KUWAIT'S FINANCIAL SYSTEM
Being able to thrive in the competitive local banking environment, Kuwaiti financial institutions are well-positioned to raise their profile as important regional players
Kuwait's financial system comprises four sectors: banking, insurance, non-banking (financing & investments and exchange companies) and investment funds. By the end of 2018, total assets were valued at $248 billion and in the banking sector accounted for approximately 80% of the country's GDP. Hundred and ten financial institutions are offering financial products and services in the country.
Out of the 23 banks in Kuwait (eleven local banks and twelve foreign bank branches), six are Islamic banks, operating as per the Islamic law. Kuwait offers a positive business environment. Kuwait's
financial sector has the highest growth potential in the country as compared to the rest of the GCC. Being able to thrive in the competitive local banking environment, Kuwaiti financial institutions are well-positioned to raise their profile as important regional players. Kuwait also has access to a large body of highly qualified professionals with substantial expertise in financial services as well as a relatively
advanced technological infrastructure communications network.
Dating back to 1977, Kuwait Finance House was the first Islamic bank and was originally regulated and supervised by the Ministry of Commerce under a special law. The National Assembly enacted the drafting of Central Bank of Kuwait (CBK) Law no.30 (2003) after a protracted process. It added a special section on Islamic banks to Law no. 32 (1968), referring to currency. Consequently, all Islamic banks in Kuwait came under the regulatory supervision of the CBK in May 2004. Islamic banks in Kuwait have been active in financing major development and infrastructure projects that supported Kuwaiti companies, restructured the debts of non-bank financial institutions, actively sought investment opportunities (especially in the real estate sector), and participated in various notable sukuk deals in the MENA region.
Several investment and financing companies operating under principles of sharia were established in Kuwait in the 1990s. These sharia principled investment/financing companies increased significantly reaching over 66 companies. Since the global financial crisis, the number of Investment companies has shrunk to around 44 companies
KUWAIT’S DEBT CAPITAL MARKET
Kuwait has substantial long-term development plans which are not met by the hydrocarbon wealth, already productively invested. As such, a larger amount of external funding is required by the government and the increasingly active private sector to fulfil policy objectives. To take advantage of the economic opportunities and to facilitate access to the private sector, a more diversified financial system should include Islamic financial products. The broader the financing options available, the cheaper it will become to fund these projects.
Rather than issuing debt, the Kuwaiti government funds its operations largely from the budgetary allocations. Kuwait controls 3.2% of the world's crude oil production. And on the back of strong demand for the state’s oil exports, it posted 15 consecutive budget surpluses. This came to a halt in 2015/2016 when the State began its new streak in the opposite direction with five consecutive budget deficits.
The Kuwaiti government has since issued 62 government bonds worth a total of KWD 8.14 billion ($26.7 billion). The Kuwaiti aggregate bonds consist of conventional bonds issued by the government.
Kuwait is the last GCC member to embrace international DCM (Debt Capital Market) whilst still being during a wave of reforms. Although some reforms are fiscal relating to; tax introduction, lifting
subsidies, and deregulating power tariffs, others equally important relate to human capital and institutional excellence.
Importantly, legal, and regulatory framework restrictions hinder the expansion of the financial sector. A large part of the legislation governing financial transactions, is outdated (from the 1960s and 1970s). The lack of legislation clarity implies that investors and financial institutions do not have clear set of rules from which to assess future tax liabilities and legal requirements. The government’s lack of enthusiasm for borrowing before the oil revenue drop of 2014, might have continuously undermined the development of adequate market infrastructure for the smooth functioning of DCM in Kuwait.
In the absence of an efficient market infrastructure linking the various parties involved in the securities transactions, DCM development is unlikely to flourish. Furthermore, a slow and inefficient securities
settlement system also affects secondary market development as it raises settlement and operational risk.
Managing Partner of Newbury Consultancy Kuwait Dr. Issam Altawari