Less than a decade ago, Kuwait’s banking sector was stagnant, hindered by a slew of changing governments and crippled by political instability. Between 2011 and 2014, infrastructure projects were few and far between, public spending was at a low point and banks were suffering on the back of it. In 2015, the government announced its first budget deficit for more than a decade.
Over the past few years, though, that has all changed, with the government making efforts to diversify the economy through a series of measures – from allowing 100 percent foreign ownership in certain sectors to providing tax breaks to investors and relaxing the regulatory environment. The latter has been particularly beneficial to the financial industry, which is now one of the country’s biggest sectors and is propping up the economy at a time when volatile oil prices (see Fig 1) and OPEC production cuts continue to have a significant impact on the Gulf Cooperation Council (GCC) region.
According to the IMF’s 2019 Kuwait: Financial System Stability Assessment report, financial system assets represented 252 percent of the country’s GDP at the end of 2017, with the majority being held within the banking sector. KPMG’s 2019 GCC Listed Banks’ Results: Embracing Digital report, meanwhile, concluded that the nation’s banks had “witnessed one of the best years in the recent past”, with overall net profits in the segment rising 19.3 percent year on year and total banking assets in the country growing by five percent.
In the coming years, a raft of mega-scale infrastructure projects – including the construction of new cities, bridges and highways under the ambitious Kuwait Vision 2035 development plan – is set to bolster the sector even further. As a result, Kuwait is now a finance leader in the GCC – a fact that is reflected in its continued position as one of the wealthiest nations in the world per capita (see Fig 2) – and it doesn’t look set to slow down any time soon.
Leading the market
While conventional banks are playing their part in propping up Kuwait’s financial industry, it’s the Islamic finance sector that’s witnessing the strongest growth: according to the Central Bank of Kuwait (CBK), Islamic banking groups recorded a 22.5 percent growth in their net income in 2018, compared with 15.9 percent among conventional institutions. Sharia-compliant assets now account for 40 percent of the country’s banking sector, according to the IMF.
Such progress has been facilitated by various developments, not least the government’s decision to start issuing Sharia-compliant instruments in 2016, which gave Islamic institutions easier access to high-quality liquid assets. Various digital innovations in the sector have helped spur growth further, with the likes of electronic payment systems, teller machines and biometric security all being utilised, and partnerships with fintech firms gradually being established.
A successful business isn’t simply defined by the actions it takes to improve its profit
Together, these changes are putting Kuwait on the map at a time when the Islamic finance industry is growing as a whole – according to Thomson Reuters’ Islamic Finance Development Report 2018, global Sharia-compliant assets were worth $2.4trn in 2017 (up 11 percent from the previous year) and are expected to reach $3.8trn by 2023.
Among those benefitting the most from this growth is Kuwait International Bank (KIB). The Sharia-compliant lender stepped into the limelight recently when it was listed on Boursa Kuwait’s Premier Market – one of three new divisions introduced by the stock exchange in 2018 for companies excelling in terms of financial performance, share liquidity, corporate governance and other policies. It marks a new era for the former real estate specialist that became a fully fledged, full-service Islamic bank in 2007, boosting its investor profile within the region and beyond.
“KIB’s listing on the Premier Market reflects improvements in the bank’s operations and financial performance as part of its new strategic direction,” the bank’s CEO, Raed Jawad Bukhamseen, told World Finance. The new strategy involves a series of forward-thinking, client-centric digital innovations, an ambitious expansion plan and a focus on corporate social responsibility that puts company culture, the local community and the development of Kuwait’s wider economy at its heart.
At the core of the global Islamic banking sector is the sukuk. Equivalent to a bond, a sukuk is compliant with Sharia law and gives the holder a portion of the earnings generated by the asset without the need to pay interest. “Sukuk are important financial instruments for the Islamic banking sector – not only in Kuwait, but all over the world,” Bukhamseen said. “These specialised financial instruments can boost the funding and capital position of financial institutions.”
Banks are catching on to this fact: according to the IMF, global sukuk issuances multiplied 20-fold between 2003 and 2013 to reach $120bn, as institutions recognised the importance of diversifying their funding. One such institution was KIB, which struck gold earlier this year when it successfully priced a $300m AT1 perpetual sukuk at an annual profit rate of 5.625 percent. Listed on Euronext Dublin, it was the first AT1 sukuk to have been issued in Kuwait since 2017 and became the best performer in the secondary market this year. A weeklong road show helped the bank generate interest from investors across 26 countries, with the order book reaching a peak of $4.6bn – a more than 15-fold oversubscription. Further, 51 percent of the final distribution went to international investors.
