Kuwait accounts for 6% of Islamic banking assets: Al-Awadhi
CBK proactive in strengthening supervision to ensure financial stability
Following is the opening address by Waleed Al-Awadhi, Executive Director, Supervision Sector, Central Bank of Kuwait at the CBKIFSB conference on Islamic finance in Kuwait City. — Editor Excellencies, Governors of central banks and monetary authorities,
Dr Bello Lawal Danabatta, Secretary-General of Islamic Financial Services Board, Distinguished guests, Ladies and gentlemen! Assalam-o-Alaikum and a very good morning.
It is a great pleasure and honor for the Central Bank of Kuwait to host the ‘10th IFSB Public Lecture on Financial Policy and Stability IFSB’.
I wish to welcome all officials, central bank governors, heads of regulatory and supervisory authorities, financial institutions, and distinguished delegation of the IFSB members to the Annual Meetings and Side Events of the Islamic Financial Services Board (IFSB) in 2018.
In particular, I would like to thank the IFSB, and it’s Secretary General Dr. Bello Lawal Danbatta for their support in organizing this 10th IFSB Public Lecture on Financial Policy and Stability IFSB, in conjunction with the IFSB annual meeting.
As a founding member, the CBK is pleased to be able to host such events and support the IFSB in its noble goals to promote the soundness and stability of the Islamic finance industry.
Let me also welcome the two distinguished speakers for the public lecture:
Professor Dr Monzer Kahf and HE Emeritus Professor Dr Ishrat Husain
In line with the agenda of the program, my remarks will focus on the central theme of this event which is financial stability. In this respect, I will reflect upon the macro prudential policies required to safeguard financial stability and will then elaborate on some of the policies and practices in the Central Bank of Kuwait.
Let me start with macro prudential policies for financial stability.
Subsequent to the financial crisis, which struck the global markets and economies in 2008, policymakers and regulators have considered financial stability as an overriding policy objective. In this respect, the Basel Committee has indicated in its Core Principles for Effective Supervision the need for having a well-established framework for financial stability policy formation.
A sound and stable financial system is a key perquisite for economic growth. Financial stability is critical to a healthy, well-functioning economy. A stable financial system is one in which financial intermediaries, markets and infrastructure facilitate the smooth flow of funds between savers and investors and, by doing so, help promote economic activity.
Financial stability is, however, not an end in itself; it is an important precondition for balanced and sustainable economic growth. From this perspective, the safeguarding of financial stability can be seen as a forward-looking task — one that seeks to identify vulnerabilities within the financial system and, where possible, take mitigating actions. Central banks now place more importance and pay additional attention to the way that monetary policy and financial stability are linked.
To this end, the role of the macro prudential policies to achieve financial stability has become critical for a stable financial and banking sector. Hence, there is an obvious need for macro prudential policies designed and directed to achieve the financial stability.
Now, let me reflect on financial stability in the context of the Kuwaiti financial system. Let me start by providing a brief overview of the financial system in Kuwait.
As a regulator, the CBK governs Kuwait’s domestic banks, foreign banks operating in the country, finance companies, and exchange companies. The Kuwaiti financial system is dominated by the banking sector, holding 83% market share, and is well diversified.
The domestic banking sector is composed of 5 Islamic banks, 5 conventional banks and one specialized bank. The conventional banks hold more than 60 percent of the total banking system assets on a consolidated basis, this share remained broadly stable since 2007.
Kuwait has played a pioneering role in the global Islamic finance industry, with its first Islamic bank, Kuwait Finance House, established back in 1977. Kuwait is an important player in the Islamic finance industry, accounting for 6% of worldwide Islamic banking assets.
All developments pertaining to Islamic finance are documented in the ‘Islamic Finance in Kuwait: Broadening Horizons’ Report, which demonstrates our continued commitment to support the growth and development of the Islamic finance Industry. This report, which I encourage you to read, provides an overview of the development of the industry in Kuwait, with analyses, insights, case studies and interviews with Islamic banks operating in the country.
For the promotion of Islamic finance, we work closely with the international institutions, including international Islamic finance bodies such as the IFSB, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the International Islamic Financial Market (IIFM), and the International Islamic Liquidity Management Corporation (IILM).
Now let me discuss some of our policies and practices for ensuring financial stability.
From the beginning, the Central Bank of Kuwait has been the lead regulator of Kuwait’s banking — centric financial system, and devotes considerable resources and attention to ensure a sound and stable financial system in the country.
In 2010, a separate Financial Stability Office (FSO) has been set up with the mandate to regularly examine developments in the financial sector. The Financial Stability Report (FSR) is a flagship publication of the FSO, evaluating the performance of various components of the financial system and serving as a key surveillance tool for the CBK.
Moreover, the Central Bank of Kuwait has itself continued to adjust and, where necessary, improve its oversight and regulation by implementing, particularly, the regulatory standards issued by BCBS including the Basel III set of financial reforms.
In keeping with international best practices, we aim to strengthen the banking and financial sector’s ability to manage and be resilient to risk — thereby reinforcing the pillars of financial stability in the country and without lessening their ability to develop their businesses profitably and efficiently.
With the introduction of various regulatory measures, our banks also remain profitable; growth in our banks’ net income has remained healthy. Moreover, asset quality has also visibly improved despite a challenging domestic economic environment due to lower oil prices. Banks’ non-performing loan ratio has dropped to 1.95%, a historically low level.
In fact, the latest IMF Article IV also stated that the “The banking system is adequately regulated, and the CBK has been proactive in strengthening supervision. Banks are under Basel III regulations for capital, liquidity, and leverage. A comprehensive set of macro-prudential measures is being enforced to minimize systemic risks.”
Within this context I should like to briefly touch upon the elements of supervision that exemplify the Central Bank’s approach toward macro prudential policies aimed at strengthening the financial stability of Kuwait.
1. We have enhanced our capital adequacy regime by setting out higher and better quality capital. As of December 2017, CAR of the banking industry stands at 18.45%, well above the Basel benchmark.
2. We have also put up additional capital requirements, upto 2%, for our systemically important banks. Furthermore, our additional capital conservation buffer and countercyclical capital buffer requirements aim to help banks to maintain additional cushion and limit the buildup of systemic
risk.
3. We have also put in place a simple leverage ratio. Again, Kuwaiti banks stand at 10.2%, substantially higher than the 3% global benchmark.
4. We have introduced limits on the loan-to-value (LTV) ratio and the debt service-to-income (DSTI) ratio in November 2013 for financing extended by banks, investment companies and finance companies to individuals to purchase or develop residential property.
5. We have also been improving our macro prudential liquidity toolkit in order to mitigate liquidity risk. This includes:
i. Liquidity ratio limits — local banks are required to maintain 18% of their Kuwaiti dinar customer deposit in form of balances with the CBK.
Moreover, our banks are currently at a level of 31%; ii. Maturity Ladder limits. iii. Maximum Lending Limits — local banks are required to comply with limits on lending to available sources of fund, which should not exceed 90%. Moreover, our banks are currently at a level of 75%;
iv. LCR — we have further strengthened banks’ capacity to withstand liquidity stress and to make their funding structure more stable by implementing Liquidity Coverage Ratio and Net Stable Funding Ratio. Our banks are already well above the minimum benchmark in both ratios;
v. Banks are required to comply with the Basel III liquidity reforms for NSFR at a level of 100%.