Banks at the top: Sharia-compliant banking institutions lead the way

Islamic financial institutions have become an increasingly important component of Kuwait’s banking sector over the past decade and a half. As of September 2012, the country’s five Islamic banks accounted for 42.3% of total banking assets, up from 33% at the end of 2011, according to data from Kuwait Finance House (KFH) and Ernst & Young (E&Y). The 2012 figure was the highest rate among GCC member states at the time. In terms of absolute value, Kuwait’s Islamic banking sector was worth $70.4bn as of the end of September 2012, according to KFH, second in the GCC to Saudi Arabia, with $99.9bn, and ahead of the UAE with $61.5bn, Qatar with $49.7bn and Bahrain with $25.7bn. As of the end of September 2012 global Islamic banking assets totalled around $1.3trn, according to KFH estimates. With this figure, Kuwait is home to an estimated 5-6% of global sharia-compliant banking assets.

Kuwait’s Islamic financial services (IFS) sector has grown substantially in recent years. According to the “World Islamic Banking Competitiveness Report 2012/13”, published by E&Y, between 2007 and 2011 the country’s total sharia-compliant assets expanded at a compound annual growth rate (CAGR) of 6.5%, compared to a CAGR of 5.5% in overall banking sector over the same period. Despite a challenging economic environment in most GCC states – including Kuwait – in the years since the 2007-08 global financial downturn, the sharia-compliant financial industry has posted solid growth figures. According to E&Y, by the end of 2012, Islamic banking assets in the GCC reached $445bn, up 14% from around $390bn at the end of 2011. While this figure is down slightly from a CAGR of around 19% for the sector over the past five years, the IFS industry remains one of the fastest growing components of the global financial system.

KFH: As the oldest and largest Islamic bank in Kuwait and the region by a substantial degree, KFH is widely considered to be a cornerstone of the global IFS industry. Founded in March 1977 by royal decree, the institution is among the largest sharia-compliant entities in the world, boasting total assets of $52.5bn at the end of 2012, up from $48.2bn at the end of 2011.

This represents growth of 67% since 2007, when KFH controlled total assets of $31.4bn. At the end of 2012 KFH accounted for more than 71% of Kuwait’s total sharia-compliant assets. According to E&Y, KFH is the second-largest IFS institution in the world, behind Al Rajhi Bank, a Saudi Arabia-based institution that had total assets of around $60bn.

EARLY DAYS: KFH was established by Law No. 72 with a mandate to compete with a handful of early GCC-based sharia-compliant institutions, namely Dubai Islamic Bank, which was launched in 1975 and is considered the world’s first modern Islamic bank; and Bahrain Islamic Bank, which set up shop in 1979, two years after KFH was founded. The institution was created by the government and remains largely government-owned today, with 24.1% controlled by the state sovereign wealth fund the Kuwait Investment Authority (KIA), 10.5% controlled by the Public Authority for Minors’ Affairs, around 8.3% by the Kuwait Awqaf Public Foundation and 6% by the Public Institution for Social Security. The remaining 51.1% of KFH’s shares are listed on the Kuwait Stock Exchange (KSE).

The bank’s expansion over the past three and a half decades was aided by the fact that it was formed by special decree, which has allowed it to function largely free of oversight from the Central Bank of Kuwait (CBK), which regulates the banking sector as a whole.

FREE REIGN: Indeed, for the first 26 years of KFH’s existence, the regulatory framework did not include any IFS legislation. During this long autonomous period, the bank was responsible for developing and introducing a variety of new Islamic financial concepts to the local IFS sector. In particular, KFH played a leading role in the development of murabaha sales instruments – under which an IFS institution acquires an asset and then sells it on to a client at a pre-arranged mark-up – which today is a common form of sharia-compliant economic activity around the world.

KFH is active in a wide variety of sectors and countries. The company’s major business lines include banking, real estate, trade financing, investment activities and financial markets. The company offers products and services at the corporate, commercial and retail levels, the latter of which is served by a domestic network of 54 branches. Beginning in the late 1980s and early 1990s, KFH invested in a variety of foreign markets. As of early 2013 the firm was active in Saudi Arabia, Malaysia, Bahrain and the Cayman Islands, among other countries.

