The GCC’s banking systems have proven resilient to past regional shocks, as affirmed by global rating agencies. The Gulf War of 1990 was one of the rare instances where private sector domestic deposits showed instability.
Historically, large outward remittances have limited the accumulation of more confidence-sensitive deposits, while confidence-boosting actions from public sector entities have helped reduce domestic funding volatility during shocks. Increased corporate activity and consistent population growth have supported customer deposit expansion and offset outflows, while the GCC’s relative safe-haven status has attracted stable funding from higher-risk geographies.
Kuwait remains among the largest Islamic banking markets. Shariah compliant/Islamic finance in Kuwait is dominated by the five Islamic banks: Kuwait Finance House (KFH), Boubyan Bank, Ahli United Bank and Kuwait International Bank (KIB) and Warba Bank.
KFH was established in 1977 as one of the pioneering Islamic financial institutions in the world.
Islamic financing in Kuwait is primarily offered through five Shariah compliant banks which are regulated by the Central Bank of Kuwait (CBK): KFH, Boubyan Bank, Ahli United Bank, Warba Bank and KIB. KFH and KIB are allowed by CBK to offer property valuation services.
Takaful insurance is also gaining market share in Kuwait dominated by affiliates of Shariah compliant banks like KFH and Boubyan.
Islamic finance companies also play their part in expanding Shariah compliant offerings but are relatively small compared with the size and reach of Islamic banks in Kuwait.
An analytical study by the General Secretariat of Arab Banks ranked Kuwait fourth in terms of the number of banks that entered the list of the largest 1,000 banks in the world, with seven Kuwaiti banks on the list, topped by the National Bank of Kuwait followed by KFH.
Review of 2022
Fitch Ratings affirmed the long-term issuer default rating on all Islamic Kuwaiti banks at ‘A’ in 2022, with a stable outlook. Fitch noted that Kuwaiti Islamic banks’ financial metrics were resilient during the year. Islamic banking assets grew by 8.5% year-on-year in the first half of 2022 (H1 2022) (roughly in line with conventional banks) and still made up 45.5% of sector assets. Islamic banking in Kuwait benefits from the country’s Muslim majority, with substantial demand for Islamic products. The average operating profit/risk-weighted assets ratio improved to 2.4% in H1 2022.
S&P Global Ratings said it believes that the earnings performance of banks in the GCC will recover almost to pre-pandemic levels in 2022, thanks to the economic recovery supported by buoyant oil prices.
Kuwaiti Islamic banks continue robust asset growth and profitability in 2022
Islamic banks in Kuwait reported a 22% increase in net profits for the nine months ended the 30th September 2022. The cost-to-income ratio for Islamic banks stood at an average of 38% as of the 30th September 2022. Financing income growth stood at KWD209 million (US$679.48 million) for the nine months of 2022 (9M 2022) at 20%.
KFH reported the highest return on average assets (ROAA) and return on average equity (ROAE) of 1.2% and 12.8% respectively among all Islamic banks in Kuwait followed by Boubyan Bank with an ROAA at 0.9% and an ROAE at 9.1% as of the 30th September 2022. Boubyan Bank reported the highest capital adequacy ratio and common equity Tier 1 ratio among all Islamic banks in Kuwait at 19.2% and 15.2% respectively, followed by KFH at 17.7% and 14% respectively as of the 30th September 2022.
Islamic banks registered a growth of 6% (KWD2.4 billion (US$7.8 billion)) in total assets during 9M 2022. Total financing portfolio of Islamic banks grew by 10% (KWD2.4 billion) during 9M 2022. Total customer deposits with Islamic banks grew by 2% during 9M 2022.
Consolidation: Mergers and acquisitions
KFH completed its acquisition of Ahli United Bank in October 2022, creating one of the largest banks in the Gulf region. The combined strength makes it one of the largest banks in the region with over US$118 billion in assets and a presence in 12 countries.
Gulf Bank received the approval of the Central Bank of Kuwait regarding the engagement of McKinsey & Company as the bank’s consultant to carry out the feasibility study of the acquisition of Ahli Bank of Kuwait. Both banks had signed an MoU in August after receiving a proposal submitted by the major shareholders of Gulf Bank and Ahli Bank of Kuwait suggesting the acquisition of one of the banks by the other, with the possibility of converting one entity to a Shariah compliant bank.
This could tilt the balance of banks in Kuwait in favor of Shariah compliant banks currently equally divided between conventional and Islamic.
Preview of 2023 and conclusion
The size of the global Islamic finance industry is expected to reach US$5.9 trillion by 2026 compared with US$4 trillion in 2021, driven by Islamic banks and Sukuk, according to the 2022 Islamic Finance Development Index issued by Refinitiv. Assets of the Islamic finance sector in Kuwait amounted to US$153 billion in 2021, ranking the country sixth in the world. The value of the assets of the Islamic banking sector in Kuwait amounted to US$134 billion in 2021, which ranked Kuwait fifth in the world. The growth of Islamic banking assets in Kuwait is expected to exceed that of conventional peers in the medium term.
Ajai Thomas is the general manager – financial control and planning/CFO of Kuwait International Bank. He can be contacted at [email protected].