Increased oil revenue, consolidation and new digital finance offerings are fuelling the sector’s growth potential. 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 for 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 saw global oil prices tumble in 2020 – a leading concern for a country in which hydrocarbons account for around one-half of GDP. However, as prices rose in 2021 and 2022, Kuwait’s economic fortunes, and those of its banks, rebounded. Indeed, 2022 recorded the highest credit growth since 2015.
The sector has seen some consolidation in recent years, as banks that feature 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 their caution and conservatism, along with their strong reserves and prudent policies, is expected to ensure that the sector remains resilient in the coming years, as demonstrated by strong financial soundness indicators.
Structure & Oversight
The CBK is the 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 January 2024 half of the board members were women, illustrating the substantial role women play in Kuwait’s financial community. The central bank regulates and supervises the sector under CBK Law No. 32 of 1968, amended in 1977 and updated regularly in the years since. Chapter III of the law pertains to banking regulation, with a separate section on Islamic banking added in 2003.
Islamic Banking
The Kuwaiti banking sector includes both conventional and sharia-compliant banks. Current regulations prohibit conventional institutions from operating through Islamic windows, which means that only 100% Islamic banks are allowed to conduct such activities. As a result, some conventional banks have Islamic arms. Among these are Boubyan Bank, the sharia-compliant subsidiary of the conventional National Bank of Kuwait (NBK).
The CBK has a specific body for Islamic financial institutions: the Higher Commission of Sharia Supervision, which reports to the CBK board, and is responsible for ensuring the sharia compliance of the CBK’s dealings with Islamic banks and finance institutions. The body 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.
Operators
As of January 2024 the CBK supervised five domestically headquartered conventional banks: Al Ahli Bank of Kuwait, Burgan Bank, the Commercial Bank of Kuwait, Gulf Bank and NBK. It also supervised four domestic Islamic banks: Boubyan Bank, KFH, Kuwait International 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 in 1973 by the government to aid the development of the banking, industrial and commercial sectors. Its current shareholders include the MoF, the CBK, and a range of Kuwaiti banks and investment companies.
There were 11 foreign bank branches operating in the country as of January 2024, the Kuwaiti operations of which are subject to CBK supervision. This list comprised: Al Rajhi Bank, Bank Muscat, BBK, BNP Paribas, Citibank, Doha Bank, First Abu Dhabi Bank, HSBC, the Industrial and Commercial Bank of China, Mashreq Bank and Qatar National Bank. Foreign banks typically focus on commercial operations, with retail banking the domain of domestic lenders. CBK duties also include the supervision of finance companies. As of January 2023, these consisted of: one Islamic finance entity, Al Mulla International Finance; one conventional financial services company, Kuwait Finance & Investment Company; eight Islamic investment companies; 15 conventional 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, respectively. The Communication and Information Technology Regulatory Authority has a dedicated information security and emergency response department for overseeing cybersecurity measures, an increasingly key area as the banking sector undergoes 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 maintains robust trade and financial relations. Through this, the CBK aims to safeguard the national currency against fluctuations in the US dollar – to which the dinar had been exclusively pegged during 2003-07. The US dollar, nonetheless, remains the most highly weighted currency in the international basket.
With heightened international inflation and many central banks raising their interest rates, since March 2022 the CBK has raised its discount rate nine times by a cumulative 275 basis points, reaching 4.25% in July 2023. This, in turn, led to a hike in bank interest rates – within the pricing cap the CBK imposes on retail lending. This cap is calculated according to a formula: the base rate plus three percentage points for consumer and housing loans; the base rate plus 2.5 percentage points for short-term commercial loans; and the base rate plus four percentage points for long-term commercial loans. Higher interest rates have impacted credit growth and net income ratios, although Kuwaiti banks have remained well prepared for monetary tightening. The sector’s capital adequacy ratio (CAR) was 18.3% at the end of September 2023, well above the mandatory CAR of 13% and 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 lowered to 80% during the pandemic – were raised to 90% in January 2022 and further increased to 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 being major players on the Kuwait Stock Exchange (KSE), the upgrade led to even tighter and more regular examination of banks’ financials by the CBK. For a number of years the banking sector was the largest on the KSE by value, with its 10 listed banks often the most actively traded. In 2023, for example, the 10 institutions accounted for 23% of all trading activity on the exchange, as well as 30% of transactions and 45% of total value traded. Virtually all the shares of listed banks continue to be Kuwaiti owned: NBK has the largest foreign shareholding, at 24.2%, and the Commercial Bank of Kuwait maintains the smallest, at less than 0.1%, as of January 2024.
