Kuwait levels of financial inclusion on par with GCC peers
The following is the first part of the report on Financial Inclusion and Financial Literacy in Kuwait by the Institute of Banking Studies.
evels of financial inclusion in Kuwait are on par with GCC peers, ahead of the global average, but lag behind high income OECD countries. For instance, according to 2014 World Bank data, 72.9 percent of Kuwait residents own a bank account, versus an average of 74.5 percent in the GCC (excluding Kuwait), 94.0 percent in high income OECD countries, and 62.0 percent globally.
To raise the level of financial inclusion in Kuwait will require reaching more women and reaching less-well educated sections of Kuwait’s population:
Relative to the GCC, according to 2014 data, Kuwait performs strongly with regards the financial inclusion of women. Even so, in Kuwait 79.3 percent of men have a bank account and 64.0 percent of women, a gap of 15.3 percentage points, while the gender gap in high income OECD countries is only 0.5 percentage points.
Educational attainment appears to be a stronger determining factor of financial inclusion in Kuwait relative to other GCC nations. For instance, in 2014, 47.7 percent of Kuwait residents with only primary education own a bank account, versus 75.6 percent who graduated from high school, a gap of 27.9 percentage points. Survey data collected by the Institute of Banking Studies suggests that relative underservicing of less educated residents may be correlated to a relative underservicing of non-citizen residents.
The Central Bank of Kuwait’s Customers Protection Manual sets out specific guidelines to banks with regards both financial inclusion and literacy; and while we believe more educational information could be presented on individual bank’s websites, responses to our survey questionnaire show the banks are following guidelines.
Standard & Poor’s global survey of financial literacy shows that while the level of financial literacy attained in Kuwait is higher than in Bahrain, Saudi Arabia and the UAE, the general level of understanding of basic financial concepts remains low. Many of the banks have expressed an interest in working together to enhance efforts to raise levels of financial literacy. We believe such efforts could be coordinated by the Central Bank of Kuwait and/or the Institute of Banking Studies.
World Bank data shows that 31.5 percent of Kuwaiti residents would be unable to access funds in an emergency, compared to 24.8 percent in the rest of the GCC and 15.6 percent in high income OECD countries. Likewise, only 25.5 percent of Kuwaiti residents save at a financial institution versus 51.6 percent in high income OECD countries. Potential future demographic challenges may require Kuwaitis to take on greater financial responsibility: borrowing less and saving more for retirement. Raising standards of financial literacy is a key part of preparing for such a change.
The term ‘financial inclusion’ references the extent to which residents of a country have access to, and use, at an affordable price, banking services, such as depositing, borrowing, and making and receiving financial transfers, such as payments and salaries. In determining the level of financial inclusion, there is often a focus on the relative underservicing of segments of the population, including, although not limited to, females, the poorer, nonnational residents, different ethnic minorities, young adults, and adults with lower educational qualifications.
Enhancing financial inclusion globally, for instance by reducing the number of people worldwide without a bank account (currently around 2.5 billion people — or half the world’s working age population), has been a goal of the G20 since the launch of the Global Partnership for Financial Inclusion at the G20 summit in Seoul in 2010. The GPFI is an inclusive platform for all G20 countries, interested non-G20 countries and relevant stakeholders.
In 2014, the GPFI launched the Financial Inclusion Action Plan, by clearly stating the link between deeper financial inclusion and greater resilience in the global financial system: “financial inclusion helps build domestic savings, bolster household, domestic and financial sector resilience and stimulate business and entrepreneurial activity. The cumulative effect of widespread exclusion is increasing inequality, and slower growth and development.”
The Action Plan outlined four specific areas that should be addressed:
1. Enhancing the access of SMEs to formal banking sectors
2. Increasing the extent to which regulators incorporate financial inclusion into rule setting for banks within their jurisdiction
3. Enhancing financial literacy by improving customers’ knowledge of banking and finance, with the result that customers make more rational financial decisions.
4. Expanding opportunities for technology to help reduce the cost of sending remittances.
While not a member of the G20, Kuwait has shown significant interest in addressing these issues and in improving financial inclusion. In the area of SME financing, for instance, the government has established the National Fund for SME Development; which has been discussed in a previous Institute of Banking Studies research paper, “Taking Stock of SME Banking in Kuwait.”
Moreover, the Central Bank of Kuwait has made financial inclusion and financial literacy a key element of its Bank Customers Protection Manual, published in July 2015. While the Manual is written to complement other rules and regulations governing a bank’s granting of consumer and other instalment loans, as we show in Section 3, it also includes a number of statements regarding financial inclusion and literacy.
