Islamic Finance 

Kuwait Islamic Finance Landscape

| 30 August, 2018 | General
Kuwait Islamic Finance Landscape

This article is an extract from the Islamic Finance in Kuwait: Broadening Horizons report.

The report can be downloaded from HERE.


Global Player

Kuwait is an important player in the Islamic finance industry, accounting for 6.1% of worldwide Islamic banking assets. Such holdings place it fifth globally, behind only Iran, Saudi Arabia and Malaysia — all countries with vastly larger populations than Kuwait — and the United Arab Emirates. “Kuwait is expected to remain a key contributor to global growth in participation banking,” EY wrote in a 2016 report.

Sharia Authority

Kuwait’s outsized influence over Sharia-compliant financial services is further shown through its Islamic expertise. The country is home to 19 Sharia scholars who hold at least one board membership in its five Kuwaiti Islamic banks, some of which have multiple Sharia board representations, as per CBK regulations.

CBK Country Report_Kuwait Islamic Banking landscape

Domestic Boom

The foundations for Kuwait’s Islamic finance boom were laid by the CBK in 2003 when it introduced specific regulations to govern Islamic finance, sparking rapid growth in Sharia-compliant banking. Islamic banks are winning market share across many industry metrics:

- Islamic banks held 41% of Kuwait’s total banking assets at 2017-end.

- Islamic banking assets grew at a CAGR of 6.7% from 2013-2017.

- With $50.7 billion in financing assets as of 2017, which accounted for 40% of the domestic market.

- Islamic banks held 42% — or $63.1 billion — of Kuwait’s total deposits accounts in 2017.

Diverse Portfolios

Islamic banks in Kuwait have diversified revenue streams. A wide spectrum of banking activities provides 60% of income, such as property purchases and sales, leasing and trading. The remaining 40% is largely derived from treasury and investment activities. Real estate, personal financing and inter-bank financing provide about 60% of Islamic banks’ total assets. The majority of transactions are Murabaha, while Tawarruq is the second most popular transaction type. Off balance sheet commitments represent 10-20% of Islamic banks’ assets. These are mostly letters of credit, acceptances and guarantees.

Risk Management

As a prudent regulator, CBK ensures its Islamic bankingregulations align with the latest regulation of the Basel Committee and IFSB edicts. The IMF in its Article IV has praised Kuwait’s Islamic banks for strengthening their risk management systems such as by undertaking group-wide capital and liquidity planning and stress tests. Banks use various tools to manage liquidity such as commodity Murabaha.

- Kuwait Finance House, established in 1977. KFH is the world’s third-largest Islamic bank by assets, with operations in seven countries including Bahrain, Germany, Malaysia, Turkey and Saudi Arabia. Domestically, the state backed banker had a 51% share of Kuwait’s Islamic banking assets as of 2017.

- Ahli United Bank was founded in 1941, then converted to an Islamic bank in 2010 and by 2017 had a 16% share of Kuwait’s Islamic banking assets.

- Boubyan Bank, which is majority-owned by National Bank of Kuwait, was founded in 2003 and is now Kuwait’s second Islamic bank by assets.

- Kuwait International Bank, another bank that converted to a full-fledged Islamic bank, has a 45-year record of accomplishment and holds 8% of Kuwait’s Sharia-compliant bank assets.

- Warba Bank, is another Islamic bank established in 2010 which quickly accumulated 8% of Kuwait’s Islamic banking assets by 2017.

- Al Rajhi Bank (Kuwait) is a foreign branch of Saudi’s Al Rajhi Bank, the world’s biggest Islamic bank. It launched operations in Kuwait in 2010. 

Credit Growth

Islamic banks are writing more financings than ever before. Combined, the country’s five Islamic banks had provided borrowers with financings worth $50.7 billion as of the end of 2017, up from $48.4 billion a year earlier. Of last year’s financing book, 44.7% was from Kuwait Finance House, 19.7% from Boubyan Bank, 18.3% from Ahli United Bank, 9.0% from Kuwait International Bank and 8.4% from Warba Bank.

CBK data show that in 2017 income from financings accounted for 86.0% of banking sector interest income. Financing to retail clients generated for 61.9% of profit income, with the remainder derived from corporate borrowing. Profit income growth is also accelerating, achieving a 10% increase in 2017 versus 9% in 2016.

Customer Confidence

The total deposits amounted to $63.1 billion including due to banks and other financial institutions. More Kuwaitis are choosing to keep their cash savings at the country’s Islamic banks, which saw private and governmental deposits reach a record high of $51.5 billion at the end of 2017, up 6.7% from a year earlier. Of these deposits, Kuwait Finance House holds 52.1%, Boubyan Bank 18.0%, Ahli United Bank 15.6%, Kuwait International Bank 7.8% and Warba Bank 6.5%, respectively.

Growth has been the strongest among smaller Sharia-compliant banks, with Warba more than quadrupling its deposits since 2013, Boubyan Bank’s deposits have more than doubled over the same period.

Islamic banks have also been succeeding in expanding without deterioration of their asset quality (non-performing financing have tumbled since 2013). At Kuwait Finance House, for example, NPFs were 1.6% last year versus 3.7% in 2013. Likewise Ahli United Bank’s NPFs dropped to 1.4% from 2.8% over the same timeframe. The Islamic sector average is now 1.6%, down from 2.9% in 2013.

Increasing Returns

As noted earlier in the report, Kuwait’s Islamic banks achieved an aggregate profit increase of 12.3% in 2017 from a year earlier as combined profits reached a record $998.3 million.

Other metrics also demonstrate banks’ improving performance: total revenues were $2.6 billion in 2017, from $1.7 billion in 2013, while return on assets averaged 1.05% in 2017, up from 0.60% in 2013.

While all Kuwait’s Islamic banks increased profits for the period 2013 to 2017, Boubyan Bank stands out as an overachiever. The banks’s profit last year was $158.1 million, nearly quadruple its 2013 net income of $43.2 million.

Warba Bank turned profitable in 2014, just four years after launch, and in 2017 made a profit of $22.5 million as revenue rose 76% from a year earlier.

Kuwait Finance House remains the sector heavyweight, accounting for 61% of Islamic banks’ combined profits and 67% of their total revenues in 2017. KFH profits increased by a CAGR of 5.3% from 2013 to reach $611.4 million last year.

Robust Balance Sheets

Industry metrics show Kuwait’s Islamic banks are strong, safe and solvent.

The CBK has set a minimum capital adequacy ratio (CAR) — which measures bank capital and is used to protect deposits and support sector stability — of 13% for the country’s banks. Among Islamic banks, the average was 18.2% in 2017.

“Results of CBK’s stress tests reveal that banks, individually and collectively, have been able to broadly withstand various shocks in credit, market and liquidity simulated under a wide range of micro- and macro-economic scenarios,” the CBK wrote in its 2016 financial stability report.

Banks’ leverage ratio was 10.2% for all banks in 2017, CBK data show, significantly exceeding the 3% minimum suggested by the Basel Committee. This indicates banks’ strong capacity to extend credit without the risk of breaching the leverage ratio.

Other metrics further substantiate Islamic banks’ resilience: Liquidity Coverage Ratio (LCR) range from 160% to 345% and their Net Stable Funding Ratio (NSFR) range from 97% to 121%.


Read the full Islamic Finance in Kuwait - Broadening Horizons report

Report: Islamic Finance in Kuwait: Broadening Horizons

© Thomson Reuters 2018 All rights reserved

Read the full Islamic Finance in Kuwait - Broadening Horizons report.