Lending picks up on the back of encouraging economic signs

Credit issuance at Kuwait’s banks rose by 5% in 2012 and by 5.7% in the first six months of 2013, as per data from the KIPCO Asset Management Company (KAMCO). These figures – which represent the highest annual lending since 2009 – can be attributed to the steadily improving financial situation at many of the country’s banks and a rapidly rising appetite for credit among consumers and, to a slightly lesser extent, businesses. The 2012 jump is also the result of years of provisioning – and a related rise in appetite for lending – among Kuwait’s banks and other financial institutions. Indeed, according to data from the IMF and the Central Bank of Kuwait (CBK), by the end of June 2013 non-performing loans (NPLs) made up 4.4% of the nation’s credit portfolio – down from 5.2% at year-end 2012 and 7% in 2011 – as a result of bank provisioning.

Challenges

Despite these positive indicators, many challenges remain in terms of expanding lending in Kuwait. Consumer lending dominates credit issuance, accounting for upwards of 80% of loan growth in recent years, according to statistics from the CBK. The consumer segment received a boost in April 2013 when the government passed the Family Support Fund Law, which involved the state purchasing and writing off interest on $2.6bn in outstanding consumer loans awarded prior to early 2008. The law, which is the most recent in a series of debt relief programmes introduced by the government over the past few decades, served to jump-start consumer spending and, subsequently, lending. Regardless, banks – many of which are quite liquid as a result of years of provisioning – continue to find it challenging to lend to corporates and major projects.

While financial institutions want to fund viable corporate projects right now, this remains a structural challenge, as project finance is linked closely to the state’s long-term development plans, many of which remain on hold. Nonetheless, many local banks expect to see continued growth in lending for the foreseeable future. Indeed, as of the end of August 2013 credit facilities extended by local banks had topped KD28bn ($98.5bn), according to KAMCO, which, in the short term at least, was a record high. This growth was underpinned by the formation of a new government in July 2013, an improving outlook at the Kuwait Stock Exchange (KSE) and the strengthening of the private sector in general. “The CBK has protected the banking sector over the past five years,” said Elham Yousry Mahfouz, the deputy CEO of the Commercial Bank of Kuwait. “They are conservative, but that has been a good thing for the industry in the years since the crisis. We expect to see a bump in both retail and corporate lending through 2014 and 2015.”

Hard Data

In the early and mid-2000s credit issuance in Kuwait grew rapidly on the back of low interest rates and the booming regional property and securities markets. During this period local investment companies (ICs), the majority of which were founded in the 1990s and early 2000s, borrowed large sums from the banking sector to invest in the KSE and in real estate holdings. From the end of 2006 to the end of 2008 overall credit facilities in Kuwait jumped from KD14.9bn ($52.4bn) to KD23.5bn ($82.6bn). Lending for real estate acquisition and related activities nearly doubled over this two-year period, from KD4.4bn ($15.5bn) at the end of 2006 to KD7.5bn ($26.4bn) at year-end 2008.

Similarly, lending to ICs and other non-bank financial institutions grew from KD1.4bn ($4.9bn) to KD2.8bn ($9.8bn) over the same period, according to KAMCO. The expansion of credit facilities in Kuwait slowed considerably in the wake of the 2007-08 global economic downturn, though lending for some activities never dried up completely. “While the extension of credit facilities to many ICs and property investors dropped off in 2008-09, banks, to their credit, never actually stopped lending to responsible, financially viable projects,” Mahfouz told OBG.

Retail credit and lending to many corporate clients by Kuwaiti banks has increased on an annual basis every year over the past half-decade. As of the end of August 2013 – the most recent data available at the time of publication – bank credit facilities as a whole reached KD28.16bn ($99bn), up substantially from KD26.9bn ($94.6bn) at the end of 2012, KD25.61bn ($90bn) at the end of 2011 and KD25.2bn ($88.6bn) at the end of 2010. Personal lending made up the majority – around 38.2% – of this total, while real estate and construction lending accounted for 32.6%, lending to non-bank financial institutions made up 6.2% and lending to other institutions comprised the remaining 23%.

