Kuwait is one of the largest Islamic finance markets in the world, hosting five Islamic banks and one foreign Islamic bank, eight Islamic investment companies, one Islamic finance company and 14 takaful (Islamic insurance) companies. These segments have seen strong growth since the Covid-19 pandemic and have capitalised on the rapid global expansion of Islamic finance, with sharia-compliant banks growing faster than their conventional counterparts.
Sukuk (Islamic bonds) have experienced growth around the world, especially in the green sukuk sector, which combines sharia-compliant products and sustainable financing. However, Kuwait’s domestic sukuk market has been limited by legislative delays hindering the trading of such bonds on the country’s stock exchange. Kuwait’s large Islamic finance institutions, their long history, and the country’s location between Asia and Africa – together with encouraging regulatory changes – provide a positive outlook for its Islamic financial services sector.
Oversight
The Central Bank of Kuwait (CBK) is the primary regulatory body overseeing the country’s financial sector, with Basel Al Haroon having occupied the position of CBK governor and board chairman since November 2022. The board has seven additional members: the deputy governor, undersecretaries from the Ministry of Finance and the Ministry of Commerce and Industry, and four private sector representatives.
In 2016 the CBK implemented instructions regarding the supervision of Islamic banking entities. These included minimum requirements for overseeing the sector’s supervisory board and determining board members. The instructions also covered the scope and objectives of audits of Islamic finance entities and the qualifications that auditors are required to have. In January 2020 the CBK published a circular covering external sharia audits for Islamic finance entities and how to receive approval for auditors.
The CBK also regulates financial technology ( fintech) in the sector, a domestic market that is projected to reach $9.5bn in 2026, according to the “Global Islamic Fintech Report 2022” written by growth strategy research and advisory firm DinarStandard and digital structured finance company Elipses. “The banking sector has undergone a period of significant evolution with the advent of digital banking,” Shaheen Al Ghanem, CEO of Warba Bank, told OBG. “There has been substantial investment in digital banking and services in Kuwait, and this has paved the way for collaboration, particularly with telecommunications operators.”
Capital Markets & Takaful
While the CBK licenses Islamic finance and investment companies, regulating these entities is the remit of the Capital Markets Authority (CMA) under the Capital Markets Law (CML) introduced in 2010. The CMA has an advisory council responsible for sharia supervision.
Notably, while such investment is not defined by its activity, sharia funds differ from traditional investment firms by limits on investment, in addition to divergent governance and auditing requirements and procedures. Applications to establish an Islamic fund are reviewed by the CMA’s relevant advisory council before they can start operating.
Takaful is regulated by the Insurance Regulatory Unit (IRU), the sole licenser of insurance firms in Kuwait. Such firms can provide either conventional insurance or takaful, but not both. The IRU imposed a September 2022 registration deadline for insurance companies to determine their status, with more than 170 foreign and domestic insurance companies applying by mid-December 2022. In March 2023 the IRU issued a circular requiring insurance companies to adopt International Financial Reporting Standard (IFRS) 17. The final stages of IFRS adoption required audited financial reports for the first and third quarters by August and November 2023, respectively. In addition to the IFRS 17 circular, the IRU also developed a plan spanning 2023 to 2027 to modernise the sector. A notable development in this respect is IruSoft, an IRU-owned and developed platform designed to digitise and streamline the licensing, supervision and inspection of the insurance sector.
The Kuwait Insurance Federation (KIF) is the sector’s trade body, representing 38 companies. A stated goal of the KIF is to nationalise jobs in the sector, as only 18% of employees working in insurance companies were Kuwaiti nationals as of April 2022. Additionally, the large number of insurance companies relative to the country’s population means that sector consolidation is likely.
Banking
The CBK has licensed five Islamic banks and one foreign branch. The largest Islamic bank is KFH, which had KD37.1bn ($120.6bn) in total assets in the third quarter of 2023, up 63.5% from KD22.7bn ($73.8bn) in the third quarter of 2022, making it the 11th-largest bank in the Middle East and seventh-largest in the GCC by asset size. In the first quarter of 2023 the banking sector as a whole had KD85.4bn ($278bn) in assets, giving KFH a 43% market asset share, according to the CBK.
Boubyan Bank is the second-largest Islamic bank and the third-largest Kuwaiti bank, with KD8.2bn ($26.7bn) in assets in the third quarter of 2023, up from KD7.8bn ($25.2bn) during the same period in 2022. Third is Warba Bank, with KD4.8bn ($15.6bn) in assets in the third quarter of 2023, up from KD4.2bn ($13.6bn) in the third quarter of 2022. Kuwait International Bank (KIB) is the smallest Islamic and Kuwaiti bank, with KD3.6bn ($11.6bn) in assets. For the first half of 2023 credit ratings agency Fitch Ratings calculated that Islamic banking assets grew to 50% of total banking sector assets in Kuwait, up from 45.5% during the same period in 2022.
