CBK sees growth in Islamic finance

Sukuk eyed to alleviate deficit

KUWAIT CITY, Nov 11, (Agencies): Governor of the Central Bank of Kuwait (CBK) Dr Mohammad AlHashel said Wednesday that the Islamic finance can play a role in financial system based on principles that create jobs, drive growth, reduce poverty and achieve equality.

This came in Al-Hashel’s speech at the opening of The Global Islamic Finance Conference, hosted by the State of Kuwait Wednesday, under the patronage of His Highness the Amir Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, and with the presence of Acting Prime Minister and Foreign Minister Sheikh Sabah Al-Khaled AlHamad Al-Sabah, Deputy Prime Minister and Minister of Finance Anas Al-Saleh and Managing Director of International Monetary Fund (IMF) Christine Lagarde.

The Islamic finance also contributes to directing the credit to productive investments as well as investment promotion, he added.

He pointed out that the conference, which witnessed the first time the International Monetary Fund’s participation, tackles Islamic financing and means of developing the sector.

Establishing a finance system based on Islamic Sharia requires essential changes not only in the financial sector but also in the way societies are working, thus building institutional capabilities is of prior importance, Al-Hashel said.

Kuwait witnessed the establishment of Kuwait Finance House (KFH) — not only the first Islamic bank in Kuwait — but also one of the very first established anywhere in the world, Al-Hashel told the conference.

It was a humble start; with only four employees, KFH opened its doors to the public for the first time on 31 Aug 1978.

“I doubt anyone imagined that it would one day become a leading Islamic bank, with 8,000 employees and operations spanning across seven regions of the world,” he said.

According to the CBK Governor, the growth of

Islamic finance as an industry is equally impressive. “This is however hardly surprising, as the basic principles of Islamic finance deservedly have a universal appeal, irrespective of religious beliefs,” he said.

He noted that the golden rule of Islamic finance epitomizes the concept of justice which is “central to Islamic finance. Justice, in economic context, requires at least two things; proper allocation of resources for the welfare of the entire society, and sharing of risk and reward.” This is the ‘golden rule’ of a good society, a principle that has been conveyed by almost every major religion and ethical tradition. It requires that anything that harms a society is prohibited, even if it is beneficial for the individual.

Since banks mobilize savings from a large group of people and lend to relatively fewer borrowers, there is an element of asymmetry in banks’ resource mobilization on the one hand, and resource allocation on the other, he said.

This necessitates that banks, in the world of Islamic finance, lend to those who can use these savings to benefit the whole of society — by making productive investments and creating more jobs.

“However, in recent years, excessive liquidity amid unconventional monetary policies has mostly fueled asset growth, with limited impact on real economic activity.” Al-Hashel said: “Islamic finance, by establishing an inseparable link between finance and the real economy, encourages economic risk taking that helps improve growth and create jobs. It requires that credit must be provided for productive investments, not for conspicuous consumption or speculative activities.” He pointed to three types of investment. First, currency based investments, which he considered ‘the most dangerous though investors mostly considered them safe’.

The second is ‘investments in assets like gold that never produced anything’, while “the third type is ‘investments in productive assets, whether businesses, farms or real estate’ — and this is precisely what Islamic finance also requires banks to do — to promote investments in productive assets so that the entire society can benefit.” More importantly, Islamic finance goes a step further, as it also requires the sharing of profits and losses. That is not only important from the justice standpoint but also to ensure financial stability, he stressed.

Since the establishment of the first Islamic bank in Kuwait around four decades ago, “we now have five domestic Islamic banks that collectively account for 39% of domestic banking assets,” he said. This is the third highest share of Islamic banks operating in any country with a dual banking system — where conventional and Islamic banks operate in parallel.

Globally, Kuwait has the fifth largest share of Islamic banking assets and the third largest share of Islamic funds. And it is not only in Kuwait that the Islamic finance industry has taken off in recent decades.

Prediction is more difficult, if it is about the future of finance, he said.

“So, instead of attempting to predict the future, I would like to discuss what needs to be done to help the Islamic finance industry reach its potential. In this regard, the role of four types of institutions is critical not only in providing an enabling environment for a sustainable and resilient industry, but also in bringing current practices closer to the true spirit of Islamic finance,” he said.

On a trip through a Gulf squeezed by low oil prices, the head of the International Monetary Fund repeatedly called on countries to cut back on subsidies, lower government spending and consider levying taxes.

But implementing Christine Lagarde’s suggestions is easier said than done in the oil-rich countries, even as crude prices have dropped by over 50 percent since last year.

Generations have grown used to cradle-

to-grave social programs, comfortable government jobs and tax-free living. While Gulf leaders, including those in Kuwait, have begun warning harder times may be ahead, some citizens remain opposed to any cuts.

“Almost every week we hear about Kuwait giving grants left, right and center to other nations that are in need of money. It’s as if the government doesn’t realize that we, in Kuwait, are also in need,” said Abdulaziz Al-Adwani, a Kuwaiti school teacher. “It’s not logical to start imposing a tax on citizens when the government can afford to give grants to this country and that country.”

That’s the kind of opposition Lagarde, the IMF’s managing director, and Gulf leaders face in moving forward with any structural reforms. Countries like the United Arab Emirates, Qatar and Kuwait have large cash reserves to cushion the blow of low prices. However, if depressed prices continue into next year and beyond as analysts predict, even oil powerhouse Saudi Arabia could find itself hurting.

After meeting finance ministers of the Gulf Cooperation Council in Qatar on Sunday, Lagarde offered her own recommendations on how to move forward. The council includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

“The main elements are common across countries: an expansion of non-oil tax revenues; raising energy prices, which are still well below international norms; firm control of current spending, particularly on public sector wages; and a review of capital expenditures,” Lagarde said in a statement.

In an interview published Tuesday by the Kuwaiti daily Al-Qabas, she suggested levying taxes on commercial profits.

“Citizens would understand the reasons behind such financial measures in the light of the oil price decline,” the newspaper quoted her as saying.

Lagarde left an economic forum Wednesday in Kuwait City after giving a speech without speaking to reporters. Kuwaiti Finance Minister Anas al-Saleh, on hand for the event, said low oil prices wouldn’t slow the country’s development plans, though it likely would raise money for projects through Islamic bonds known as sukuk.

“The government is considering adopting sukuk as a means to bolster income and alleviate the expected budget deficit,” Al-Saleh said.

The Gulf Cooperation Council on Sunday offered yet another way to raise money for its members — a proposed 100 percent “selective tax” on tobacco products equal to customs duties, the state-run Kuwait News Agency reported.

But even that may be a step too far, as Saudi smokers consumed an average of 35 cigarettes a day in 2012, one of the highest rates in the world, according to a study by the Institute for Health Metrics and Evaluation at the University of Washington. Kuwaiti smokers that year had 21 cigarettes daily on average, the study found.

“Whenever I travel on vacation, I buy my cigarettes from Kuwait,” smoker Abdullah Al-Enizi said. “Now to hear that they might increase the prices even more is very bizarre. Lawmakers should protect the rights of consumers and reject this proposal.”