 18.4% and then to a 2022 average of 17.3% – this remains significantly higher than regulatory requirements. At the same time, the gross non-performing loan (NPL) ratio was around 1.5% in June 2022, with international credit ratings agency Moody’s predicting it would remain under 2% in 2023. NPL coverage was in excess of 300% in June 2022.
At the beginning of 2023 Moody’s rated the Kuwaiti banking sector “A1” with a stable outlook, with the country’s leading lenders also scoring highly in the global ratings agency charts. Fitch gave NBK a long-term issuer default rating (IDR) of “A+” with a stable outlook in January 2023, noting that this made the bank systemically important. Also in that category was KFH, with an IDR of “A” and a stable outlook rating, which Fitch also assigned to the Commercial Bank of Kuwait, Gulf Bank and Burgan Bank. In March 2023 an “A” rating with a stable outlook was assigned to Al Ahli Bank of Kuwait and Warba Bank, making the sector’s listed banks all highly sound and systemically important – a reflection of the Kuwaiti authorities’ ability and willingness to provide support to domestic banks, irrespective of the banks’ size, franchise, funding and level of government ownership, as cited by Fitch in its January 2023 assessment of NBK.
Consolidation
In 2022 KFH completed its long-unfolding acquisition of Bahrain’s AUB. Among the world’s biggest bank mergers that year, at $11.6bn, it created the Gulf’s seventh-largest lender by assets. The KFH-AUB consolidation gave rise to some debate over whether this constituted the beginning of a long-awaited trend in Kuwaiti banking. This was heightened when, in August 2022, Al Ahli Bank of Kuwait and Gulf Bank signed a memorandum of understanding for one to acquire the other, with the possibility of one converting into a sharia-compliant lender. The merger talks were, however, cancelled by the two banks in June 2023.
It remains to be seen whether there will be a wave of further consolidation, as the particular circumstances of the KFH-AUB merger may be difficult to reproduce among other lenders. The government has had a significant stake in the banks that have consolidated or planned to consolidate, which facilitates these banks to undertake a shift in ownership and management. Banks with more traditional structures may find such consolidation challenging.
While the arguments in favour of further consolidation may be strong, it would likely take a shift in the ways in which banks are managed – away from family control in particular. At the same time, the continued strength of Kuwait’s smaller banks is likely to leave less of an incentive for any radical market overhaul in the near term.
High-Tech Solutions
While Kuwaiti banks have a reputation for caution, recent years have seen rapid growth in the country’s digital finance offerings, spurred by new CBK regulations and the pandemic.
The global health crisis accelerated a shift in behaviour away from face-to-face business and towards digital interfaces, with remote work and remote banking in particular taking off. The CBK’s regulatory changes, which began when it set up a fintech unit in 2018, were crystallised in February 2022, when the CBK introduced new guidelines for the establishment of digital banks.
Driving these developments are some demographic motors. Around 40% of Kuwait’s population is under the age of 24 and 25% is under 15. This foreshadows a major youth surge in a country with one of the fastest internet speeds in the world and a mobile penetration rate of 178% in early 2023 (see ICT chapter).
In late 2022 peer-to-peer (P2P) money transfer was used by around 44% of the population, while research from global consultancy firm PwC at the time indicated around 83% of the population was willing to adopt fintech solutions. Given this background, it is no surprise that Kuwait’s banks have moved from internal IT infrastructure transformations and upgrades to rolling out fintech services to retail and commercial customers.
The CBK regulatory sandbox, established by its fintech unit, provides a secure space for product innovation and development, with products such as buy-now/pay-later microfinance undergoing testing there in late 2022.
NBK-owned digital bank Weyay was launched in 2021 and has shown strong growth: a year later it had exceeded its customer acquisition goals by 300%. The fully digital offering has targeted young Kuwaitis in particular, featuring P2P payments, savings pots and goals.
KFH, meanwhile, has partnered with US-based fintech firm Ripple to launch instant cross-border payments to its Turkish unit, Kuveyt Türk, making the bank the first of Kuwait’s Islamic lenders to enter this blockchain territory. NBK also partnered with Ripple in 2018.
Another digital innovation is biometric facial recognition for customers, which Gulf Bank pioneered in 2016 using Daon’s IdentityX platform. In May 2023 Kuwait International Bank announced it was using Zwipe fingerprint recognition technology to provide customers with biometric security for its payment cards. The Commercial Bank of Kuwait has also embraced new technologies – it was the first bank in Kuwait to introduce ATMs – with cardless cash withdrawal, InstaPay and T-Pay services on offer.
Meanwhile, according to the CBK, several applications for digital banking licences were received in 2022, which were still being assessed as of September 2023. Three types of digital banks are permitted in Kuwait: units within a traditional bank, a partnership between a traditional bank and a digital institution, and a standalone digital bank.
Looking ahead, the country has larger ambitions to leverage the strength of its banking sector to establish itself as a digital finance centre. The creation of the Madinat Al Hareer, or Silk
City, development may be key to this, with the potential for the new mega-project to establish a regulatory framework for banking and finance that leapfrogs to future fintech best practices.
Outlook
The coming years are slated to be a period of continuing profitability and asset growth among Kuwait’s lenders. In the wider economy, inflation has been largely brought to heel as monetary policy has tightened, while higher oil revenue has refilled government coffers. Monetary tightening has taken place without seriously constraining the credit growth of banks, which remain highly capitalised and with low levels of NPLs.
Economic growth is, however, expected to slow in 2023-24, and oil prices and revenue forecasts remain uncertain. Nevertheless, the new government of Prime Minister Sheikh Ahmad Nawaf Al Ahmad Al Sabah, who was re-appointed following the June 2022 general elections, will likely move ahead with long-awaited reforms that may unleash further growth, engendering positive outcomes for banks (see Economy chapter).
As new digital lenders arrive on the scene, the country could see heightened competition while also bringing more Kuwaitis into the fintech space. Although global uncertainties remain, Kuwait’s banking system remains a solid foundation for the country’s economy, as well as for the wider regional and international financial system.
Read More from OBG