This breakdown of credit facilities has remained relatively consistent in recent years. Since lending began to pick up again in late 2012, personal facilities have expanded at a much faster pace than corporate credit. According to KAMCO, by the end of August 2013 personal credit issuance topped KD10.7bn ($37.6bn), up from KD8.9bn ($31.3bn) at the end of 2011, for example. During this same period lending for real estate and construction grew from KD8.4bn ($29.5bn) to KD9.1bn ($32bn). Credit facilities extended to ICs, meanwhile, have declined in recent years, from KD2.9bn ($10.2bn) at the end of 2009 to KD1.7bn ($5.98bn) as of the end of August 2013. This drop can be attributed in large part to the numerous ongoing challenges currently faced by Kuwait’s non-bank financial segment. The country’s ICs were hit hard by the financial downturn, and a handful have entered into debt restructuring deals since 2007-08 (see Capital Markets chapter).

Growth Drivers

The improvement of Kuwait’s credit facilities in the years since 2008 can be attributed in large part to the CBK’s quick response in the wake of the crisis. By the end of 2008 the central bank had cut Kuwait’s discount rate to 3.75%, down from 6.3% at the end of 2006. Between 2011 and October 2012 the rate was cut further, to 2%. Similarly, in recent years the CBK has introduced a variety of new regulations aimed at shoring up bank stability and transparency and, as a result, boosting lending. In May 2012, for example, the regulator announced new loan-to-deposit ratio rules, wherein ratios were linked to loan maturity rates, as opposed to the previous flat loan-to-deposit rate of 85%. Most recently, in early 2014 the CBK announced that local banks would be required to implement Basel III standards in the near future. Indeed, Kuwait is one of the first countries in the Gulf region to issue Basel III requirements as well as being one of the first to have issued Basel II requirements in 2005.

Another key driver of lending in recent years has been the high level of bank provisioning since 2008. In an effort to cover non-performing loans (NPLs) and meet capital adequacy requirements, Kuwait’s banking sector has set aside considerable sums in recent years. While this effort has resulted in rapidly rising levels of liquidity in the banking system, it has been effective in terms of reducing NPLs and other bad debts. Indeed, as of the end of June 2013 gross NPLs made up 4.6% of the sector’s loan portfolio, down from 5.2% at the end of 2012, just under 6% at the end of 2011 and around 9% at the end of 2011, according to IMF data.

Rising Demand

As a result of provisioning and other protective measures, Kuwait’s banks are currently well capitalised and, consequently, eager to lend. Until mid-2012, however, demand for credit remained somewhat depressed, as a result of slow economic growth and low levels of investor confidence in the wake of the downturn. Though as Kuwait’s economic outlook has improved in recent years, demand for credit across most segments has climbed. For example, from the end of September 2012 through September 2013 Kuwaiti household credit rose by 18%, according to the IMF. The quick jump in consumer demand over this period led the CBK to issue a raft of new lending requirements in an effort to tighten up credit issuance. Among other newly introduced conditions, banks are required to ensure that loans issued for the purchase of property must not be used for any other purpose.

The introduction of a household debt relief programme in April 2013 has also been a key driver of demand for personal credit. Newly appointed members of parliament, many of which had promised to enact debt relief during their campaigns, were largely responsible for the new law, which was based on the idea that many banks have overcharged Kuwaitis for loans over the years. Under the initiative the state planned to buy up $2.6bn of personal loans taken out from commercial banks before April 2008. Some banks will also have to pay back past interest charged to Kuwaitis. Some 47,000 nationals are eligible for relief under the plan.

The programme is the most recent in a series of consumer credit write-off programmes put forward by the state over the years. For example, in the mid-1980s the government cancelled some $20bn in bad loans after the crash of the Souk Al Manakh, an informal and unregulated equities exchange that crashed in August 1982 (see Capital Markets chapter). Less than a decade later the government cancelled a considerable amount of consumer debt after the local economy was decimated following the 1990-91 Gulf War. While hard data on the effects of the initiative had yet to be released at the time of publication, the state’s 2013 debt relief programme was expected to have a positive impact on consumer spending and, thus personal lending in Kuwait.