Like most of its competitors in Kuwait, KFH has faced declining revenues in recent years as a result of the credit crunch in the US and EU and the lingering effects of the 2007-08 downturn. In 2011 profits dropped 24% to KD80.3m ($286.8m) at the end of the year, down from KD106m ($378.6m) in 2010. In an effort to minimise further losses, in 2012 the firm launched a phase of restructuring and consolidation, which is expected to have a positive long-term impact.

AHLI UNITED BANK: Ahli United Bank (AUB) was formed in April 2010 when the Bank of Kuwait and the Middle East – a conventional institution established in February 1971 – was rebranded and converted to Islamic status. The switch to sharia-compliance was led by an institution of the same name in Bahrain, which owns some 67.3% of AUB’s shares. An additional 21.7% of the bank is listed on the KSE, while 11% is held by the Public Institution for Social Security, Kuwait’s government-owned social security provider. AUB provides a variety of products and services, broadly centred on retail, commercial and corporate banking, asset management and investment services.

In 2012 the bank boasted total assets of KD2.63bn ($9.4bn), up slightly from KD2.62bn ($9.4bn) in 2011 and KD2.45bn ($8.8bn) in 2010. Profits jumped some 22% from KD31.5m ($112.5m) in 2011 to KD38.5m ($137.5m) in 2012. This increase can be attributed primarily to improvements in operating profits in the bank’s core businesses. AUB launched a number of new products and services over the course of 2012, including a new automobile financing service and a real estate financing programme. The latter has been in great demand since it was launched.

BOUBYAN BANK: Founded in 2004, Boubyan Bank was launched by royal decree and initially controlled by the KIA. The government distributed most of the institution’s shares among around 90% of the country’s Kuwaiti population. Since then, most of these shares have been acquired by two local conventional institutions, namely the National Bank of Kuwait, which currently holds just over 58% of the bank, and the Commercial Bank of Kuwait, with just under 20%. The remaining 22% is still publicly held on the KSE. Boubyan offers retail, commercial and corporate banking, asset management, investment services and private equity, among other products and services. In addition to its domestic business, Boubyan owns shares in a handful of foreign operations, including United Capital Bank in Sudan, a number of companies in Indonesia and the UK’s Bank of London and the Middle East.

In 2012 Boubyan boasted total assets of KD1.88bn ($6.7bn), substantially up from KD1.6bn ($5.7bn) in 2011 and KD1.3bn ($4.6bn) in 2010. At the end of 2012 the bank was more than halfway through a five-year plan (2010-14) that aimed to return the bank to its core activities, namely corporate and retail services on the domestic market. With this in mind, Boubyan has expanded its branch network in recent years and rolled out a handful of new initiatives, including accounts aimed at high-net-worth individuals as well as a national promotional campaign. Additionally, the bank increased its credit portfolio by some 23% over the course of 2012, which represented one of the highest credit growth rates in the country.

Boubyan does not currently plan to undertake any expansion outside of Kuwait, although this could potentially change after the firm’s current five-year plan concludes in 2014. “Right now we are busy because the slice of Islamic pie in Kuwait is big,” Adel Abdul Wahab Al Majed, the bank’s chairman and managing director, told local media in late 2012.

OTHER ISLAMIC BANKS: Kuwait International Bank (KIB) was founded in May 1973 as the Kuwait Real Estate Bank, and it converted to an Islamic institution in May 2007. Some 68% of KIB is listed on the KSE, while the remainder is controlled by a handful of local government and corporate entities.

Warba Bank, a government-owned institution, was established in April 2010 by royal decree. Like Boubyan before it, 76% of Warba’s shares were distributed evenly among Kuwait’s population at the time of its creation, with each citizen receiving 684 shares of the company. The remaining 24% of the bank is owned by the KIA. Kuwait is also home to a branch of the Saudi Arabia-based Al Rajhi Bank, which was established in 1957 and was the largest Islamic financial institution in the world as of May 2013. As a foreign financial institution, Al Rajhi is only permitted to operate a single branch in Kuwait, through which the bank currently provides investment services for customers.