With one of the largest banking sectors in the Gulf, Kuwait aims at becoming a financial hub in the region.

EXCITING and challenging times lie ahead for Kuwait’s financial institutions as fresh opportunities arise from liberalization and the oil-driven economic boom. Competition is arriving in the form of foreign banks, and demand is increasing for new products and Islamic banking.

Kuwait boasts one of the largest banking sectors in the Gulf, and has been advancing its ambition to be recognized as the financial hub of the region through reform and improved supervision of the finance industry.

Tighter guidelines have been introduced on credit extension, deposit taking, and capital and asset ratios. The authorities have won praise from the International Monetary Fund, which has acknowledged the development of financially sound, well-managed, and profitable institutions.

Banking offers the best opportunity for Kuwait to diversify away from oil. Total bank-ing assets amount to approximately $68 billion. Last year saw record profits, and all five of the largest banks posted profit increases in the first quarter of this year. Credit to the private sector grew by 37.6% in 2004 over the previous year’s level as oil prices continued to surge.

Governor of the Central Bank of Kuwait (CBK) Sheikh Salem Abdul-Aziz Al-Saud Al-Sabah sees a bright future ahead. “The banking sector is in a very healthy state,” he says. “It is an extremely liquid market, and opening our system to foreign banks will continue to develop and add value to our banking system through healthy competition. It also presents opportunities for integration and synergies for domestic Kuwaiti banks and banks from abroad.”

The first foreign banks to be licensed are already busy setting up shop in Kuwait City. The European banking and financial group BNP Paribas has been present since March, and the National Bank of Abu Dhabi and HSBC expect to be operational by the end of the year.

Currently limited to single branch operations, the foreign banks will focus on corporate banking, trade, and private banking services.

The Governor of the Central Bank says the foreign banks are aware that they will not be able to compete with Kuwaiti banks in the retail market, but there will be a high level of competition in the corporate market.

“We are well placed to compete,” he adds. “The size of the investment portfolio managed by the investment companies is currently about $27.4 billion,” he comments.

Yousef Al-Jassem, Secretary General of the Union of Kuwaiti Banks, agrees. “Kuwaiti banks have been given A ratings by agencies like Moody’s, Fitch and Standard & Poor’s,” he observes. “They are among the most technologically advanced in the region and are well prepared for any foreign competition.”

Technology has become one of the weapons used as the battle for retail customers has intensified. The National Bank of Kuwait (NBK) and Burgan Bank have pioneered online banking facilities and services allowing consumers to use their cell phones for retail purchases.

The government-controlled Kuwait Finance House (KFH), which has enjoyed a monopoly in Islamic banking, is introducing a range of new customer incentives now that the sector has been opened to competition with the passing of a new Islamic Banking Law.

Operating according to Islamic principles has made KFH one of the largest Islamic banks in the region, with assets worth $7 billion, 27 branches, and a customer base of 400,000 representing approximately 35% of the Kuwait retail market.

With the issuing of two new Islamic banking licenses, however, others are set to tap into this highly profitable market. Kuwait Real Estate Bank (KREB) is in the process of converting from a conventional bank to a fully Islamic bank, and a new Islamic bank, Bank Bubiyan, has been established.

Several international banks are eager to enter the market, including HSBC and BNP Paribas. “That’s one of the main reasons they are coming here,” says Jassar Al-Jassar, KFH’s General Manager.

Analysts remain bullish about prospects for the Kuwait Stock Exchange (KSE), one of the fastest-growing stock markets in the Middle East.

He expects to see significant growth in Islamic banking in the coming years. “There is a growing demand, not only from clients and banks, but also from governments,” he elaborates.

The changing landscape at home is prompting Kuwaiti banks to look at extending their activities beyond their national borders. Leading the way is NBK, whose regional network has expanded to include Saudi Arabia, Qatar, Bahrain, Jordan, and Iran. NBK is one of three foreign banks authorized to operate in Iraq, and has acquired a 75% majority stake in Credit Bank of Iraq.
Meanwhile, Gulf stock markets have been enjoying one of the most sustained booms in their history. The Kuwait Stock Exchange (KSE) is among the fastest growing in the Middle East.

In 2003, KSE was among the world’s top-performing markets when its index advanced by a remarkable 102%, before slowing to 30.3% in 2004. Investor confidence pushed market capitalization over the $100-billion mark for the first time in April this year, and the first half of 2005 witnessed the listing of 19 new companies.

Analysts remain bullish on KSE’s prospects, and the outlook continues to look positive. Legislation is being prepared to improve transparency and introduce stiffer punishments for insider trading.

In May, Dow Jones laun-ched the Dow Jones Kuwait Index, a composite equity index that will track the performance of the Kuwaiti market. Leading companies in the index include the Public Warehousing Company, the Mobile Telecommunications Company (MTC), and three Kuwaiti banks: NBK, KFH, and the Gulf Bank of Kuwait.