Kuwait Roundtable: Banks Stand Ready To Support Growth

Global Finance: How are global, regional and local conditions impacting Kuwait?

Michel Accad: Globally, my impression is that Kuwait has had this uncanny ability to avoid problems. We’ve seen it regionally from a foreign-policy perspective, where Kuwait has played its hand beautifully, threading a very fine line. And we’ve also seen it globally from an economic perspective—although it’s not necessarily by design that Kuwait ends up with the lowest break-even oil price in the GCC to balance its budget.

It’s nevertheless a great position to be in, as oil price fluctuations have the least impact on Kuwait relative to the other GCC countries. Similarly, as we’ve seen, fluctuations in US and global interest rates have also had less impact in Kuwait than in other GCC countries because, of course, our monetary policy is a bit more flexible than that of the surrounding countries where currencies are pegged to the US dollar.

Mazin Al-Nahedh: Some Kuwaiti banks with a presence abroad are impacted by political or economic developments in the countries where they operate. KFH, for instance, has investment in Turkey, and the recent turmoil there had an impact on the mother bank in Kuwait. On the regional space, there are also threats. As GCC states, we need to strengthen ties and inclusion.

In Kuwait itself, the main driver to achieve fiscal balance is not only the monetary policy but also the fiscal policy. They have to go hand in hand. We were, for example, successful in removing some of the subsidies on the petroleum and fuel, but there were also cuts on electricity, water and on the food subsidies. Those did not go through. Plus, there was a plan to introduce VAT in Kuwait by 2019. With the increase in oil prices, all those reforms have been pushed back. If we don’t see improvement in implementing those reforms on the spending side, then we will continue to have issues.

Manaf Abdulaziz Alhajeri: We always ask ourselves, as Kuwaitis, to what extent do we matter in the world. Do Arabs or Gulf countries matter in the world? I think there are three or four things that come to mind. First, there is the oil sector, or the oil reserves. We have a significant weight in that field. We have one of the best-run and the oldest sovereign wealth funds in the world. Then there is our foreign policy. I think we’ve gained tremendous respect and admiration from the international community in recent years. Finally, we are big purchasers of defense and arms. I think these are the areas where we matter internationally and we can build on this.

Our private sector is not very big. We have some of the best-run banks in the world, but not in absolute size; I don’t think we’re big enough to compete globally.

Also, I think we have a capital market that needs to be revamped. We are in a hyperactive region where leadership has become significantly younger, more technologically savvy, and I don’t think Kuwait has yet formulated a coherent capital-market investment strategy to cope with this competition. I believe there is a pressing need for a fresh look—a new investment policy to deepen the non-bank financial sector in order to restore the investment sentiment. The non-banking financial sector, a mature and highly regulated sector, should now be instrumentalized in the execution of Vision 2035.

Tareq Muhmood: I think Kuwait’s positioning is unique in navigating trade tensions, not only between the US and China but also between different economic blocks. When you start engaging with the Koreans or the Chinese, their level of involvement in Kuwait’s economy has really increased substantially in the last few years and I expect that to grow further. Our engagement with the East probably needs to grow in comparison to the historic engagement with the West.

The second point I want to touch on is the ease of doing business. The rank is 97 for Kuwait at present, which is very sad given the wealth of human capital that our country has. Having a clear focus on that, not only attracting international capital but making it easier for that capital to be deployed through the private sector is a very clear criterion the World Bank has set in place. I think efforts around there would support developing the right environment for the economy to grow.

Mohamed El Saka: Kuwait is not immune to global economic fluctuations. Petroleum supply, demand and price fluctuations affect our country’s revenues. However, Kuwait has been prudent with its fiscal policy and maintains one of the largest sovereign wealth reserves. The fundamentals of Kuwait’s economy are stronger than that of many of the oil-producing countries. We have seen that during the past economic crisis and, more recently, the fall in oil prices.

Kuwait could focus on sectors in which it has an inherent competitive advantage, such as downstream petrochemical industries, trading and financial services, alternative energy and knowledge-based industries. Deployment of the country’s sizable sovereign wealth fund also could create opportunities.