Bukhamseen believes the successful issuance represents another turning point for the bank: “With this important financing instrument, KIB will be able to carry out its local expansion strategy, build its capital base as per Basel III guidelines and add a new source of capital. It also enhances the bank’s capital adequacy ratios and diversifies its funding sources.” KIB’s expansion plan includes opening several new retail branches in the country over the coming years, with the bank considering the strongest growth opportunities to be present in the market where it already boasts a substantial customer base. “Every organisation seeks growth and expansion as a long-term goal, as this allows you to gain an advantage in a relentlessly competitive environment,” Bukhamseen added. “As well as presenting new opportunities for everyone in the bank and enhancing profitability, expansion is a crucial strategy for survival.”
According to Bukhamseen, it’s not just the bank that will feel the benefits, as sukuk like this are essential to the development of the wider economy: “In addition to supporting the bank’s accelerated growth plans, the sukuk is a strong testament to the region’s capabilities in driving greater economic development by enabling the exchange of expertise and pro-active collaboration. A more diversified, efficient and stable financial system is necessary for the development of the banking sector. The financial system’s ability to allocate resources effectively and efficiently is crucial to supporting Kuwait’s transformation into a high value-added, high-income economy.”
Banking on digitalisation
But the health of the financial system (and, indeed, Kuwait’s wider economy) does not just rest on the development of sukuk: it also depends on how such financial instruments are presented to the public. This is where technology – and the sector’s uptake of it – comes into play. “Now, clients across every industry want to be constantly connected in all aspects of their lives,” Bukhamseen told World Finance. “The banking industry must meet these demands by offering new services that deliver an enhanced client banking experience – one that is armed with innovative technology. Today, the banking world is being disrupted by new technology and digitally sophisticated clients, driving banks to innovate in order to maintain customer loyalty. By embracing technology, banks can continue to stay relevant and set themselves apart in an increasingly digital world.”
Put simply, technology is essential in a market dominated by young, digitally savvy consumers – according to the UN, over 70 percent of Kuwait’s population is under the age of 35. Technology is also a way of reaching the underserved, with access to payments, transfers and other transactions made easier through the introduction of digital systems. Such transactions tend to involve lower costs for both the provider and the customer.
With the help of the CBK, which introduced new regulations to promote innovation in electric payment operations last year, Kuwait’s financial industry has already taken several steps to implement digital solutions. Further, according to KPMG’s GCC Listed Banks’ Results: Embracing Digital report, this trend is set to continue in the near future: “The digital agenda for banks in Kuwait is expected to increase as Kuwaiti banks continue to invest in digital banking channels, infrastructure and solutions. This will involve investments in new-age technologies, such as intelligent automation, blockchain and artificial intelligence. It is anticipated that Kuwaiti banks will see an increased acquisition of customers through digital channels across most product offerings.”
But, as Bukhamseen told World Finance, banks can’t do it alone: “KIB believes that collaboration between fintech firms and banks is essential in order to advance processes and banking offerings. These collaborations have already paved the way for improved service and technological innovations.”
A client-centric strategy
In order to keep up with this changing landscape, KIB has made significant changes to the way it utilises technology: at the beginning of 2018, the bank implemented a new, client-focused digital strategy, introducing several new services to its online and mobile banking platforms. Among the most significant updates was KIB’s new multichannel contact centre – the first of its kind in Kuwait. The centre provides a centralised system for monitoring, queuing, routing and reporting transactions, improving services and revolutionising the customer experience.
KIB’s youth empowerment project encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs
The bank has also introduced a new ‘cardless’ ATM withdrawal system that enables users (including non-customers) to withdraw cash using their mobile phone number or civil ID. Other developments include an interactive voice response system and a live chat service, which provide clients with access to most of KIB’s services via a visual interface rather than just a voice-activated, self-service one. More recently, the bank launched a video call tool, enabling clients to complete a number of transactions face to face with a service representative, without having to go into a branch.
Of course, it’s how these services are accessed that is of the essence. With the aim of making its interface more convenient and user-friendly, KIB undertook an ambitious overhaul of its website. The new design features various advanced aspects to increase accessibility and meet the banking needs of all of its customers. For example, a special text-to-speech function has been introduced for those with reading difficulties.
Mobile compatibility is also an important consideration for any company making the move into the digital sphere. As such, KIB has used Unstructured Supplementary Service Data to ensure all of its clients can access the website, regardless of how new or old their phone is. The updated mobile website allows for all of the essential banking functions to be carried out on even the most basic of devices, from viewing account balances to paying credit facilities and transferring money between accounts.
“By incorporating more digital solutions, we want to deploy services across all channels and become a necessary extension to clients’ everyday lives,” Bukhamseen said. “We are putting the customer at the heart of everything we do, as clients continue to seek exceptional, personalised experiences.”