The aim of this study is to take stock of Kuwait’s progress in enhancing financial inclusion and financial literacy, and suggest paths which the banks could take, individually and in concert, to raise standards further.
In Section 1, we use 2014 data (the most recent data available) in the World Bank Financial Inclusion Database to assess Kuwait’s performance with regards financial inclusion. How, for instance, does Kuwait perform with regards to gender and the richer/poorer divide in the provision of basic banking services? We compare Kuwait’s performance with fellow GCC nations, high-income OECD countries, the world as a whole, and Singapore. Singapore is included, first because it represents global best practice, and second because as a city-state with high levels of non-citizen residents, it exhibits similarities to Kuwait.
In Section 2, we examine the issue of financial literacy, using survey data from Standard and Poor and the World Bank. In this section, we make the specific link between literacy and the levels of borrowing and saving in Kuwait.
In Section 3 of the study, we use survey responses from the banks and our own analysis of websites to examine how Kuwaiti banks are responding to the Central Bank of Kuwait’s consumer protection manual.
In Sections 1 and 3 we make use of responses to a survey questionnaire sent out to each of the banks. We would like to thank the respondents for taking to the time to provide us with such valuable information.
Section 1: Assessing Kuwait’s Level Of Financial Inclusion
1.1 Overall financial inclusion Retail banking customers use banks for three main reasons: to make deposits, to take loans and to make payments. The charts below show that on these basic measures financial inclusion in Kuwait is in line with other GCC countries and high by global standards; although still below levels achieved in high income OECD countries and Singapore. For instance, according to World Bank data, 72.9 percent of Kuwait residents own a bank account, versus an average of 74.5 percent in the GCC (excluding Kuwait), 94.0 percent in high income OECD countries, and 62.0 percent globally.
The left hand panel of Chart 1 measures the proportion of the population that has a bank account; the right hand panel the proportion of the population that has borrowed from a financial institution in the past 12 months. Chart 2 assesses the relative development of payment systems by looking at the percentage of the population that has a debit card in their own name. Unless otherwise stated, all data in this Section is taken from the 2014 World Bank financial inclusion database. Each of the charts reflects the percentage of individuals over the age of 15 years using each banking service.
In terms of overall levels of financial inclusion, Charts 1 and 2 tell the same story: Kuwait is performing broadly in line with the GCC, significantly better than the world average but behind Singapore and high income OECD countries. In should be noted however that while borrowing from a financial institution is in line with Singapore, residents of Kuwait tend to borrow material amounts from non-bank sources. We discuss these issues in greater depth in Section 2 in the context of financial literacy.
1.2 Financial inclusion by gender, income and age
While overall financial inclusion in Kuwait is good, a more detailed examination of World Bank data by different sub-sets of the population, e.g. male/ female, richer/poorer, young adult, and educational attainment, shows that there are disparities worthy of attention.
1.2.1 Financial inclusion by gender
For all three banking services, Kuwait performs better on gender equality than the GCC average. In particular, Kuwait performs strongly in the context of borrowing from a financial institution, with significantly more gender equality in this category than in high income OECD countries. In the other categories: holding a bank account and having a debit card in one’s own name, while performing well, Kuwait still lags behind the level of gender equality recorded in high income OECD countries and Singapore. Note, for instance, that in Kuwait 79.3 percent of men have a bank account and 64.0 percent of women, a gap of 15.3 percentage points, while the gender gap in high income OECD countries is only 0.5 percentage points.
1.2.2 Financial inclusion by richer and poorer
While Kuwait is ahead of the global average, it does lag other GCC countries, albeit not in a significant way, in the relative balance between the richest and poorest in each country. This is most pronounced with regard to owning an account at a financial institution.
Perhaps worthy of specific note is the performance of Singapore. Not only is the disparity between the richest and poorest less than in GCC and high income OECD countries, but in one case, borrowing from a financial institution, the poorest 40 percent are more active than the richest 60 percent. In some respects, this is exactly how it should be; after all, in theory poorer sections of society are more likely to need credit to make purchases, especially of expensive durable items, such as cars or ‘white’ goods (fridge, freezer, etc.). All the same, such an outcome is only possible given that poorer sectors of society still earn a sufficient income to make them reliable customers for the banks. This in turn requires a sufficiently advanced credit scoring/ risk management system to ensure that repayment is highly probable.