Mohammad Y Al Hashel, Governor, Central Bank of Kuwait (CBK): Interview

Interview: Mohammad Y Al Hashel

How do you view the resilience of Kuwait’s banking sector in the current economic environment?

MOHAMMAD Y AL HASHEL: It is a key mandate of the CBK to ensure a sound and stable financial system, and we have ensured this stability over the years, even at times when financial systems in many countries experienced serious meltdown. Our banking system remains well capitalised, with a capital adequacy ratio of 16.5% as of September 2015. Moreover, around 92% of the banks’ capital is Tier 1, a strong indication of the high quality of their capital base. The ratio of non-performing loans (NPLs), at 3% as of September 2015, is also at historically low levels. The coverage ratio, measured as total provisions to NPLs, stands at a robust 168%, and the banking sector’s liquidity coverage ratio is well above global benchmarks.

These numbers highlight the capacity of our banking system to remain stable even under challenging macroeconomic conditions. Results of our stress-testing exercise also affirm the resilience of our banking system to withstand major shocks. While we recognise the difficult macroeconomic situation with oil prices hitting historically low levels, the banking system is well insulated. Higher capital expenditures by the government and steady growth in consumption can help achieve healthy non-oil growth in 2016; these trends will support the operating environment for banks, notwithstanding the decline in oil prices.

Will capital adequacy regulations under Basel III negatively impact the real estate sector either by increasing the cost of mortgages or by causing less capital to be allocated to real estate?

AL HASHEL: In an attempt to ensure a better quality and higher overall level of capital, Basel III does propose greater risk weights for riskier exposures. Yet the risk weights are not similar for all types of real estate lending; for instance, high-volatility commercial real estate exposures have been assigned a risk weight of 150% by the US. While Basel III regulations would require higher capital allocation in the case of more volatile commercial real estate, credit allocation and the cost of borrowing will also be influenced by banks’ risk appetite and business strategies. At the CBK, we have tried to strike a balance between robust capital adequacy levels on the one hand and continued availability of credit to the key sectors and borrowers on the other. In the case of real estate, we have used a range of risk weights commensurate with the risks involved. Typically, retail exposures to individuals have been assigned a risk weight of 100%. However, we have assigned a 35% risk weight for qualifying residential housing loans of up to KD70,000 ($232,000) and a 75% risk weight for residential housing facilities of up to KD250,000 ($827,000), subject to certain conditions. Credit facilities extended for trading in real estate attract a much higher risk weight of 150%. By differentiating between classes of real estate, our regulations will encourage banks to lend to the required areas while limiting riskier exposures like trading in real estate. In line with Basel regulations, we are reducing the use of real estate collateral as an eligible credit risk mitigant; it has already been curtailed to 30% in 2015 and will be phased out by 2018.

As regional governments turn to the debt market, do you think that this will encourage corporates to issue greater levels of debt?

AL HASHEL: While the growing issuance of the sovereign debt will provide a useful benchmark to price corporate debt, it appears only the high-quality corporates will be able to tap the bond markets. Amid a difficult macroeconomic environment, investors may demand higher risk premiums, thus pushing up borrowing costs. However, corporates might still be inclined to tap the capital markets as tighter liquidity conditions at regional banks and a slowing flow of deposits can limit the growth of lending by banks.