The implementation of Kuwait’s Development Plan is moving forward with notable examples like building the new airport, a new passenger terminal at Kuwait International Airport, a petrochemical complex, oil refineries and renewable-energy complexes.

Adel Abdul Wahab Al-Majed: Kuwait was historically a financial hub and a regional trade zone and, even over the last decade, it has experienced steady levels of economic growth. Yet the recent decline in oil prices and lower levels of investment raise the prospect of greater economic uncertainty for the country in coming years.

To overcome these challenges, Kuwait needs to diversify its economy, improve its links to international markets, and focus on attracting not only natural resource-seeking Foreign Direct Investment (FDI) but also market and efficiency-seeking FDI. The solution is there, but I think right now we need the usual support and guidance of the government to translate it into action.

GF: This takes us to my next question. Kuwait has a national development plan, Vision 2035, to try to move away from oil dependency and create new sources of revenue. But what is being done today to achieve these goals?

Isam Al Sager: I think the development plan is very ambitious and aims to transform Kuwait into a leading regional, financial and commercial hub by 2035. In concept, this is quite important to diversify our economy, help develop the private sector and attract foreign investments. However, I think we have lots of challenges in front of us. Progress has been very difficult and implementation has been very slow for various reasons. We’ve been talking about reforms for the past five or ten years—yet on the ground, very little has been done. To implement the Kuwait National Development Plan, the overall climate needs to be improved.

To ease doing business in Kuwait we really need to change lots of things. The long-term plan is to diversify the economy of Kuwait, but I don’t think we have a well-diversified economy. We are still depending on oil; 90% or more of our income comes from oil, and that is quite far from any diversification. We need to be more engaged with the private sector, invest more in various sectors of the economy and improve the reputation of Kuwait in the international market.

Mohammad Al-Hashel: The government has introduced certain reforms to address the issue, but I think we have a long way to go. In order to create employment opportunities for our young population, we need to increase the role of the private sector, since absorption of the national labor force in the public sector is not sustainable.

However, there is increasing resistance toward reforms. It is a case of a sick body that is not willing to take the medicine. But without addressing our structural imbalances, we can’t make much progress. And the banking sector can provide funding, but it can’t play any role in addressing structural issues.

Accad: There frankly still seems to be a disconnect between Vision 2035 and the projects that are being undertaken, stalled or canceled. For instance, we talk a lot about diversification away from oil and about the importance of education for future development. These are absolutely critical matters, yet a large PPP school project was canceled recently without explanation. Similarly, there was an important non-oil-related energy project (the KABD Waste to Energy roject) that was inexplicably put on hold. These decisions are rather confusing, as both projects clearly fit Vision 2035. So having a vision is great, but we also need milestones along the way so we can track our progress, or lack thereof.

GF: We talk a lot about economic diversification for Kuwait, what are we actually talking about concretely?

Al-Hashel: First, we cannot completely move away from oil. We are blessed with this natural endowment and must utilize it efficiently. However, we can certainly diversify within the oil sector, by moving away from crude oil and going into refined products to secure better margins regardless of movement in oil prices.

Then, in other sectors, financial services is one suitable candidate. Kuwait could be a financial hub for the region and maybe beyond. Our banking sector has excellent foundations, with a strong degree of resilience. In fact, our domestic market is not big enough to productively utilize the ample liquidity that our banks have. That’s why you see our banks expanding abroad. And tourism could be another key sector for diversification efforts.

Muhmood: Kuwait is a gateway to the 180 million population that is in the surrounding area. If you look around the world, there are many small states that play key roles in supporting the wide economic growth of a region. There are classic examples like Singapore and Hong Kong where it’s gone well. There are classic examples such as Brunei in Southeast Asia where it hasn’t gone well.

Whether it’s the ease of doing business or whether it’s the ease of trade and investment flows into surrounding areas that’s really a key catalyst, such key countries must have a strong financial system—and that we have in Kuwait. Now it’s just a matter of ticking the other boxes to make it happen.

GF: That leads us to our next topic, fintech. How do we encourage innovation in the financial sector?