Market Shares
The Forbes Middle East list of the region’s 50-largest banks by market value, which used February 28, 2023 as its baseline, 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 the 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 placed 40th, with $2bn; and Warba Bank ranked 43rd, with $1.5bn. Kuwaiti banks are strongly represented among the top institutions regionally as well as globally. After its acquisition of AUB, KFH ranked 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 combined assets of KD87.7bn ($285.3bn) as of December 2023. According to international credit ratings agency Fitch, in the first half of 2023 the share of sector assets held by Islamic banking and by conventional institutions was divided equally, at 50% apiece. NBK reported total assets of KD36.1bn ($118.8bn) at the end of the second quarter of 2023, with its Islamic subsidiary Boubyan Bank recording KD8bn ($26.4bn), while KFH confirmed KD37bn ($121.8bn) in total. Fitch estimated NBK’s share of the Kuwaiti market at around 33% after KFH’s October 2022 acquisition of AUB, with KFH’s share at 28%. Both NBK and KFH also have numerous overseas operations – with the 2022 acquisition boosting KFH’s international portfolio. In terms of the other banks on the latest Forbes list, for the second quarter of 2023 the Commercial Bank of Kuwait reported total assets of KD4.3bn ($14bn), Gulf Bank KD6.9bn ($22.6bn), Burgan Bank KD7.1bn ($23.3bn), Al Ahli Bank of Kuwait KD6.3bn ($20.7bn) and Warba Bank KD4.7bn ($15.6bn).
Performance
After slower economic activity in the period leading to the pandemic – which itself caused an economic contraction in Kuwait, as elsewhere – GDP growth began to recover in 2021 and accelerated in 2022 (see Economy chapter). According to the IMF, GDP grew by 1.1% in 2021 and 8.9% in 2022, positioning the latter as a boom year for the country. The fund forecast real GDP to contract by 0.6% for 2023 on the back of weakening oil prices, before recovering to 3.6% growth in 2024. Meanwhile, the population – which shrunk during the pandemic as many expatriate workers left – grew by 8% in 2022 to 4.7m, nearing pre-pandemic levels. This highlights a surge in new projects, with many non-Kuwaiti workers employed in construction, as the fourth quarter of 2022 and first quarter of 2023 welcomed an uptick in project awards (see Construction & Real Estate chapter).
The government responded to the increase in oil revenue and economic revival with a series of ambitious budgets. The 2023/24 iteration, at KD26.3bn ($86.6bn), was a record 11.7% larger than the 2022/23 budget. However, some uncertainty remains in early 2024 following the passing of the late Emir, Sheikh Nawaf Al Ahmad Al Jaber Al Sabah, in December 2023, the subsequent resignation of the Cabinet, and the appointment of Prime Minister Sheikh Mohammed Sabah AI Salem Al Sabah by the new Emir, Sheikh Mishal Al Ahmad Al Jaber Al Sabah, in January 2024. It remains to be seen where the government’s priorities lie in the months ahead. Reforms to public spending may move slowly, particularly for long-awaited changes to the public debt law – alongside some concerns that the 2023/24 budget, allocating 80% of spending to public-sector salaries and subsidies, could create a deficit.
Against this backdrop, the banking sector enjoyed a return to growth. Total domestic sector assets increased by 9.7% in 2022, up from KD77bn ($250.5bn) in December 2021 to KD84.5bn ($274.9bn). The most recently available figures from the central bank indicate growth of 3.8% in December 2023.
Deposits & Lending
The year 2022 was one of intense competition for deposits, which has sometimes driven margins down. 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 submitted bids in December 2022. Keeping liquidity in local currency can make such bids worthwhile amid the current operating environment. Credit facilities by residents rose by 7.4% in 2021 and 7.7% in 2022, according to CBK data. Credit growth slowed to 1.7% in December 2023 as higher interest rates and declining price competition between banks impacted the segment. Household and business credit growth measured 9% and 6.8%, respectively, for 2022. At the end of December 2023 these measured a more moderate growth rate of 1.5% and 1.9%, respectively, year-on-year. Regarding the forecast for credit growth in 2024, much is projected to depend on interest rates and global inflationary concerns, as well as on the flow of projects and investment opportunities in the country. As a sign of optimism for the space, the US Federal Reserve plans to implement three interest-rate cuts in 2024, according to its December 2023 projections, with the CBK broadly expected to follow suit.
High interest has negatively impacted corporate cashflows, resulting in banks reducing rates, extending loan repayment schedules, and restructuring in 2023, with effects expected to continue until mid-2024. Real estate in particular has suffered, with falling yields as margins are squeezed by high costs and falling rents.
