Unlocking potential: The government has introduced new regulations as the market recovery continues

In March 2014 Kuwait’s central bank announced that foreign banks would be allowed to operate more than one branch at a time in the country. Moreover, over the past few years the Central Bank of Kuwait (CBK) has worked to encourage banks to boost credit issuance to both individuals and businesses. These changes have been lauded as a means of encouraging competition and the development of new banking services and products. “The new rules will have a positive impact on the local market as they enrich the type of services being offered, create new jobs and ultimately result in the economic and social growth of the country,” the CBK said in a statement released in March 2014.

The loosening of restrictions on banking activity in Kuwait has taken place against a backdrop of improving stability, transparency and oversight at most institutions. Since the downturn the CBK has put in place various new regulations to ensure that the sector is protected against future shocks. As a result, Kuwait’s banks today hold very little bad debt and keep close track of their exposure to real estate, equities and other potentially risky products. They are also highly capitalised, and so are well insulated against future losses.

DOWNTURN: While Kuwait was well insulated against the worst of the global economic downturn, the domestic financial sector nevertheless experienced losses in 2008, primarily as a result of rapidly rising debt levels among a handful of local investment companies (ICs). Many of these firms had borrowed heavily from domestic and foreign banks alike, using this capital to invest in property markets and equities on the Kuwait Stock Exchange (KSE). The rapid decline in values in both the local bourse and the real estate market as a result of the crisis led to losses not only for the ICs, but also for a number of banks and other financial institutions.

Gulf Bank was hit particularly hard during the downturn. In 2008 it reported a net loss of KD359.5m ($1.24bn), primarily as a result of large losses related to derivatives trading. It subsequently issued a KD375m ($1.29bn) emergency rights issue. Kuwait Investment Authority, the state’s sovereign wealth fund, subscribed to this issue, and later became a 16% owner of the bank. “There were system-wide problems in Kuwait, but Gulf Bank’s main problem was management’s failure to manage their derivative risks,” Robert Thursfield, an analyst at Fitch Ratings, told media in mid-2010. Since then, the institution’s financial situation, corporate oversight and overall reputation have improved markedly, as evidenced by its strong capital position. Gulf Bank ended 2014 with net profits of $122m, up 10% from the previous year, and total assets of $18.36bn.

NEW STABILITY: Since the crisis, domestic financial institutions have updated their operating procedures in line with various new rules from the CBK, which have had the intended effect of boosting transparency and oversight. This has led to increased trust in local banks among the general population since 2011-12, in particular, and, consequently, steadily rising levels of banking activity. By the end of 2014 Kuwait’s local banks boasted assets of KD55.46bn ($191.1bn), up from KD51.48bn ($177.4bn) at the end of 2013, KD47.14bn ($162.4bn) at the end of 2012 and KD40.32bn ($138.9bn) at the end of 2009. Lending has also increased dramatically in recent years. According to the National Bank of Kuwait, in December 2014 Kuwaiti banks posted year-on-year credit growth of 6.2%.

The announcement in March 2014 that foreign banks would be allowed to open multiple branches in Kuwait was another sign of the CBK’s goal of boosting market activity. Foreign banks have been allowed to operate a single branch in Kuwait since 2004. As of the end of 2014 the country was home to 11 foreign banks, including regional and global heavyweights such as the National Bank of Abu Dhabi, Qatar National Bank, HSBC Bank Middle East, BNP Paribas and Citibank.

In addition, the March 2014 ruling allowed for the entrance of new foreign banks into the domestic market. In May 2014 the Industrial and Commercial Bank of China – China’s largest bank – took advantage of this regulatory change and opened a branch in Kuwait.