Al-Majed: Some of the technologies have been readily adopted by financial institutions, such as mobile banking, but many have yet to be massively implemented. This creates a huge opportunity, which hasn’t gone unnoticed by investors. In terms of integration by banks, almost all banks that respond to regular surveys say that they are proactively looking at fintech adoption as a key priority. As for consumer adoption, the right proposition can enable a fintech firm to attract more consumers than a traditional financial institution.

Al-Nahedh: We believe that fintech is not a luxury. It’s a must-have and it’s the future. Slowly but surely, we are trying to address the needs of the youth. We partner with startups and in order to capture what’s going on at regional level, we established a Shariah-compliant investment fund, KISP Ventures.

In Kuwait, the regulatory environment will prevent fintech—at least for the next five to ten years—from replacing banks. We believe in the collaboration of different stakeholders. The Central Bank’s sandbox initiative, for example, is going to be a huge milestone.

Alhajeri: I feel that we have some roadblocks on the way that are stopping us from reaching the levels of innovation we want. First, there is risk appetite. Innovation is associated with failures, trials and errors. We’ve got to develop some tolerance for calculated risks and learn to stomach the losses.

Another thing that worries me in innovation is that, yes, we see a lot of fintech, but most of the companies we’re seeing now are utilitarian as opposed to really disruptive and innovative. Practically nothing is fueled by research and development.

On the investment side, one should keep in mind that this is a surplus region. It’s a paradox. We have massive surpluses and yet innovation is extremely low. We don’t have many VCs, and those that exist don’t have a very strong deal flow. So actually we have large amounts of liquidity that chases very few ideas. Moreover, I have to say that I am impressed by the rapid moves of the central bank. I am convinced that fintech can have a renewed momentum if endorsed by central banks.

GF: How can you encourage more innovation, more R&D?

Al-Hashel: To encourage innovation, four key players need to do their part: regulators, educators, bankers and the players themselves.

Regulators must be flexible, up-to-date and willing to change and evolve with what’s happening. They must lead the way, encourage the private sector and nurture innovators.

Then it’s very important that educators equip newcomers to the market with the necessary skills. I asked the universities to introduce new technology-related courses for all types of specialties, not only for computer engineering or computer science. Even if they are studying music, students need technology.

Bankers are the third pillar, for three reasons. First, they can leverage consumer trust when they introduce innovation. Two, they have the data. Three, they have the financial resources to acquire startups.

Finally, there are the players themselves, the innovators. And my message to them is: Fintech is not just about automation of existing procedures; you must center your efforts on addressing customers’ needs.

Al-Majed: In Kuwait, we see numerous Fintech initiatives growing and attracting thousands of users across the region including food delivery apps, e-commerce, payments and retail.

Fintechs will are there and we need to establish our own resources to compete with them in case we can’t cooperate or co-invest. Some of them will decide to go on their own, we will compete.

We must also be afraid of attackers from outside. I’m not talking about the small guys. I’m talking about the equivalent of Apple Pay, PayPal, Google, and others. Within a short timeframe, people will go to companies and brands that are more well-known than us.

Muhmood: I think there are three points here. One is that I’m very enthusiastic about the players in the market, not only the banks but also some great startups who are regionally competitive based out of Kuwait. We’ve partnered with one that will be launching in Egypt soon. I think that’s a great starting point. There are two things that the banking sector can do. One is around opening banking platforms and the other thing is from a human capacity angle. If you look at the criteria to take a leadership position in our industry, we’re still following quite a traditional model of credit skills, traditional banking skills, but I think increasingly, if you look to the future, I think technology and understanding of technology has to be a key skill to qualify for single leadership roles in most industries, not only banking.

El Saka: Fintech includes in addition to blockchain and similar disruptive technologies, artificial intelligence, data management, cloud computing, and cryptocurrencies. Risks related to multiplication of fintech can include system hacking, data breaches and money laundering.