Takaful
Several Islamic banks have their own insurance subsidiaries. Warba Insurance & Reinsurance is affiliated with Warba Bank, although it does not offer sharia-compliant products. KFH’s subsidiary is KFH Takaful; Boubyan Bank is the sole shareholder of Boubyan Takaful; and KIB’s insurance operations are carried out by KIB Takaful, formerly Ritaj. According to the IRU, an additional 11 takaful entities are certified. The most notable of these are Gulf Takaful Insurance, a subsidiary of Kuwait’s largest insurer, Gulf Insurance Group (GIG); First Takaful, one of two such companies listed; Burgan Takaful, a subsidiary of Kuwait’s Burgan Bank; and Wethaq Takaful, the first Kuwaiti takaful company. Similar to banking and investment, companies are not allowed to participate in both sharia-compliant and conventional insurance activities.
Takaful entities are relatively minor players in the insurance market. First Takaful registered KD13.3m ($43.2m) in total assets in 2022, and Wethaq Takaful had KD4.2m ($13.7m). In comparison, GIG’s total assets for the year were KD1.3bn ($4.4bn), while Al Ahleia Insurance Company, and Warba Insurance & Reinsurance recorded total assets of KD408m ($1.3bn) and KD92m ($299m), respectively. Health insurance dominates the market, representing 50% of total premium income in 2021, with motor vehicle and third-party liability insurance among the top-three classes at 13.7% and 3.4% of premiums, respectively. Other common insurance areas are marine and aviation, general accident and fire. Additional areas to watch are rollouts of digital insurance products and potential mergers resulting from the large number of takaful companies.
The insurance sector broadly has seen changes as well. A proposed plan by the Ministry of Health will separate the markets for expatriates and Kuwaitis. Should the plan be fully implemented, locals will receive health care at government hospitals, while expatriates will only be treated at facilities that are run by the Health Assurance Hospitals Company (Dhaman), a public-private partnership. Health insurance is also set to become a mandatory part of the visa application process, with Dhaman announcing in September 2023 plans to increase these costs from the current KD130 ($423) to KD190 ($618) by increments of KD20 ($65) every two years, with additional increases possible depending on inflation rates. In April 2023 the IRU announced a plan to increase the annual insurance rate for private vehicles from KD19 ($62) to KD32 ($104), although the decision did not take effect.
Sukuk
The CML oversees sharia-compliant debt.
Among the most important revisions made in 2015 to the CML was laying the groundwork to issue sukuk domestically using a special-purpose company. Sukuk need to be approved by the CMA and a sharia auditing office before they can be issued. According to a 2018 memorandum of understanding between the CMA and the CBK, the two entities are responsible for supervising government-issued sukuk.
Foreign markets including Dublin, Dubai and London remain the primary destinations for Kuwaiti companies to issue debt. In April 2021 Boubyan Bank issued a $500m sukuk on the Irish Stock Exchange, and in June 2021 KFH’s investment arm, KFH Capital, issued a $750m sukuk on the London Stock Exchange (LSE). In July 2023 Kuwait Projects Company (KIPCO) became the first locally incorporated company to issue a sukuk denominated in the local currency, but KIPCO also issued a sukuk on the LSE.
The development of the domestic sukuk market has been slowed by a public debt law in Parliament that has been stalled since 2018. In September 2023 Kuwait’s minister of finance said that building momentum for the law is not a priority, despite the law being required to establish Kuwait’s secondary debt market, which would allow domestic sukuk issuances and trading. As of the end of November 2023 the CBK had issued 36 tawarruq (reverse cost-plus financing) papers with rates ranging from 4.5% to 4.63% for 12 months, 4.38% to 4.50% for six months, and 4.25% to 4.38% for three months. The most common value was KD90 ($293m).
Banking Performance
The banking sector has rebounded strongly following the Covid-19 pandemic. The government implemented policy reforms, such as a low CBK discount rate, a reduction in the capital adequacy ratio (CAR), and altered risk weighting for small and medium-sized enterprises (SMEs). The CBK rate has also increased to better handle inflation, while the CAR is back to pre-pandemic levels. However, the risk weight for SMEs remains 25% to spur lending to the market segment.
Saudi Arabia and Kuwait were the engines of a 10% global growth rate in Islamic banking assets in 2022, a trend that global ratings firm Standard & Poor’s projects to continue into 2024. By mid-2022 non-performing loans had dropped by 50% compared to the peak seen in September 2020, though they inched up to 1.6% in the second quarter of 2023, compared to 1.5% during the same period in the previous year. In October 2023 Fitch Ratings reported that the Islamic banking sector would grow despite lower oil prices and a possible global recession. Continued demand for Islamic products is expected to help mitigate negative external forces, and it has helped Islamic bank assets in Kuwait grow to 50% of total sector assets.
