Kuwait’s banks are well capitalized, have low levels of problem loans and are sitting comfortably in terms of liquidity, says the Central Bank governor.
Global Finance: What is the performance of Kuwait’s banking sector? Are there good opportunities for growth despite the more challenging environment?
Mohammad Al-Hashel: The banking system in Kuwait has remained stable despite the challenging economic environment since the sharp drop in oil prices in mid-2014. For instance, our banks’ capital adequacy ratio stood at 18.7% as of December 2016. The non-performing loan (NPL) ratio, at 2.2%, is at historically low levels, while the coverage ratio stands at 237%. Banks posted 5.8% growth in profits last year. Results of our stress-testing exercise also affirm the resilience of our banking system to withstand various shocks. Growth in domestic credit, at 2.9%, was lower in 2016, in part due to one large corporate debt payment in October 2016. However, the recovery in oil prices over recent months is likely to help improve economic conditions, with better outlook for credit offtake going forward.
GF: Is their adequate liquidity in the banking sector?
Al-Hashel: There is adequate liquidity, with banks comfortably meeting the newly introduced Liquidity Coverage Ratio (LCR); as of December 31, 2016, banks’ aggregate LCR was over 159%, well above our regulatory benchmark of 70% for 2016, as we are phasing in the LCR to reach 100% by 2019, in line with the Basel recommendations.
GF: What has been the impact of the interest rate rise in late 2016 on the banking and financial sector? What is the outlook for interest rates in 2017?
Al-Hashel: The central bank raised its discount rate by 25 basis points on 15 December 2016 from 2.25% to 2.5%. While inflation remained low at around 3.2%, the change in the discount rate came in the wake of the US Federal Reserve’s decision to increase the target federal funds rate by 25 basis points. Through the marginal increase in the discount rate, the Central Bank of Kuwait aims to signal its commitment to maintain continued attractiveness of the domestic currency. We believe the rise will help banks attract more deposits in local currency, given the fact that interest rates in many advanced countries are at historically low levels, even negative in some cases.
GF: In view of a likely lighter touch approach on banking regulation in the US, is a less demanding regulatory approach likely to be seen in other countries?
Al-Hashel: While the current US administration has mandated a review of the existing regulations, the actual impact at this stage is unclear. In general, the regulatory reforms introduced over the last few years from the Basel Committee on Banking Supervision have helped strengthen the stability and resilience of the financial system.
While we are cognizant of the costs that these regulations entail for the banking sector, the cost of any financial crisis is way too steep, a harsh lesson that many countries learned during the global financial crisis where lighter touch regulation was in part responsible. So it would be unwise to make the same mistake of favoring lighter touch regulation as it will undermine all the hard work done so far in strengthening the global regulatory regime. Having said that, we also need to avoid over-regulation as it will stifle innovation and create inefficiencies. What is required is a balanced and prudent approach to regulation, which proactively ensures banks’ stability, but without limiting their role as financial intermediaries.