The MENA fintech ecosystem is currently at a frontier stage. Kuwait’s mobile penetration rate is among the highest in the world. The GCC region is also home to the world’s second largest youth population. These conditions are conducive for an explosion of fintech activity in the country. However, enhancing the fintech landscape in Kuwait requires a lot of collaboration from the regulators, technology providers, banks and end-users. A notable initiative has been CBK’s launching of a regulatory sandbox for startups aimed at becoming the Middle East’s top fintech hotspot.

Under Kuwait’s Development Plan, the vision for 2035 is to increase government spending on R&D to over 1% of total GDP from the current 0.3 %.

GF: Let’s move on to education. A lot of you have already touched on this, there seems to a problem with education. How can we fix it, not only for university students but also existing staff?

Al-Hashel: There is an urgent need to enhance, improve and develop our educational system. What we have today is not enough. From our part at the CBK, we’ve developed excellent partnerships with Kuwaiti banks to develop high-level programs for the staff.

I’ll give you a few examples. We have completed an advanced cybersecurity program where we trained employees from the Central Bank [of Kuwait], other banks and even the regular citizens to enhance their skills in fighting cyberattacks.

Also, internally at the CBK, we strongly encourage our staff to pursue higher education, or complete relevant certifications like CFAs, CPAs and other certificates in technologies and cybersecurity. If you are willing to obtain one of those certifications, we sponsor them completely. Our ambition is very high, and I think it’s our duty to our people to support them in continuously enhancing and upgrading their skills.

Al Sager: Yes, we do have a lot of challenges when it comes to education as well. All our future aspirations and plans as a nation are built on our young population. We need to invest in human capital so we get quality deliverables in the future. We have seen some efforts recently to improve the education system through developing the caliber of the teaching staff and upgrading the teaching facilities, but we still have a long way to go. One of the very important things I always like to highlight when talking about education is that we need to focus on matching the outcome of the educational system with our future needs in Kuwait, considering our plans and directions. This is a very important step to be able to assess exactly the outcome of the educational system and how relevant it is.

Al-Nahed: What his Excellency, the Governor, is describing is that all the initiatives led by the central bank, with the help of the Kuwaiti banks, are specific to the financial sector. I think the bigger problem for Kuwait to achieve its vision of 2035 is to have a significant cultural change in our educational system, from entitlement to hard work and meritocracy. Today, if you look at the university graduates, they have a sense of entitlement. “This job is guaranteed,” or, “I’m entitled to this job.” As long as this feeling of entitlement is there, it means performance is not important.

This culture change should be a foundation of the educational reform. What the Governor is doing through the banks is commendable, but at the end of the day, one hand does not clap. You need both hands to do it.

Muhmood: Having seen all the programs made available to all the staff of the banking sector, there is no other country in the world that offers the opportunities that the employees here in Kuwait have, whether it is online learning, digital learning, special workshops bringing in the top professors from around the world—it’s phenomenal. Now it’s more of a matter of making sure that people embrace the opportunity they are offered.

GF: Going back to innovation, how to you balance innovation and cybersecurity?

Al-Hashel: Indeed, it is a very delicate balance to achieve, as we need to promote innovation but without compromising on financial stability. To address this issue effectively, we have recently developed the regulatory sandbox. So we encourage innovators and bankers to come to us and try new products in a safe environment.

Unfortunately, regulators are specifically paid to be risk averse. Changing that mindset is not easy. But at the CBK, we are willing to take calculated risks because we have the future of the banking sector in mind. Unless they go in this direction, banks will become obsolete, and other players will take over because society will not accept old-fashioned services. We must be flexible, but at the same time cautious and take the necessary steps in order to ensure stability.

Al Sager: First we have to acknowledge the fact that innovation and technology for a financial institution is not a luxury anymore. With today’s disruptive technologies and the rise of the fintechs, we need to be innovative to stay in business, especially since we serve a young population that is very tech-savy and quite demanding. We have seen, through history, industries vanish because they don’t cope with the ongoing changes.

That said, with the ongoing development and spending on technology and the automation of most processes and interaction, cybersecurity becomes a major concern. According to a recent study, 70% of the world’s largest financial institutions said that cybersecurity is the biggest risk associated with working with fintechs and technology. So it’s really important, and cybersecurity is becoming a major concern for all of us. We are actively working with the CBK to finalize a cybersecurity framework and have also initiated cybersecurity development programs for local talent in that field.

