Basel Al Haroon, Governor, Central Bank of Kuwait: Interview

Interview: Basel Al Haroon

Where do you see potential for Kuwait’s banking industry in the coming years, and how do you expect lending to evolve amid rising interest rates?

BASEL AL HAROON: Kuwait’s banking sector demonstrated its resilience during the global financial crisis and Covid-19 pandemic. The low interest-rate environment since 2020 and pandemic-related moratoriums have resulted in loan growth. As rates increase and borrowing becomes more expensive and therefore less attractive, growth is expected to slow while remaining positive. Although this development might affect the banking sector, the agile nature of Kuwaiti banks means they could capitalise on other revenue streams.

On the retail side, the banking sector is expected to experience a slowdown in light of normalisation dynamics. On the corporate side, the rallying oil market could encourage investment and borrowing as more business opportunities present themselves. In addition to its contribution to the diversification of the Kuwaiti economy, the banking sector is expected to play a major role in financing development projects in line with New Kuwait 2035, which aims to transform the country into a global financial and commercial centre.

How can the Central Bank of Kuwait (CBK) improve the local ecosystem for banking innovation, and how does this tie in with New Kuwait 2035?

AL HAROON: Embracing digitalisation is key to modernising the country’s financial sector. The CBK has adopted a flexible and progressive approach to regulation while encouraging responsible and sustainable innovation. It continues to improve the regulatory infrastructure by issuing instructions to the market in areas such as cloud computing and digital onboarding. We are also updating the open banking and outsourcing frameworks, and the country’s regulatory sandbox scheme supports and enables emerging technologies. In this sense, the CBK is working to improve its current financial technology framework, specifically that of payments and lending.

More broadly, the CBK plans to continue to support the drivers of sustainable economic development, as well as outline monetary and credit policies to promote investment and achieve economic and social advancement. As national income increases, Kuwait’s welfare and prosperity are expected to rise. The CBK encourages banks to diversify their financing towards the advanced technology and knowledge sectors, as well as promote the financing of renewable and alternative energy sources, along with clean technology.

What is the current and future capacity of local banks to manage risks, absorb external shocks and capitalise on growth opportunities?

AL HAROON: Kuwaiti banks survived Covid-19 and achieved consistent profits in 2020 and 2021 due to the strength of the sector, which grew despite external shocks and geopolitical uncertainties. Even with the risks of a potential global recession, Kuwaiti banks are expected to remain resilient. The overall capital adequacy ratio of the local banking sector in the second quarter of 2022 was 18.4%, well above the CBK (13%) and Basel III (8%) minimums, while the ratio of non-performing loans to gross loans has remained below 3% since the fourth quarter of 2014, standing at 1.5% at the end of the second quarter of 2022. In addition, the provisions coverage ratio was 303% in October 2022.

These healthy figures indicate security and the possibility of steady growth without compromising on quality. In terms of managing risks, banks remain wellequipped with management tools and capabilities to avoid unnecessary problems. As an additional line of defence, the CBK regularly communicates with banks on vulnerabilities through quarterly stress-testing and other detection tools, and it ensures that threats to financial stability are addressed. These quarterly stress tests and proactive financial stability studies demonstrate that banks’ portfolios are well positioned to withstand external shocks in the most extreme scenarios.