Digitalisation also comes with challenges, though – not least concerns around cybersecurity. Fortunately, the Kuwaiti banking sector is working hard to minimise risk, and KIB is no exception, having made data protection its priority through a series of new measures. This includes the introduction of a 3D secure authentication service, which is designed to offer an additional layer of protection against fraud during payments, and other software elements to pre-emptively combat and deter potential threats.
The bank has also established a dedicated information security steering committee – chaired by the CEO – to constantly monitor information security across the company and keep an eye on any security breaches in the wider industry to help protect KIB from similar threats. Further, the bank has implemented the internationally recognised ISO 27001 standard to ensure it is up to date with best practices. KIB has received several accolades in recognition of these security measures, including Cybersecurity Professional of the Year, Middle East, and Cybersecurity Team of the Year, Middle East, at the Cybersecurity Excellence Awards 2018, reaffirming the company’s commitment to its customers and their privacy.
The whole works
A successful business isn’t simply defined by the actions it takes to improve its profit margin. Central to any good business is a commitment to the employees within it – something that KIB has fully embraced. “For continued success in any industry, organisations must invest in their people,” Bukhamseen said. “Investing in the long-term development of human capital helps maintain a competitive edge both locally and regionally, and fosters a strong reputation for the industry as a whole. As one of the most valuable components of any organisation, investment in human capital is a necessary step in ensuring competitiveness in a changing market environment.”
KIB has introduced several policies to support its employees and the wider local workforce, nurturing and developing talent in the banking sector through various training programmes and workshops. These range from leadership skills sessions to classes focusing on specific roles and functions, with the ultimate aim being to develop its employees’ future career prospects. In 2018, more than 700 employees took part in these training programmes; as of September this year, nearly 600 – covering all divisions and levels within the company – have already participated.
“Human capital continues to play an increasingly critical role in the implementation of a bank’s future strategy, and KIB’s human resources department works hand in hand with the bank’s overall objectives to achieve a common goal, anticipating business needs and overall business direction,” Bukhamseen explained to World Finance. “The future will belong to those who pay attention to effective human capital management as an essential criterion for growth.”
It’s not only a case of training existing talent, though: recognising and recruiting the right individuals is just as important to any business wanting to boost its bottom line, create an efficient, cohesive company culture, engage and motivate staff, and provide the highest levels of customer service. “When employees are motivated and engaged, absenteeism and employee turnover are reduced, increasing productivity and efficiency, and improving overall results,” Bukhamseen said. “KIB has set forth clear, all-encompassing strategies with the goal of attracting qualified, talented individuals and matching them with career opportunities that fit with their professional aspirations. This ultimately allows them to grow and develop.”
A pillar of society
In recent years, financial institutions across the globe have been establishing and enhancing their corporate social responsibility programmes to the benefit of the wider community. Bukhamseen believes such an approach is essential to any organisation hoping for long-term success.
“In addition to providing a number of financial services, banks play a key role in community development by empowering youth, spreading fundamental financial and banking knowledge, and serving as a long-term partner in their everyday lives,” he said. “Today’s interconnected world has highlighted the influential role that financial institutions play in their local communities. As a corporate citizen, KIB focuses on addressing a diverse range of social issues, underscoring its integral role as a national financial institution.”
With the aim of supporting and bettering the Kuwaiti community, the bank has implemented a social responsibility programme based on four key pillars: financial literacy, youth empowerment, positive social impact and community development. KIB’s flagship financial literacy programme aims to promote financial and economic education through school visits and other means. By introducing students to the basic principles of saving, spending and money management, the project is designed to ensure younger generations grow up with a heightened awareness of financial products and the banking industry. This empowers pupils to propel the economy forward while improving financial inclusion and banking penetration.
The bank’s youth empowerment project, meanwhile, encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs. Beyond that, projects span fields as diverse as arts and culture, health, sports and the environment, with the overarching goal of having a positive social impact and developing communities throughout Kuwait. All of KIB’s projects tie in with the bank’s underlying aim of putting the customer first – of recognising them as an integral part of the business and reaching out to them in innovative ways that set an example for others in the sector.
“We believe this commitment brings benefits to both the organisation and the community,” Bukhamseen said. “Those benefits are manifold – it’s about uniting everyone while reinforcing the bank’s reputation and establishing it as a true partner for its clients. Time and time again, KIB has proven its dedication to meeting both the growing needs of its customers and the social needs of the community in the hope of accelerating Kuwait’s development across all areas.”
KIB’s ultimate goal is to develop Kuwait as a whole, and Bukhamseen believes banks can work together to achieve this aim: “The banking sector has always been the backbone of economic development in any country, providing financing to both the private and public sectors. Acting as intermediaries, banks channel funds from savers to investors in an efficient manner, enabling a more productive allocation of capital and higher income growth.