Alhajeri: At the end of the day, cybersecurity and internal controls are like any other controls. I don’t think we have a choice but to implement it. We must protect our companies and our clients.

However, at the end of the day, we should look at our spending, and if it ends up being exorbitantly high then this is where regulator should step in. It is highly related to productivity. At the end of the day, the private sector must be productive. If it’s spending all its revenues on internal controls and cybersecurity, it means that the business environment has a problem. That goes back to the initial promises of empowering the private sector and capital markets. If growth is not there, I think we have a problem. I would link the two parameters together.

Al-Hashel: To start with, the government should provide a minimal level of security for the overall public and private sectors. We have the Communication and Information Technology Regulatory Authority (CITRA), an institution in charge of ensuring safety at a national level. At the same time, each entity must do its job to ensure the safety of its own system.

GF: Talking about investments, Kuwait’s development will require investments in new infrastructure and renewed infrastructure. What is being done to provide investment in this specific area?

Al-Nahedh: Where do we start? In terms of infrastructure, we can talk about new cities. If you go toward the north or south of Kuwait, you’ll see all the new highways that were established to cater to the new cities. There is also the new international airport. After that, there are oil and gas infrastructure investments that we’ve seen to ensure that our main source of revenue is sustained.

Alhajeri: Everyone is happy because the banking sector was a large beneficiary of all the projects that have happened. However, if you look at the ecosystem of the capital market of Kuwait, it’s rather poor. We don’t have many PPPs. We don’t have many bond issuances for projects. SMES are hardly there. Yes, we have a large fund, but I don’t think it came out in a meaningful way, so I don’t think our ecosystem is that diverse. It continues to be largely dominated by the banking sector.

If you look at the stock market now, most of the liquidity is chasing the banking sector and I don’t think we’re having a trickle-down effect on any other segments or industries. I don’t think this is sustainable. You must have more diversity—different industries and different businesses. Today, no one is talking about the diversification of financial instruments.

I think capital markets are poorly understood. People confuse capital that is coming to invest in the stock market with serious, patient FDI. They use them interchangeably and this should not be the case, in my opinion. I think we are making a grave mistake. FDI inflows went down last year. They haven’t come up, and all the numbers that we’re seeing now are in the stock market and this can be liquidity that can leave.

On the other hand, many of our institutions, because we do not have a clear investment policy, are using this opportunity to leave the market and sell to foreign investors. I’m talking about public institutions, and I don’t think this shows a real commitment to investment in Kuwait.

If we want to transcend the logic of frontier to emerging markets, we must understand that this is not an administrative label. This is a mindset that must be changed.

Al-Hashel: In terms of financing, I think our banking sector is very comfortable and well-positioned to provide the necessary funding for mega projects. While the CBK has provided necessary support to promote capital market development, the truth is that the private sector still is reluctant to go to capital markets. They find dealing with banks more convenient and cost effective.

I’m sure bankers here share that opinion about their relationship with major clients. It’s not that we don’t have the capacity or the knowledge. All I’m saying is that large companies and conglomerates are still family businesses, not keen to list their shares, publish their financials or issue a bond. They go private, one-to-one with the banks. Capital markets are not developed yet because willingness from the private sector, entities and borrowers is not there. They have easier accessibility to the banking sector. Why the hassle?

Accad: There is a problem for which I don’t really have an answer, and that’s from the demand side. Kuwaiti investors that would be interested in investing in local bonds would probably demand a higher interest rate than the issuer is willing to pay, because that issuer is able to borrow at a lower interest rate from the banks. One possible reason is the relatively low bid-to-offer spread between deposit and loan rates in Kuwaiti dinars, since dinar deposit rates have been rising faster than the discount and lending rates. It’s a strange, distorted situation, since local bonds are a more natural source of financing for long-term (10 to 20 years) projects than bank loans, which banks cannot tenor-match with long-term deposits.