In a move to remain competitive, the CBK employs an interest rate ceiling for conventional banks, which sharia-compliant institutions generally also follow. Some banks face challenges with this cap to cost effectively price and offer loans to businesses that may be higher risk but potentially profitable. This is a particular concern for loans distributed to small and medium-sized enterprises (SMEs), which may be higher risk and less transparent than those for larger companies. To help address this issue, the National Fund for SME Development, established in April 2013, offers support packages to qualifying businesses. Some banks have advocated for the interest cap to be raised for SME loans, and the CBK has lowered SME credit-risk weights from 75% to 25% in an effort to encourage banks to provide more financing to this segment.
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 regarding the CAR have also kept banks’ coffers full. The CAR of Kuwaiti banks stabilized at 19.2% at the end of 2021 and 2022, and decreased slightly to 18.3% at the end of September 2023, although it has remained significantly higher than regulatory requirements. At the same time, the gross non-performing loan (NPL) ratio was around 1.7% in December 2023, with NPL coverage of 288%.
At the beginning of 2023, the latest update available at the time of writing, Moody’s rated the Kuwaiti banking sector “A1” with a stable outlook – with the country’s leading lenders also scoring highly in global ratings agency charts. In January 2023 Fitch assigned Banking assets, 2018-23* Source: CBK 60 70 80 90 100 2023 2022 2021 2020 2019 2018 NBK a long-term issuer default rating (IDR) of “A+” with a stable outlook, 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. This reflects the Kuwaiti authorities’ ability and willingness to provide support to domestic banks, irrespective of the bank’s size, franchise, funding and level of government ownership, as cited by Fitch in its most recent assessment of NBK during January 2023.
Consolidation
In 2022 KFH completed its 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 consolidation gave rise to some debate over whether this constituted the beginning of a long-awaited trend in the sector. 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 in June 2023.
It is yet to be seen whether there will be a wave of further consolidation in the months ahead, as the specific circumstances of the KFH-AUB merger may be difficult to reproduce. The government has had a significant stake in the banks that have consolidated or planned to consolidate, which facilitates these banks in undertaking a change in ownership and management. Banks with more traditional structures may find such consolidation challenging, although the strength of smaller banks is likely to leave less of an incentive for any radical market overhaul in the near term.
Digital Solutions
While Kuwaiti banks historically retain a reputation for caution, recent years have seen rapid growth in the country’s digital finance offerings, largely spurred by new CBK regulations and the pandemic. Restrictions related to the global health crisis accelerated a shift in behaviour, away from face-to-face business and towards digital interfaces, with remote work and banking in particular taking off. The CBK’s regulatory changes, which began with the establishment of a fintech unit in 2018, were crystallised in February 2022, when the CBK introduced new guidelines for the establishment of digital banks.
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 that some 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 upgrades, to rolling out fintech services to retail and commercial customers. “Progress in the Kuwaiti fintech landscape is dependent on the concerted efforts of multiple stakeholders, including banks, investment companies, the CBK and entrepreneurs,” Hamad Al Hasawi, Secretary-General of the Kuwait Banking Association, told OBG. “Collaboration and integration are both key to fostering market-relevant innovation that addresses actual needs.”
Enabling Innovation
The CBK regulatory sandbox provides a secure space for product innovation and development. Moreover, the CBK has established Wolooj, an innovation centre that seeks to motivate creators to develop solutions in the areas of artificial intelligence, digitalisation and cybersecurity, as well as supervisory and regulatory technologies, by offering an interactive environment for the testing and development of these products and services.
NBK-owned digital bank Weyay was launched in November 2021 and has shown strong growth: one year later it had exceeded its customer acquisition goals by 300%. The offering targets young Kuwaitis in particular, featuring P2P payments, and 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 partnered with Ripple in 2018.
Another innovation is biometric facial recognition, 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.
According to the CBK, several applications for digital banking licences were received in 2022 and were still being assessed as of the end of 2023. Three types of digital banks are permitted in the country: units within a traditional bank, partnerships between a traditional bank and a digital institution, and standalone digital banks. Looking ahead, Kuwait has ambitions to leverage the strength of its banking sector to become a digital finance leader. The creation of Madinat Al Hareer, or Silk City, may play a key role in this, with the potential for the new mega-project to establish a regulatory framework for banking and finance that could enable the country to leapfrog to using fintech best practices.
Outlook
The coming years are expected to be a period of continuing profitability and asset growth. Inflation has been largely brought to heel as monetary policy has tightened – without seriously constraining the credit growth of banks, which remain highly capitalised and with low levels of NPLs. The economic contraction experienced amid weaker oil prices in 2023 is expected to reverse as Kuwait works to unlock the benefits of diversification. It remains to be seen where budgetary and regulatory priorities lie, and how the authorities will move ahead with long-awaited reforms. As new digital lenders arrive on the scene, the country could see heightened competition while also bringing more Kuwaitis into the fintech space. Ultimately, Kuwait’s banking system continues to provide a solid foundation for the broader economy, as well as for the wider regional and international financial system.
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