“Countries with a stable financial industry are generally met with faster, more sustainable economic growth than those in a more precarious position. A thriving banking sector also means a greater availability of capital for investment, presenting the opportunity for organisations to direct resources in a way that stimulates economic growth. Additionally, banks provide specialised financial services, reducing the cost of obtaining investment information, boosting the efficiency of the overall economy and driving GDP-per-capita growth.”
The Kuwaiti Government is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects
Among the sectors that hold the most potential for both private and public investment is, of course, real estate. As a former specialist in the field, KIB continues to focus a large portion of its efforts in this area. “Kuwait’s real estate market has witnessed outstanding performance in 2019,” Bukhamseen said. “In the absence of other investment opportunities, real estate continues to provide significant profitability and reel in investors. Over the years, the market has found itself in a position of importance with regards to economic change, and has played a pivotal role in transforming the built environment. With megaprojects and new cities at its core, the real estate market will have a profound impact on the national economy moving forward, as many sectors and industries will depend on it.”
The sector isn’t without its challenges: for instance, it still struggles with significant information gaps and insufficient data, which affects the investment decisions of individuals who want to buy real estate. Accessible, timely and accurate reports from independent bodies are also lacking, presenting hurdles to market regulation and slowing the sale and purchase of properties.
To help combat these issues, KIB has a dedicated real estate appraisal division (READ) that brings together a team of qualified specialists to offer a variety of services, including property management, economic feasibility studies, cost estimation and real estate appraisal. Drawing on the bank’s long-standing expertise, READ uses a combination of approaches to determine the real value of a property. It has served as a key source of information for a number of government entities, banking institutions and real estate firms, providing in-depth reports on the local market and offering insight into current trends to help customers make the right property decisions.
A site more
According to Bukhamseen, there are further challenges to potential homeowners, real estate developers and investors in Kuwait – not least a shortage of land. “A lot of land is either unsuitable for construction or in areas that do not appeal to buyers,” he told World Finance. “This means prime spots are sold at a premium.”
Fortunately, the country is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects that come under the far-reaching Kuwait Vision 2035 development plan. Announced by the government in January 2017, the plan was drawn up with the aim of further diversifying the economy and reducing its dependence on oil production at a time of volatility and instability. Its goal is to transform the country into a leading financial, commercial and cultural hub over the coming years, scaling back public investment and increasing the private sector’s influence.
The Kuwait Vision 2035 plan focuses on the development of seven key pillars: public administration, economy, infrastructure, living environment, healthcare, human capital and global position. Ultimately, though, it aims to create a favourable business climate and prepare the younger generation for more private sector involvement in the future. Currently, its most crucial elements concern infrastructure – notably, the construction of bridges, roads and government buildings, as well as larger-scale projects such as new cities. The latter, in particular, will bring huge opportunities for private investment.
Projects already under construction include: a new rail network; a metro system; a regional highway; a university campus; Kuwait’s largest housing project to date; the biggest hospital in the Middle East; and an extension to Kuwait International Airport. The Sheikh Jaber Al-Ahmad Al-Sabah Causeway – a bridge megaproject that will cost an estimated $3bn – is also scheduled to open next year, connecting Kuwait City to both Doha and the future Silk City. A whopping $100bn has been put aside by the government to support these projects in the next few years, with the aim of quadrupling the government’s total revenues by 2035.
“The real estate market is pivotal to the Kuwait Vision 2035 development plan, offering ample opportunities for private sector participation and providing a boost to related industries,” Bukhamseen said. “Currently, the Kuwaiti Government is focusing on encouraging more private investment in the real estate market, which has started to yield positive changes. In addition to reforming laws, the sheer number of major infrastructure projects currently underway is contributing to market momentum.”
Bukhamseen believes the country’s high per-capita income (see Fig 3) is also supporting this growth, with individual investors flocking towards the real estate market for investment opportunities – particularly the residential sector, where sales are valuable and frequent. With greater investment comes increased profits for the likes of KIB, which, in turn, helps such institutions achieve their individual goals and support Kuwait’s wider economy.
While there are still significant challenges to overcome, these ambitious moves signify a sea change for Kuwait and its private institutions. Combined with an advancing march towards the digital world, they represent a turning point in the history of a country that has depended almost solely on its oil exports for decades.
For banks willing to adapt to such a change, it’s an incredibly exciting time – there are more opportunities in the sector now than ever before. Financial institutions have the power to shape the future of the country by educating members of the younger generation and empowering them to successfully lead Kuwait’s changing economy. How they go about doing so remains to be seen, but KIB is one bank that has fully embraced the new opportunities, leading Kuwait’s financial sector into the future with confident strides.