GF: Kuwait is one of the leading countries in Shariah-compliant finance. What could boost growth in this sector? The country doesn’t yet have legislation to handle the issuance of sukuk. Could that be a significant step forward?

El Saka: Kuwait has played a pioneering role in the global Islamic finance industry. Today, the country accounts for 6% of worldwide Islamic banking assets. Legislation to handle the issuance of sukuk both at the sovereign level and at local corporate level would provide a boost to the debt and capital markets, given the underlying strong fundamentals and funding requirements.

Greater use of primary capital markets would help close the funding gap and provide adequate liquidity for massive investments planned in infrastructure and on other fronts at a reasonable cost.

Mohammad Al-Hashel: Currently, Shariah-compliant banks in Kuwait represent about 40% of the market, in terms of asset size. In a dual banking system, I think this is the largest percentage worldwide. Plus, we are pioneers in the field. In fact, Kuwait is a leading country, with the establishment of Kuwait Finance House back in 1977, and today we have five Shariah-compliant banks.

Many initiatives, not only sukuk, are necessary and we are taking steps forward. But unfortunately, we face some gridlock. For the sukuk law, the CBK finished some logistical and legal steps that are necessary before the issuance. We have also finalized a draft law for a centralized Shariah Board at the Central Bank [of Kuwait] to ensure harmony in terms of fatwas. At the central bank level, in order to ensure proper management of liquidity for Islamic banks, we regularly use Shariah-compliant tawarruq-based treasury and central bank instruments.

Besides, we have issued Shariah audit regulations and we are about to launch the Shariah auditor certification which would be recognized by the Capital Markets Authority (CMA), as well. So these are some of the steps we are taking to further support our Islamic banking industry.

Al-Nahedh: Basically, given the lack of legislation, the Central Bank of Kuwait has stepped in to manage the liquidity of Islamic banks. The Capital Markets Authority, thankfully, approved the issuance of sukuk. However, when it comes to government issuances of sukuk, a change in the legislation is required. We hope that this legislative change takes place. If it does, it means that it would open the avenue for Kuwaiti banks to invest directly in Kuwait-based sukuk.

Al-Majed: Islamic banks have been the key driver of Islamic finance growth in recent years. However, a saturated domestic market and regulatory constraints on consumer lending limit prospects for further fast-paced growth in Islamic banking. As a result, Islamic banks are looking to expand into nascent Islamic finance markets abroad, where they can leverage their market expertise and resources to maintain growth.

We see the big growth in Islamic banking portfolios, but it is mostly related to individuals or consumer finance and personal lending. From my experience, most corporate borrowers, until now, have taken a practical approach toward Islamic Finance. They deal with both Shariah-compliant and conventional finance, because for them—the majority, I’m saying, around 80%—what is important is to get better terms and better pricing. That’s their reasoning. Even the big projects that are happening right now, we’re trying to convince them to allocate part of their borrowing into Islamic banking but they say, “Why should we? If you are better we will come to you but not because you are Islamic, because you are competitive.” On the matter of sukuk, it is mostly for us, as Islamic banks, to have a vehicle where we can lend to the government.

Mumhood: Originally, when it first kicked off, Islamic finance seemed to be very complicated, with amounts of additional paperwork, commodity dealings, et cetera. Thanks to fintech and new technologies, it’s improved considerably, and the ability to execute is now as good as at a conventional bank. I think Islamic banks can now compete in the sector, as evidenced by the numbers of 40% asset share. Now, when we compete for big project deals we must compete on equal footing with the conventional banks.

I think the biggest support for growth is around education. I think there’s still a brand of Islamic banking that sometimes intimidates the general public or the treasurers of some of the companies that we deal with. I think when you position it around ethical banking, and the good governance around what the Islamic principles provide to the nature of the services, then it takes a bit of a different twist.

So, from the mindset of treasurers that I speak to, it’s really around the ethical nature of the products that we’re delivering and the structure of the pricing that helps advance the mindsets. I think Kuwait is way ahead of many counties in understanding that. I do think positioning Islamic finance around the ethical nature of banking, as opposed to pure religion, is helpful.