Profit Indicators
KFH’s operating income at the end of the third quarter of 2023 was KD1.1bn ($3.6bn), up from nearly KD700m ($2.3bn) at the end of the same period in 2022. Meanwhile, net profit for the first nine months of the year more than doubled from around KD250m ($810m) in 2022 to around KD520m ($1.7bn) in 2023. In June 2023 KFH won Euromoney magazine’s award for Kuwait’s best Islamic bank and the world’s best Islamic bank in regards to environmental, social and governance (ESG) standards. Boubyan Bank’s operating income in the first nine months of 2023 was KD163m ($531m), slightly higher than the same period in 2022, when it was KD153m ($498m). Net profit was also up from around KD46m ($150m) to KD59m ($192m). Operating income for KIB in the third quarter of 2023 was KD52.5m ($171m), up from roughly KD47m ($153m) during the same period in 2022, and its profits in the third quarter of 2023 were KD7m ($23m) compared to KD4m ($13m) for the same period in 2022. Warba Bank was the exception, recording an operating income of close to KD50m ($163m) at the end of the third quarter of 2023, compared to KD62m ($202m) during the same period a year earlier. Net profit was down slightly, from short of KD16m ($52m) in the third quarter of 2022 to more than KD14m ($45.5m) in 2023.
Takaful Performance
The insurance sector as a whole saw profits grow by 2% to nearly KD109m ($354m) in 2022, and total premium rose by 14.6% to just short of KD630m ($2bn). A major development in the sector announced in 2021 by the IRU, the KIF and Public Authority for Manpower and implemented in February 2022 requires expatriates older than 65 without a university degree to pay KD500 ($1630) per year for additional health insurance. In January 2023 GIG rolled out a new insurance package targeting this age group, although no takaful companies had done the same as of November 2023. In March 2023 Kuwait Insurance Company (KIC) took a 74% stake in the unlisted National Takaful Insurance Company (NATICO) for an undisclosed price.
First Takaful has experienced steady growth in recent years, reporting profits of KD140,000 ($457,000) in 2022. Wethaq Takaful recorded KD83,000 ($270,000) in profits that same year after a loss of KD39,100 ($127,000) in 2021. However, takaful companies are relatively small when compared to conventional insurance companies. Despite the size difference, the conventional and takaful sectors have similar retention rates, while companies in the takaful segment have slightly better loss ratios than conventional insurance firms.
Sukuk Performance
Because the Kuwaiti government cannot issue debt until a public debt law is passed, Kuwait’s sukuk market has remained less active than those seen in Bahrain, Saudi Arabia and the UAE. Throughout 2023 Saudi Arabia dominated the sovereign sukuk issue market, with the UAE coming second and Qatar third. Similarly, in terms of corporate sukuk issuances, the UAE and Saudi Arabia outpace other GCC countries. Across the MENA region, sukuk slightly outperformed traditional bonds throughout 2023.
However, Kuwaiti Islamic banks have issued sukuk in the past: Warba Bank issued a $250m sukuk in 2021, KFH issued a $750m sukuk the same year and KIB issued a $300m sukuk in 2020. In addition to issuing sukuk, the banks have also traded them and helped manage issuances for others. In 2022 KFH traded more than $13bn worth of sukuk, down from more than $16bn in 2021. Warba Bank has been a joint lead manager for $800m in Emirati sukuk issuances: two for Sharjah-headquartered real estate firm Arada Development and one for an Emirati royal family office. In July 2023 KFH Capital and Warba Bank were joint lead managers for a KD103m ($335m) sukuk issued by KIPCO.
Green Financing
The growth of Kuwait’s Islamic finance sector and consistent regulatory improvements by the government mean that it can start positioning itself as a global centre of Islamic finance. Central to this initiative is a growing interest in green Islamic finance, which is set to capitalise on future investment in green technology. In February 2022 the CMA issued guidelines on green sukuk and bonds, and in November 2022 the CBK issued sustainable finance and ESG guidelines.
Fintech companies that have a sustainability component are positioned to be given priority in the CBK’s regulatory testing environment, and individual banks have also taken steps. In December 2022 Warba Bank and the UN Development Programme jointly conducted a workshop on Islamic finance and green investing, while KIB published its second annual sustainability report in December 2023.
Outlook
The outlook for the Kuwaiti Islamic financial market is a positive one. Islamic banks are growing more rapidly than their conventional counterparts, and financial institutions can benefit from the regional explosion in green Islamic financing and the continued global expansion of the Islamic banking sector, which is estimated by the Dubai-based AlHuda Centre of Islamic Banking and Economics to reach $5trn in value by 2025.
The Kuwaiti takaful market is expected to face competition from larger conventional insurers along with the changes seen in the insurance market, primarily consisting of a higher minimum premium. This in turn is projected to force companies to develop new products to meet the evolving demands of customers. Consolidations in the sector are likely to happen more frequently in response to the new economic realities and government spending priorities.
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