Moody's publishes first Banking System Profile on Kuwait

"However, despite the recent economic growth, Kuwaiti banks face some challenges relating to the operating environment in light of the country's relatively undiversified economy, in which oil-related activities generate half of GDP. This results in the Kuwaiti banks having limited non-oil related exposures and sizeable balance-sheet concentrations, both to the oil sector and to individual entities," says Stathis Kyriakides, a Moody's Analyst and author of the report.

Moody's new Banking System Profile for Kuwait forms part of a new series of reports on banking systems throughout the world, which are designed to complement the rating agency's Banking System Outlook reports by serving as descriptive reference guides to key structural factors that are reflected in Moody's bank credit ratings.

Kuwait's domestic banking system is relatively saturated, with 16 banks - including Islamic financial institutions, specialised banks and branches of foreign banks - competing to serve a total population of 3.4 million, only a third of which comprises the banks' traditional retail target market. Conventional banks have historically dominated the financial system. To date, Kuwait Finance House has been their primary Islamic competitor but other Islamic financial service providers are set to pose increased competitive pressures. Moody's views the conventional banks' position as defensible, despite the central bank restriction on them tapping the Islamic segment.

"In recent years, a number of non-bank financial institutions have emerged as key market participants in Kuwait, in response to which banks have been expanding their investment banking, asset management and ancillary financial operations. Local banks have to date enjoyed the support of the regulator, i.e. the central bank, which has been unwilling to open up the market to foreign banks to an extent that would constitute a threat to the local banks' retail franchise. However, the central bank now believes that domestic banks are ready to withstand direct foreign competition and is currently in support of amending the banking law to lift the one-branch-only restriction applied to foreign banks," explains Mr Kyriakides.

The independence of the central bank's supervisory authority is well established, but Moody's is concerned that political pressure may have a bearing on central bank regulations. Although regulatory standards have been consistent with best common practices and the central bank has developed a prompt corrective action framework, the current regulatory burden is considerable.

"Overall, the framework for banking supervision and regulation in Kuwait has proven successful in addressing the country's needs following liberation. Nonetheless, given substantial changes over the past five years, it is still fairly new and developing and the regulator would need to ensure that it continues to adapt to changing industry demands, particularly as the sector evolves and the nature of Kuwaiti financial institutions' business becomes more complex," cautions Mr Kyriakides.

Over the longer term, greater institutionalisation of the reforms, transparency of enforcement practices and formalisation of processes would be indicative of a more stable and mature bank regulatory and supervisory framework.

Moody's considers systemic support expectations for Kuwaiti banks in general as high, based on the state's ability and willingness to support the banking sector, the importance of the banking system in the country's development, the absence of a deposit insurance scheme as well as the country's track record of support.